An interest only strip that serves as a credit enhancer (credit enhancement). A credit-enhancing interest-only strip (I/O) is an on-balance sheet asset that meets two key conditions: it represents a valuation of cash flows related to future margin income, and is subordinated to other items. A credit enhancement is a contractual arrangement in which a bank or other entity retains or assumes a securitization exposure and, in substance, provides a certain degree of additional protection (credit enhancement) to other parties to the transaction.

Furthermore, and in form or in substance, it represents a contractual right to receive part or all of the interest and no more than a minimal amount of principal falling due on the underlying exposures of a securitization; and it exposes the holder to credit risk directly or indirectly in relation to the underlying exposures that is above a pro rata share of the holder’s claim on the underlying exposures, whether by means of subordination provisions or other credit-enhancement tools.

The strip provides the first line of defense against credit losses on the receivables (e.g., credit card receivables) underlying securitized certificates, and, as a result, are typically the most subordinated residual interests in a securitization, constituting the highest level of risk and volatility. Furthermore, the value assigned to the strip is a major driver of the gain arising on sale for the initial and periodic transfer of the receivables. Their value, therefore, impact earnings, asset quality, and capital levels.

It is known for short as CEIO or CE IO strip (CEIO strip).