Introduction to Securitization

CREDIT ENHANCEMENT STRUCTURE

As explained above, a conduit is the issuer of CP because the program provides an issuance window to several seller-level trusts, each of which are SPVs. Typically, for multiseller conduits the assets are pooled at the level of the seller and are transferred into individual SPVs. The sellers are, for a trade receivables conduit, the custom- ers of the sponsor bank who want to have their trade receivables financed. At this level, enhancement is done to an extent sufficient to ensure that the interest being sold from this SPV to the conduit will allow the conduit to seek the desired rating. This means that unless the conduit itself is credit-enhanced, the rating of the interest sold by the SPVs to the conduit should match up with the desired rating of the CP to be issued by the conduit, say AAA.

The enhancement granted at the seller level is called seller level enhancement or pool level enhancement. When all these pool interests, duly credit enhanced, are sold to the conduit, there might be a credit or liquidity enhancement at that level too, which is called program level enhancement. See Figure 9.2.

The program level enhancements may include both a credit enhancement and a liquidity enhancement. At the program level, the basic objective is to obtain a liquidity enhancement (as the interest sold to the conduit has already been credit enhanced), and the credit enhancement at this level is primarily required to be able to tie up liquidity facilities ...