Credit enhancement

The process of reducing credit risk of a transaction with a counterparty by requiring insurance, cash collateral, profit retention, third party guarantee, letters of credit payable to a recipient like a project company as security for a project participant's contractual undertakings, a debt service reserve fund, and/or contingent equity commitments. This can also imply over-collateralisation.
Similar for bondholders to provide them with reassurance that principal and interest payments will continue if the borrower defaults.
Credit enhancements are typically used in securitisation or project finance transactions to reduce interest costs and improve credit ratings.