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Credit Enhancement
Credit Enhancement is the
unconditional, irrevocable guarantee of income
flows and counterparty risk.
Improving credit ratings
An example of a 'credit enhancement' involves
securitisation - a way of raising money by turning
predictable cash-flows (such as mortgages or royalty
income) into securities which are then sold to
investors.
For such a deal to succeed, it is vital that the securities have a good credit rating - and this can be achieved by insuring
the cash-flows from which the securities derive.
Crossing new frontiers
Such financial risks mechanisms are a growing
feature of the insurance business. They occupy
territory that offers the more forward-thinking
institutions a new array of challenges, a fresh
stream of clients and an increasingly sophisticated
range of products.
For an idea of the kind of
solutions that we have been providing our clients
over the years, please have a look through the
more detailed examples below:
- 'Unfunded' Investor/Liquidity
Creation
- Project/Cashflow Credit
Enhancement
- Portfolio of Corporate
Credits
- Secured Credit
- Portfolio Loan Receivables
'Unfunded' investor
/ liquidity creation
In many of the transactions that we enter into,
for both residual value and credit enhancement,
the role assumed is that of an 'unfunded' investor.
The risks associated with
owning the asset (i.e. a note issue supporting
the acquisition of property) are transferred onto
the QBE balance sheet, as a liability, via the
issue of an insurance policy. Instead of purchasing
the asset outright and thus the economic performance
of that asset, QBE assumes the associated economic
risks through the issue of an insurance policy
promising to indemnify the owner of the asset
in the event of non-performance. This creates
liquidity of the asset for the owner and 'monetises'
it.
Project / Cashflow
Credit Enhancement
An entity, usually with a small asset
portfolio, might be looking for efficient medium-term
asset finance/refinance.
QBE will insure the position
of the lender or note-holder in the financing.
The note-holders or lenders look to QBE for their
security. QBE is secured on the underlying assets
and income streams.
Lease Receivables
Lessors seeking to reduce exposures to
core lessees by protection on the lease receivable
stream. Portfolio or single lease protection available.
Secured Credit
A bank may wish to sell the risk, or
have the risk insured, of a company/lessee during
the remaining life of a secured loan/lease. This
will typically allow the bank to realise a profit
on the underlying transaction.
QBE can insure the bank's
loan or the debt associated with the lease,and
in doing so, have the same security rights and
interests as those of the bank.
Portfolio Loan Receivables
A corporate might want to monetise its
future receivable streams by selling them to investors.
A true sale of the receivable
streams (e.g. short-term loans) is made to a Special
Purpose Vehicle Company, which in turn sells these
receivables to investors. The Asset Protection
team can insure the investor's return. Typically,
the QBE position will be over-collateralised.
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