It encompasses a variety of provisions that may be used to reduce the credit risk of an obligation. Credit enhancements are often incorporated into OTC derivatives, corporate debt, securitized debt and other instruments.
Credit enhancement is a key part of the securitization transaction in structured finance, and is important for CRA (Credit Rating Agencies) when rating a securitization.
Techniques of credit enhancement include Collateralization, third party loan guarantees, credit insurance, and credit letter.
Other techniques may sometimes also be referred to as credit enhancement. These include netting agreements, credit downgrade triggers, and bundling with credit derivatives.