Credit Enhancement

What is Credit Enhancement?

Credit Enhancement is a strategy for improving the credit risk profile of a business or structured financial transaction usually to obtain better terms for repaying debt. Within the financial sector Credit Enhancement may be used to reduce the risks to investors of certain structured financial products or transactions. And/or also to improve the credit profile of borrowers.

The main function is to create more confidence among investors. This is achieved by decreasing the perceived and actual risks of investment losses. And by doing so, expanding the financing resources for the beneficiary borrowers.

In most instances Credit Enhancement is a complex structured financial transaction. It requires strong knowledge and financial capacity of the guaranteeing institution.

Credit Enhancements are useful because they:

  • encourage lenders and investors to put money into unfamiliar markets or products (such as renewable energy lending).
  • can absorb risk of loss and, as a result, be used as a negotiating tool to convince lenders to reduce interest rates or provide longer loan terms.
  • can be used as negotiating leverage to convince lenders to relax their underwriting criteria in order to lend to individuals or businesses with lower than typical credit profiles.

Credit Enhancement occurs when a security’s credit quality is raised above that of the sponsor’s unsecured debt or that of the underlying asset pool. A variety of internal and/or external credit supports are employed to increase the likelihood that investors will receive the cash flows to which they are entitled.

Credit-enhancement- from-Surety-Bonds-increase-your-business'-credit-risk-profile

Internal Credit Enhancement

Subordination: A class of securities that function as the protective layer for the secured lenders. If a loan in the pool defaults, any loss thus incurred is absorbed by the subordinated securities

Overcollateralisation: Amount of loan portfolio is larger than the security it backs :

External Credit Enhancement

Surety Bond: A surety bond is an insurance policy provided by a rated and regulated insurance company to reimburse the ABS (Asset Backed Security) for any losses incurred. One major form of credit enhancement is surety bonds. This is a surety instrument utilised ex ante to backstop the main debt. In this instance the Surety bonds are insurance policies stipulating that the insurer guarantees payments of interest and principal to the ABS investors up to a specified amount. An insured ABS is rated equal to the claims-paying rating of the insurance company, typically A rated, because the insurance company guarantees the timely payment of principal and interest on the security.

Parental Guarantee: Another form of third-party guarantee is when the parent company of the issuer guarantees payment. Sometimes, the ABS issuer is supported by a letter of credit (LOC), where a bank/insurance company promises, for a fee, to pay the issuer when the issuer does not have enough to make the current payment

Cash Collateral Account: In this case, the issuer borrows the required credit-enhancement amount, usually from a commercial bank, and then invests that amount in the highest-rated short-term (one-month) commercial paper. Since this is an actual deposit of cash—unlike an LOC, which represents a pledge of cash—a downgrade of the CCA (Cash Collateral Account) provider would not result in a downgrade of the transaction.

For further enquiries please contact the team at Surety Bonds directly. See below.

Surety Bonds

Our process is seamless and requires very little effort from you. As our client you will benefit from both our expertise, and our established relationships with global surety markets.

Why Choose Surety Bonds

Because customers benefit from our experience in the Global Bond Market.


Our experienced team of surety specialists simplify the process for our clients as they secure tailored and competitive terms on their behalf.


Firm relationships established with surety providers & specialist underwriters; ensuring we can get deals done securing favourable rates, terms & conditions without delays.


As Ireland’s leading authority on surety bonds we are a trusted intermediary recognised and relied upon by Brokers nationwide as they provide best terms and service to their clients.

Meet Your Team


Colm McGrath

Managing Director

Subscribe to our Newsletter and always be up to date!