Concept of Credit Enhancement
"Credit enhancement" or "enhancing credit" shall means, in economic and financial terms, to enhance or strengthen credit of obligors (corporations and individuals) or credit of certain receivables (ie., loan receivables, trade receivables, property). In modern financing, the word "credit" often means "monetary lending" and is one of the essential concepts in capitalism.
A typical means of credit enhancement is to obtain collateral in such forms as "guaranty from a third party" or "security over property (mortgage or pledge)". However, there are many other options in credit enhancement. In European and U.S., a number of business transactions have been guaranteed by wealthy third parties. Lloyds insurance market is a good example. Credit Enhancement provides a number of new opportunities by integrating insurance and finance.
Form of Credit Enhancement
The basis of "credit enhancement" is that the obligor pays a guaranty premium to a third party and obtain guaranty in favor of the obligor's obligations in return. The "credit" of the obligor is "enhanced" or "improved", hence the obligor is able to complete business transactions at more attractive terms and conditions. A typical guarantor is property & casualty insurance company. Financial guaranty is one of the largest insurance lines written by European and U.S. insurers. The type of business transactions to be guaranteed varies from one another and insurers hedge themselves using several means. Online insurance market has already emerged in Europe and U.S. within which not only risk associated with fire and earthquake, but also certain typhoons and meteors is being transacted.
Role of Credit Enhancement
There are three major roles of credit enhancement in view of corporate financial strategy. The first role shall be to improve the credit rating on the asset-backed securities ("ABS") issued by your companies so that they can be easily placed in the market. ABS notes are usually rated by the quality of the asset, but in cases where the originator acts as servicer, the originator's credit rating will be reflected on the ABS rating. Financial guaranty by an insurer with a high credit rating "enhances" the credit rating on the ABS notes.
The second role is to increase the amount of funds to be raised. As financial institutions have become more and more selective when extending loans, a business plan prepared by the borrowers alone may not be convincing enough. Credit enhancement may assist the borrowers's credit to increase, hence more chances for the borrowers to obtain larger funding.
The third is to hedge certain business risk with a third party. Such risk includes (but not limited to) inevitable risk associated with certain business which cannot be calculated beforehand. It would be much more logical for the corporate to hedge such risk with a third party rather than holding it within your corporate.
Development of Credit Enhancement in Japan
Credit enhancement is expected to grow rapidly in Japan as was the case in Europe and U.S. insurers, however, are yet to grow its credit enhancement insurance line as European and U.S. insurers have done. On the other hand, European and U.S. insurers are increasingly more interested in underwriting Japanese credit risk. The outstanding issue now is how to access those insurers. FinTech Global Incorporated has established FinTech Capital Risk Solutions Inc., in July a joint venture in Japan (FCRS) 2001 with JLT Risk Solutions Limited, a capital risk division of Europe's largest insurance broker, Jardine Lloyd Thompson Group. Through this network, various Japanese credit risk has been plased with foreign credi enhancers; hence Fintech Global Incorporated has become known as an expert in credit enhancement arrangement.
