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Credit Cliff |
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Credit Cliff A slang term referring to the compounding of a company's credit deterioration caused by provisions such as financial covenants, or events that trigger a change in the company's credit rating. These can put pressure on the company's liquidity or its business to a material extent. Notes: For example, if a company is performing poorly it may get a credit rating downgrade, which gives the company a higher cost of capital (because a lower rating means the company would have to pay higher interest on its debt), making the company's situation even worse.You can think of a highly leveraged company that is in financial trouble as teetering on the edge of a cliff. One false step and they'll be in a freefall! |
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Based on these revised purchase rate assumptions (assuming no change in assumptions related to yield, losses, or payment rate is warranted), in most cases, a one-category downgrade with respect to the rating of the seller/servicer should not result in a credit cliff for outstanding securitized bonds. This will help identify so-called credit cliff situations, where the creditworthiness and rating could decline precipitously under certain, lower probability but adverse scenarios. This will help identify so-called credit cliff situations, where the creditworthiness and rating could decline precipitously under certain, lower probability but adverse scenarios. |
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Credit Cliff
