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Introduction to Securitization by VINOD KOTHARI, FRANK J. FABOZZI

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KEY POINTS OF THE CHAPTER

Credit enhancements are mechanisms for providing credit support for a securitization transaction.
The type of asset securitized and the type of investor targeted dictates the nature and extent of credit enhancement required in a transaction.
The credit enhancement level for every bond class in a structure to be rated is based on the target rating sought for that bond class.
Because all credit enhancement has a cost associated with it, in creating the structure the structurer will perform an economic analysis of the cost of further enhancement versus the improved execution of the transaction.
The amount of credit enhancement needed to obtain a specific credit rating is specified by the rating agencies from which a rating is sought and is referred to as the sizing of the transaction.
The mechanisms for credit enhancement can be classified into three categories: (1) originator-provided, (2) structural, and (3) third-party provided.
Originator-provided credit enhancement refers to credit support where a part of the credit risk of the asset pool is assumed by the originator/seller and includes cash, assets in excess of the liabilities, and retained profits.
Excess spread, the most natural form of originator-provided credit enhancement and the one that is least burdensome to the originator/seller, is the interest not paid to the bondholders nor used to pay fees.
If the excess spread is not paid to the originator/seller either up-front or ...

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