S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Tax-Secured Debt■■difficult because the government usually has noeventual equity interest in the facility. Ownershipof the building being leased normally resides withthe developer after the government makes all of itslease payments. Therefore, the incentive to makelease payments in later years is not enhanced bythe expectation of eventual ownership.Triple-net lease: Despite vendor involvement ordeveloper ownership, the lease must be triple-net,without the right of offset.Bankruptcy: An absolute assignment of rentalpayments from the private third-party lessor tothe trustee is required.Nontax-Supported LeasesHigher education leasesColleges and universities frequently use leases as ameans of financing capital improvements andequipment such as computers, telecommunicationsequipment, and research facilities. Historically,capital leases were the most used form of leasingfor institutions of higher education. From a ratingperspective, many of these capital leases are nodifferent than other bonded, long-term debt. Aninstitution wishes to finance an academic orresearch building over a long period of time, butmay be subject to state debt restrictions, whichprohibit the issuance of GO debt. For public universities,because of these debt limitations, capitalleases are often subject to annual renewal or reappropriationof debt service. However, public universitiesoften issue capital leases that are notsubject to appropriation. Typically, this instanceoccurs when a university wishes to involve outsidedevelopers, or affiliation foundations.Capital leases’ payment of debt service can besubject to annual appropriation, or it can be a continuingand unconditional obligation without theoption of termination. The rating assigned byStandard & Poor’s depends on the underlying security;if a lease for a public university is subject toannual appropriation of debt service, the ratinganalysis follows the criteria established for othermunicipal entities such as states and local governments.Therefore, in most instances, a lease supportedby legally available funds of a universitywill be rated one notch from the general obligationequivalent rating. There is one caveat, of course,which is that the lease rating is still a function ofthe underlying nature of the lease pledge and theobligor’s general credit quality. If the underlyingsecurity on an appropriation lease is not legallyavailable funds, or the broadest possible pledge,such as a general revenue pledge, then Standard &Poor’s might notch it further than leases for stateand local government entities.For instance, consider an appropriation lease fora parking system. If the revenues that actuallysecure the lease are only parking revenues, a fairlynarrow revenue stream, the rating would likely benotched lower than that on a general revenueappropriation lease. For a capital lease to be ratedon par with a general obligation equivalent rating,it should be continuing and unconditional, not subjectto annual renewal or appropriation, andsecured by the broadest possible pledge of revenues.Most capital leases for private colleges and universitiesreflect an unsecured general obligation. Mostprivate college bond ratings also reflect an unsecuredgeneral obligation pledge. Unlike health careinstitutions, which historically have placed a lien ongross revenues, private colleges and universities typicallydo not. Therefore, a capital lease, which is anunsecured corporate pledge, can be rated on parwith other unsecured debt of the institution.Health care leasesIn the not-for-profit health care sector leases are afairly common means of financing for majorequipment, such as radiology machines, telephonesystems, and computers. From time to time theyare used to lease additional space for physicians’offices, research facilities, or back-office functions.These leases are usually operating leasesalthough capital leases do occur from time totime. Capital leases are rare but are always incorporatedin the long-term debt structure of theorganization. If a capital lease for a health caresystem is subject to annual appropriation of debtservice, the rating analysis follows the criteriaestablished for other municipal entities, such asstates and local governments.Transportation leasesGenerally speaking, leases are not used as a financingvehicle in the transportation sector. In the veryrare instance when an airport issues lease bonds,where debt service is subject to appropriation risk,but not abatement risk, the rating analysis followsthe criteria established for other municipal entities,such as states and local governments. ■106 Standard & Poor’s Public Finance Criteria 2007