What is credit enhancement?
Credit enhancement is the process a business goes through to improve its credit profile. This lowers the default risk for lenders and investors by providing evidence that the business will be able to meet its financial obligations.
Where have you heard about credit enhancement?
You may have heard the term in relation to asset-backed security (ABS), which is financial security that’s backed by assets like loans and credit card debt.
Asset-backed securities offer investors an opportunity to invest in a variety of income-generating assets which are credit enhanced, and therefore carry less risk. Other investments such as corporate debt and bonds tend to be unsecured, carrying greater risk.
What you need to know about credit enhancement…
Credit enhancement provides a guarantee for investors that should markets change for the worse, or a business experiences financial difficulties, their investment will be safe. There are several types of credit enhancement including collateral, third-party guarantees and insurance.