External Credit Enhancement

External Credit Enhancement

External credit enhancement (ECE) is a financial instrument that is used to improve the credit rating of a securitization transaction. ECE can take a number of forms, including:

Surety bonds: A surety bond is a guarantee issued by a third party that promises to pay the bond's principal and interest if the issuer defaults.
Letters of credit: A letter of credit is a financial instrument issued by a bank that promises to pay a certain amount of money to the beneficiary if the issuer defaults.
Overcollateralisation: Overcollateralization occurs when the value of the collateral backing a securitization transaction exceeds the amount of the outstanding debt.
Reserves: Reserves are funds that are set aside to cover potential losses on a securitization transaction.