Credit enhancement, Financial Management

Assignment Help:

To obtain an investment credit rating and make the transaction attractive to the investors, some type of credit enhancement procedure is usually necessary. In order to cover the possibility that the loan portfolio will generate insufficient payment to fund payments of interest when due, some form of liquidity support is provided, usually by a credit facility from a third party lender. The credit enhancement part will take care of the risk involved in such receivables that will in turn protect the SPV against potential default in respect of the receivables acquired.

Since this process of securitization often involves dealing with the backing of assets, it is referred to as Asset-Backed Securitization (ABS). There is another form of securitization that deals with mortgages instead of assets called Mortgage-Backed Securitization (MBS).

In MBS, securitization is done on a pool of mortgages that are placed with the originator. Say, in case of a housing finance company which finances construction/ acquisition of dwelling units in return for mortgaging such dwelling units. The housing finance company may securitize the mortgages thereby seeking the advantages of securitization. Most other factors remain the same as in ABS.

Some forms of credit enhancement are: Overcollateralization, Cash Reserve Account, Subordination, Issuer Limited Recourse in case of high risk receivables such as NPAs, Letter of Credit, Mortgage Pool Insurance and Financial Guarantee by the banker of the originator on the receivables. 

Differences between Asset-Backed Securitization and Mortgage-Backed Securitization

Though, it was stated earlier that any resource with predictable cash flows could be securitized, the investment bankers perceive that to make a resource attractive as a raw material for securitization, the following features must be present.

  1. The asset portfolio must have a documented history showing loss and delinquency experience.

  2. The historical loss on the portfolio must have been modest.

  3. The assets must have originated from standardized contracts.

  4. The asset portfolio must have been so structured that the risk is well-diversified.


Related Discussions:- Credit enhancement

Categorization of management risk , Categorization of management risk: ...

Categorization of management risk: Once each event has been evaluated, and been classified as to its probability and impact, the next step is to categorise those events. To do

What are the financial management problems, What are the financial manageme...

What are the financial management problems Traditional approach was challenged was that the treatment was built too closely around episodic events, like incorporation, promotio

Explain about opportunity cost of capital, Explain about opportunity cost o...

Explain about opportunity cost of capital Risk free rate compensates for opportunity lost and risk premium compensates for risk. It can also be known as the 'opportunity cost o

Constructing index numbers - weighted aggregates index, Weighted Aggregates...

Weighted Aggregates Index   In a weighted aggregates index, weights are assigned according to their significance and consequently the weighted index improves the accuracy of the

HOW TO MANAGE FINANCES?, What are the strategies in managing your finances?...

What are the strategies in managing your finances? How it should be monitor?

Credit risk, A bond investor is always exposed to credit risk. Credit...

A bond investor is always exposed to credit risk. Credit risks can be classified into three types. They are: Default Risk Credit Spread Risk

What is business combinations, Q. What is Business Combinations? Combin...

Q. What is Business Combinations? Combining of two entities. Under PURCHASE METHOD OFACCOUNTING, one entity is deemed to attain another and there is a new basis of accountingfo

Leverages, Leverages 'Leverages' are of prime importance in the analysi...

Leverages 'Leverages' are of prime importance in the analysis of a companies' risk. They give a good picture of the business, financial and the overall risk of a company's oper

NPV calc, Capital cost of product a is ? 5 crores and initial capital cost ...

Capital cost of product a is ? 5 crores and initial capital cost of product b is ? 3 crores. Life of product a is 30 years and life of product b is 10 years . The difference in ini

Analysis of financial plans, Part 1: Contingency plan Create contingency pl...

Part 1: Contingency plan Create contingency plans for the following scenarios: > One of your highly qualified consultants has given three months notice and is planning to move to a

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd