Series 50: Credit Enhancements

Credit Enhancements

A credit enhancement is a legally binding pledge of financial support coming from a source other than the issuer that virtually guarantees repayment of the bond and serves to improve the bond’s creditworthiness.

Bonds with credit enhancements have higher credit ratings than ones without. The underlying rating is the rating that an issue would receive without any credit enhancement.

Three types of credit enhancement are:

1.Bond insurance

2.Advance refunding

3.Letters of credit

A bond insurance policy assures that the issuer’s debt service obligations will be paid on time and in full. Bond insurance requires a one-time premium based on the projected debt service over the life of the bond. After the bond issue is insured, it will take on the rating of the bond insurer. Bond insurance usually lasts for the life of the bond. This type of insurance is only available for non-callable bonds.

A bond’s credit can also be enhanced through advance refunding. This is when an issuer issues new bonds to p