Question

what effect does collateral have on a company's debt rating and interest cost?

Answer 1

Collateral-

• Collateral is an asset that a borrower gives as security to the lender as a sign of commitment towards payment of the obligations by the debtor as they become due.
• If the borrower defaults on their loan payments, the lender may seize the collateral and sell it to recoup some or all of his losses.
• Collateral can take the form of real estate or other kinds of assets, depending on what the loan is used for.
• Collateral, especially within banking, traditionally refers to secured lending (also known as asset-based lending).

Effect which collateral have on a company's debt rating-

• Collateral creates commitment towards payment of the obligations by the debtor as they become due, in case of failure to oblige the same lender may seize the collateral. Due to this feature company's debt rating rises.
• More-complex collateralization arrangements may be used to secure trade transactions (also known as capital market collateralization).
• Rating agencies also give huge importance to collateralized debt obligations (CDOs) & give high credit ratings to borrower company which offers collateral against there debt obligation.

Effect which collateral have on a company's interest cost-

• Loans that are secured by collateral are typically available at substantially lower interest rates than unsecured loans.
• The protection that collateral provides generally allows lenders to offer a lower interest rate on loans that have collateral.
• The reduction in interest rate can be up to several percentage points, depending on the type and value of the collateral.
• For example, the interest rate on an unsecured loan is often much higher than on a secured loan or logbook loan, as the risk for the lender is then increased.