credit enhancements There are a number of enhancements in structural credit products that drive the concept of taking a pool of sub-investment grade products in making them investment great. These are critical to investors and rating agencies first is subordination, which creates a priority claim for senior note holders and a cushion against losses. This is improved with more Junior notes and or equity.

Over collateralization creates a first loss Equity trash which is unrated and provides this cushion against principal losses to the rated debt.

More Equity can be added in proceeds can be used to buy more collateral the excess spread as discussed creates an additional cash buffer that can be captured in used to replenish lost senior credit enhancement. This is driven by portfolio construction the cost of debt and expenses the interest test ensures adequate interest coverage a breach of a ratio threshold triggers a return of principle to the most senior class until the test is back in compliance. This is driven by as well portfolio construction cost of debt and expenses an interest diversion test is a ratio which forces the manager to purchase additional collateral using interest proceeds until the test is back in compliance. There's usually only one test in a transaction and this can be improved by cutting back on riskier assets. For example, if there have been significant downgrades From B to Triple C and lastly the over collateralization test. This ensures adequate par coverage.

A breach of this threshold will trigger return of principle to the most senior class until the test is back in compliance and it can also subsequently stop interest payments to debt below the test level separate tests are usually done for each class of the notes.

Again, cutting back on the riskier assets will improve this test.