Credit Enhancement

Business, Legal & Accounting Glossary

Definition: Credit Enhancement

Quick Summary of Credit Enhancement

Any methodology that reduces the credit risk of a transaction with a counterparty.

Full Definition of Credit Enhancement

Credit enhancement encompasses a variety of provisions that may be used to reduce the credit risk of an obligation. Credit enhancements are often incorporated into OTC derivatives, corporate debt, securitized debt and other instruments.

Techniques of credit enhancement include:

  • Collateralization: One or more parties may agree to post collateral. Collateral levels may be fixed or vary over time to reflect the market value of different parties’ obligations.
  • Third-Party Loan Guarantees: A parent company or other third party may be contractually bound to meet the obligations of one party should that party default.
  • Credit Insurance: An insurance policy may provide for compensation in the event that a party defaults.
  • Letters of Credit: A bank may confirm financing.
  • Special Purpose Vehicle: One party may enter into the deal through its own over-capitalized, bankruptcy remote subsidiary.

Other techniques may sometimes also be referred to as credit enhancement. These include netting agreements, credit downgrade triggers, and bundling with credit derivatives.

Cite Term

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Page URL
Modern Language Association (MLA):
Credit Enhancement. Payroll & Accounting Heaven Ltd. September 27, 2021
Chicago Manual of Style (CMS):
Credit Enhancement. Payroll & Accounting Heaven Ltd. (accessed: September 27, 2021).
American Psychological Association (APA):
Credit Enhancement. Retrieved September 27, 2021, from website:

Definition Sources

Definitions for Credit Enhancement are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 17th April, 2020 | 0 Views.