- It is a method whereby a company attempts to improve its debt or credit worthiness. Through credit enhancement, the lender is provided with reassurance that the borrower will honor the obligation through additional collateral, insurance, or a third party guarantee.
- Credit enhancement reduces credit/default risk of a debt, thereby increasing the overall credit rating and lowering interest rates.
- It is used to obtain better terms for an outstanding debt. Securitization, posting collateral and obtaining external credit enhancement such as a letter of credit are some basic forms of credit enhancement. Firms may also increase cash reserves or take other internal measures to uphold superior solvency ratios.