Definition for : Credit enhancement

In the context of a borrowing, a "credit Enhancement" refers to some financial engineering technics which improve the Creditworthiness and Rating of the securities issued. For example, Asset-Backed Securities can reach AAA Rating even when the underlying Assets securitised are on average rated BBB, by resorting to the following credit Enhancement features: (i) "Tranching", which is the issuance of at least two tranches with different levels of Seniority; (ii) "Deferred Purchase Price", whereby the payment of a portion of the purchase price of the securitised Assets is conditional upon their performance; and/or (iii) cash reserves, Insurance policies, Wrap from a Monoline insurance company... More specifically, the "Dynamic Credit Enhancement" refers to the acquisition of further Assets during the revolving period, where the portion of the purchase price which is paid upfront varies so as to dynamically re-adjust the actual credit Enhancement on the overall outstanding portfolio of securitised Assets to the desired level, in order to comply with pre-determined Loan-To-Value (Ltv) levels.

To know more about it, look at what we have already written on this subject