another quick one…what are they?
Hey, something related to my job! Credit enhancements essentially increase the investor’s liklihood of receiving the promised cash flows. The enhancement can come in several forms such as subordination (lower tranches in a bond absorb losses first, therby supporting the more senior tranches), overcollateralization (the amount of the loan portfolio which backs the security is larger than the security itself), third-party guarantees to reimburse the trust for losses up to a certain amount, just to name a few.
basically a co can transfer the assets backing the asset backed security to a special purpose vehicle (SPV) ( a separat elegal entity)… this is to obtain lower cost of debt (as credit rating on ABS is higher than that on unsecured debt) and since these ABS on their own dont get high credit ratings, issuer may chose to go for external credit enhancements like Letter ot credit, corporate guarantees or bond insurance… need to look up the internal enhancements though…
if you back up your debt with an asset…That means you are allowing the lender to take that asset if you don’t pay. This will increase the credit rating of your debt somewhat. transferring that asset to a SPV will increase it even more, because you have already given up that asset to a third party. Think of an escrow company in terms of real estate transactions.
ruckmani Wrote: ------------------------------------------------------- > basically a co can transfer the assets backing the > asset backed security to a special purpose vehicle > (SPV) ( a separat elegal entity)… this is to > obtain lower cost of debt (as credit rating on ABS > is higher than that on unsecured debt) > > and since these ABS on their own dont get high > credit ratings, issuer may chose to go for > external credit enhancements like Letter ot > credit, corporate guarantees or bond insurance… > > > need to look up the internal enhancements though… Do you also have limited liability in an SPC just as you do if for a company? ie if the whole deals tanks, you only lose what you put in the vehicle?
My understanding of the advantage/requirement of using the SPV are : 1. It helps to delink the rating of the debt with the rating of the issuer. Eg. if a bank with a BBB rating issues a ABS then the rating of the ABS would be linked to the rating of the bank. Whereas by selling it off to the ABS, the rating is based on the quality of the Assets backing the ABS, rather than the issuer. 2. The reasons for the above is because, the ABS would not be impacted if the issuer goes bankrupt, as long as the assets are still good. Because the Assets are know transferred to the SPV, while the issuer is only responsible for the collection of the cashflows and earns an interest rate spread on that.
Guys - An SPV isn’t a credit enhancement. See this is why we are having this debt crisis. Transfer something to a bankruptcy remote vehicle that owns nothing and everyone calls it a credit enhancement. MeddlingKids gave a good answer though…
hmmm well wouldn’t the assets (acting as collateral for the loan) be ‘safer’ under an SPV rather than the company itself? if the company went bankrupt then the collateral goes bye-bye… it cuold used to go to creditors higher on the list than you…but if it was in an SPV, its still yours… yeh? or am i looking at it too simply?