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

Explain the random walk model for exchange rate forecasting, Explain the ra...

Explain the random walk model for exchange rate forecasting. Can it be consistent along with the technical analysis? Answer:  The random walk model assumes that the current excha

Dividend policy, #questThe managing directors of three profitable listed co...

#questThe managing directors of three profitable listed companies discussed their companies'' dividend policies at a business lunch. Company A; has deliberately paid no dividends

Riskiness of portfolios b/w riskiness of individual asset, Why does the ris...

Why does the riskiness of portfolios have to be looked at differently than the riskiness of individual assets? The riskiness of portfolios has to be seemed to be at differently

Capital asset pricing model - working with beta, Your research assistant we...

Your research assistant went home early (rock concert related illness) and left you with the following table listing the expected returns, standard deviation, correlation with the

Valuing mortgage-backed and asset-backed securities, A cash-flow yield is t...

A cash-flow yield is the discount rate that makes the price of a mortgage-backed or asset-backed security equal to the present value of its cash flows. It is built

External financing with same cost of capital, External Financing with Same ...

External Financing with Same Cost of Capital and Same Proportions as Existing: If a firm raises new capital funds in the same proportion as at present and at the same specific cos

Derivatives, Derivatives - Financial instruments whose value varies with va...

Derivatives - Financial instruments whose value varies with value of an underlying asset (like a stock, BOND, commodity or currency) or index like interest rates. Financial instrum

Define the gropus of profit maximisation criterion, Define the gropus of Pr...

Define the gropus of Profit maximisation criterion Profit maximisation criterion has, though, been questioned and criticized on several grounds. Reasons for the opposition in

Explain interest rate risk, Explain Interest rate risk Interest rate r...

Explain Interest rate risk Interest rate risk considers to interest rates changing not favorably before the swap dealer can lay off with an opposing counterparty the unplaced

Define compensating balances, What are compensating balances and why do ban...

What are compensating balances and why do banks require them from some customers?  Under what circumstances would banks be most likely to impose compensating balances? Compensati

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