3.1.4.2. External Credit Enhancement
#fixed #income
A
letter of credit from a financial institution is another form of external credit enhancement for a bond issue. The financial institution provides the issuer with a credit line to reimburse any cash flow shortfalls from the assets backing the issue. Letters of credit have also become a less common form of credit enhancement since the credit crisis as a result of the credit rating downgrades of several financial institutions that were providers of letters of credit.
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