How is credit enhancement typically expressed?

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Credit enhancement is typically expressed as a percentage of debt service because it relates to the degree of additional backing that reduces the risk of default on a bond issue. This enhancement mechanism can make the debt more attractive to investors and often leads to a better credit rating for the issuer. By expressing credit enhancement in terms of debt service, it allows for a clearer understanding of how much additional security is provided relative to the total payments required.

When financing is evaluated, investors pay close attention to the relationship between the enhancements and the overall obligations of the issuer. A percentage of debt service effectively communicates the degree of risk mitigation achieved through various mechanisms like insurance, guarantees, or collateral. This approach ensures that investors can assess the financial stability of the bond while factoring in the protective measures that have been put in place.

In contrast, expressing credit enhancement as an absolute dollar amount does not contextualize the enhancement concerning the overall debt obligations, while a portion of total issuance lacks clarity in conveying how enhancement specifically impacts debt service obligations. An increase in bond rating is a potential outcome of credit enhancement but does not directly measure or express the enhancement itself.

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