External credit enhancement, Financial Management

It is in the form of third-party guarantees which protect against losses up to a particular fixed level. This is available in the form of a corporate guarantee, a letter of credit from a bank or a bond insurance. Though the third-party guarantee is referred to as "first loss protection", it is generally not used as a primary protection.

For example, if in a Rs.100 crore asset-backed securities deal, 10% is guaranteed, then for any losses that are in excess of 10%, the sponsor will not be liable. Thus, we see that an asset-backed security which has an external credit support is prone to credit risk of the third-party guarantor. If the third-party guarantor undergoes a downward change in credit rating, then the rating of the issue will also be lowered even if the performance of the entire structure is intact. This is because of the general practice the rating agencies follow by which the credit quality of the issue is assessed to be only as good as the lowest link in credit enhancement.

Posted Date: 9/8/2012 9:08:16 AM | Location : United States

Related Discussions:- External credit enhancement, Assignment Help, Ask Question on External credit enhancement, Get Answer, Expert's Help, External credit enhancement Discussions

Write discussion on External credit enhancement
Your posts are moderated
Related Questions
Applicant should have been well versed in the calculation of actuarial losses and gains on pensions. It would have been significant to ensure each item affecting liabilities and as

Explain the Basis Risk Basis risk considers to the floating rates of two counterparties being pegged to two dissimilar indices.  In this situation, as the indexes are not compl

Role of Sponsor In the establishment of mutual fund trust, the main role is played by the sponsors. Both the trustees and the fund managers or the asset management company have

I am trying to make a payment and I can''t seem to get it to go throught on you all site..

Secured LBO Financing or Asset-Based Lending Under asset-based lending, the borrower pledges certain assets as collateral. Asset-based lenders look at the borrower's assets as

Valuation Methods: 2 - Year Method Perpetual Growth Method Constant Growth Method Zero Growth Method Growth Phases Valuation Model:  'Constant Growth Met

The sales manager considers that there will be substantial foreign exchange risk in trading with Werland. Payment is unpaid in Werland francs in three months time. The current ster

What is the Price earnings (PE) ratio PE = Market share price/EPS (no. of times) PE ratio is the most widely quoted investors 'ratio. It demonstrates market confidence in a

The following treasury issues can be included for the construction of the curve: On-the-run treasury issues. On-the-run treasury issues and sele

Q. Merits of accept-reject criteria? Merits of ARR:- (i) Simple: - ARR method is very simple to understand and use. (ii) Complete life time of the project is considered: