Overcollateralization

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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"The quality of the note buyers, the blended note rate, the overcollateralization target and the adjusted yield are all extraordinary and seem to signal that LendingPoint's plan to issue periodic securitization will be welcomed in the markets," Burnside said.
The rating reflects initial credit enhancement levels, excess spread, four levels of coverage tests including overcollateralization ratio and interest coverage tests, and an interest diversion test.
Credit enhancement on the Notes consists of i) overcollateralization ii) yield supplement overcollateralization iii) subordination (in the case of Class A, Class B and Class C notes) and iv) amounts on deposit in a reserve account.
A two-notch recovery uplift is assigned as the underlying assets are viewed as standard and the relied upon Overcollateralization Components (OC) of 10.5% is greater than the 7.5% credit loss in a 'AAA' stress scenario.
The agreement is structured as a modified coinsurance treaty with counterparty protections around investment guidelines and overcollateralization established to meet Lincoln Financial's risk management objectives.
The cash surplus account (due to the initial overcollateralization of the transaction), along with the cash reserve from the bank guarantee collectively stand at 18.3 per cent of the outstanding bond.
Credit enhancement for the senior and subordinate notes consists of overcollateralization and projected minimum excess spread, while the senior notes also benefit from subordination provided by the class B notes.
overcollateralization, excluding excess spread; and (ii) external
The first shaky principle is that if the return on these bonds is highly correlated, so that they all default at the same time, overcollateralization is not much help.
The undercollateralization of 2.00% will grow to 1.50% overcollateralization (OC), bringing the target hard CE to the class A notes to 9.50%.
While 33 of 35 Fitch-rated CREL CDOs reported delinquencies in February, a 1.3 percent to 40.6 percent range, 15 CREL CDOs were failing at least one overcollateralization test--two more CDO overcollateralization (OC) failures than in January.
Instead of using subordination, the senior liability class in the structure can also be supported by overcollateralization. In this structure, the rated class is supported by an excess of assets.