Overcollateralization

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Overcollateralization

The practice or process of placing an asset as collateral on a loan where the value of the asset exceeds the value of the loan. For example, a person could pledge a farm (worth $10 million) on a loan for $5 million. Usually, however, the value of the asset only exceeds the value of the loan by 10-20%. Overcollateralization reduces the risk for the lender and improves the borrower's creditworthiness. It is used most commonly when a bond issuer wishes to improve its credit rating.
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--Sufficient asset coverage provided to the preferred shares as calculated per the funds' over-collateralization (OC) tests;
Reportedly, this receivables purchase agreement increases AFC Funding's US committed liquidity to USD1.15bn, extends the facility's maturity date to 29 June 2018, reduces the over-collateralization requirement and provides increased flexibility for AFC to offer a broader array of term structures to its dealer customers.
The transactions are to be completed on a 100% coinsurance basis, with Beechwood holding reserves and required over-collateralization in trusts, with investment guidelines and periodic true-up provisions.
The market said the assets were only worth $28 billion, resulting in an over-collateralization of $15.8 billion, or 56% more than the NCUA Guaranteed Note balances, according to Filson.
The cover pool could consist of mortgages, auto loans, credit card receivables, student loans, and other asset classes, and the designated assets in the cover pool could change from time to time to maintain minimum over-collateralization requirements.
Lenders typically rely on over-collateralization techniques as a primary means to insulate investors from losses on a receivables pool.
Short-term commercial financing, such as interim loans and bridge loans, can also be placed-in a FASIT with greater efficiency and at a lower cost than using a REMIC structure because the FASIT has the capability to remove or take in additional assets in cases of over-collateralization.
Credit enhancement may also be provided through over-collateralization when the value of the underlying assets in the pool exceeds the face value of the securities issued against it.
CE is provided by a funded loan default account to cover for future defaults that is not part of trust assets, the over-collateralization, and available excess spread.
With respect to more speculative streams of income, use of over-collateralization techniques permit the inclusion of properties such as multi-tenanted office buildings and hotels.
Additionally, the target over-collateralization has a fixed amount floor of $465,458.