What Is Credit Enhancement?

A Note on Credit Enhancement in Finance

A company that is raising cash by issuing a bond may use credit enhancement to lower the interest rate it pays to investors. The rating on the bond issue might improve if the company can get a guarantee from a bank to assure a portion of the repayment. The bank guarantee has made the bond issue more safe.

The issuer can now offer a slightly lower interest rate on its bonds. Mortgages or credit card receivables are some of the underlying assets that derive the value of structured products. Some of the assets are riskier than others.

Credit enhancement is a cushion that protects against losses from defaults on the underlying loans. Buyers of the highest rated bonds get priority in any claims for repayment against the underlying assets, because of credit enhancements attached to the highest rated bonds. The junior bonds pay the highest yields.

The junior tranches absorb any loss if the loan in the pool goes bad. The face value of the underlying loan portfolio is larger than the security it backs, so the issued security is overcollateralized. Principal and interest payments on the asset-backed security can still be made even if the underlying loans are late or in default.

Credit Enhancement Strategies

Credit Enhancement is a strategy adopted by companies that take various internal and external measures to improve their creditworthiness, with the primary aim to procure better terms for repaying their debt and also reduces the risk of the investors of specific structured products in the financial market. Credit enhancement can be internal or external. External support to improve the creditworthiness can be termed as an external enhancement, whereas internal enhancement is referred to as internal enhancement.

Over-collateralization is the most common credit enhancement technique. The value of the security is not as high as the value of the collateral. An investor can rest assured that they will be paid in the event of default since the underlying collateral is higher.

Wraped security is insurance or guarantee by a third party with respect to the payment of interest and principal. The issuer of the security may be the parent company of the bank or insurance company. The guarantee is usually provided by a bank or company.

Subordinated Bonds

There are a number of legitimate methods that can help improve the financial stability of a debt instrument. One method is over-collateralization. Property is pledged as security for a debt.

A mortgage is a common example. The mortgage holder can take the property as repayment for the loan if the person defaults. Subordinate bonds increase the credit rating of an asset.

Subordination is a method of classification that shows which debts will be paid first and which will be paid last. Senior bonds have a higher credit rating because they have less risk if income flow decreases. Junior bonds are the last to be paid.

Accessing Secondary Markets as a Capital Source for Energy Efficiency Finance Program

The introduction to grid-interactive efficient buildings describes the buildings in the context of state and local government interests, highlights trends, challenges and opportunities for demand flexibility, and outlines actions that state and Financing is one of several strategies that can help customers demand for energy efficiency. Financing alone does not lead to energy savings, but it may be an effective tool for helping customers overcome the high up-front costs of a range of energy efficiency investments.

Broad customer access to attractive capital can enable widespread adoption of energy efficiency improvements by scaling and leverage secondary markets, reflecting a true assessment of risk, providing more liquidity, and reducing borrowing costs. The program design considerations for policymakers and administrators are covered in Accessing Secondary Markets as a Capital Source for Energy Efficiency Finance Programs. The collection of approaches for determining and documenting energy and non-energy benefits resulted from end-use energy efficiency activities and programs is called the EM&V.

Energy savings can be confirmed by effective EM&V. Setting energy savings targets for utilities helps policymakers understand how electric and natural gas utilities can achieve greater efficiency. The Integrated Resource Planning to Encourage Investment in Cost-effective Energy Efficiency is a book about how utility planning processes that allow demand-side resources to compete with supply-side resources can promote cost-effective energy efficiency.

Privately-owned buildings have higher energy expenditures than public buildings. Policies that improve the way buildings use energy throughout the building lifecycle are a priority in communities across the country. State and local governments and utility regulators can get technical and policy information from SEE Action organization-wide, performance-based policy and program strategies for energy efficiency in public and private commercial buildings.

The information how access to energy use data can help local governments create policies for benchmarking and disclosure of building energy performance for public and private sector buildings is provided by Energy Benchmarking, Rating, and Disclosure for Local Governments. Behavioral efficiency programs and strategies can be used to reduce energy consumption. Behavioral insights from academic research can help improve the performance of efficiency programs.