Credit Enhancement

Posted in Finance, Accounting and Economics Terms, Total Reads: 929

Definition: Credit Enhancement

Credit enhancement is a financial process which helps a company to improve its debt or credit worthiness. In credit enhancement, the lender is reassured that the borrower will fulfill the requisite obligation through third party guarantee, additional collateral or insurance. Credit enhancement reduces the credit/default risk of a debt, hence lowering interest rates and increasing the overall credit rating.

Not only does it help in obtaining better credit terms for outstanding debt but this process is also crucial for credit rating agencies when they are coming up with ratings for certain investments.

Following are the various kinds of credit enhancements available in the market:

1. Excess Spreads

2. Cash Collateral Account.

3. Surety Bonds

4. Wrapped Securities

5. Overcollateralization


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