Credit Enhancement

Credit enhancement is an essential part of a securitization transaction and is most often determined by the rating agencies to determine the rating of an asset-backed security. There are different types of credit enhancements. Generally, a distinction is made between structurally related credit enhancement and external credit enhancement.

• 2.1 Wrapped Securities
• 2.2 Cash Collateral Account

Excess spread

The excess spread is the difference between the obtained on the underlying collateral and the coupon interest payments of the issued asset-backed securities. The excess spread is a first- loss tranche usually.

Overcollateralization

Overcollateralization is a kind of over-collateralisation ( civil law ) and a common form of credit enhancement. Overcollateralization means that the security ( mortgage, mortgage, deposit, security assignment, etc.) and whose cash flows are higher than the securities issued ( and optionally the coupon payments and other transaction costs).

Reserve Account

A reserve account (or spread account), ie protection against losses up to a certain amount, usually used as overcollateralization. The amount of the hedging reserve account can be paid during the transaction only, but can also be reduced in proportion to repurchase the securities.

Wrapped Securities

Wrapped Securities are asset-backed securities that are hedged with respect to additionally by an insurance ( monoline insurer ) credit risk.

Cash Collateral Account

With a cash collateral account (CCA ) can also credit enhancement can be achieved. In this case, the Guarantor may borrow a certain amount at a bank and invested it in short-term money market instruments available with the highest credit rating.

• Lending business
• Risk Management ( Bank)