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

Tax-Secured Debt■ The financed facilities should be owned by a singlepurpose,bankruptcy-remote entity. The facilitiesmay than be leased back to the private operator.■ The obligation to make debt service payment onbonds sold to finance these projects should be aspecial obligation of the issuing entity and payablesolely from the revenues of the trust estate;■ The contract with the federal government, alongwith the revenues associated with those contracts,should be assigned to the single-purpose, bankruptcy-remoteentity and, in turn, pledged to athird-party collateral agent as part of the collateralsecurity for the bonds;■ Confirmation that the contract revenues supportingthe transactions would not be property of thebankruptcy estate of the private operator or subjectto the automatic stay provisions were the privateoperator has to file for bankruptcy;■ Payments from the contract revenues should, inthe first instance, be used to pay debt service onthe bonds; second, to make any required propertytax or insurance premiums; third, to replenish allrequired reserve accounts and, last, to flow backto the operator for prison facility operations; and■ Confirmation that the operator can be terminatedand replaced in the event of a default by theoperator under any of the contracts with thefederal government.Moreover, the single-purpose, bankruptcy-remoteissuer should be owned by an independent not-forprofit-corporationhaving no affiliation with theprivate prison owner, preferably a not-for-profitthat has as a charter commitment to aid governmentin the providing of essential services.Strong project essentialityThe project facility should be of an essentialnature meeting the stated mission of the contractingfederal department.Strong lease revenue streamThe lease payments should originate from rentalreimbursement payments due the M&O contractorfrom the federal government under the M&O contract.The contracting federal department, as partof its consent to and acceptance of the lease, mustacknowledge that the rent under the lease, togetherwith other operating expenses are allowable reimbursableexpenses under the M&O contract.Rent paymentsRent payments should be paid directly to theTrustee by the contracting federal department thruthe Federal Assignment of Claims Act.Requirement to renewIf the M&O contract does not extend for the termof the lease, the M&O contractor must providethat as long as its M&O contract with the contractingfederal department remains in force and effect,the M&O contractor will exercise each of theextension options, which should match the extensionoptions of the lease.Operator substitutionIf the private operator fails to meet the requirementsof the M&O contract with the contractingfederal department, that contract may be terminated.The transaction should be able to rely on thegovernment department or a number of other privateoperators being available to assume the roleof operator. The M&O contractor should agreeunder the lease that any replacement operatorresponsible for the management of the facilityenters into a replacement lease for the propertywith the same terms and conditions as set forth inthe lease. As such, the payments from the contractingfederal department in support of the debt servicepayments on the bonds will continue regardlessof who the M&O contractor is.Strong monitoring of the facilityDetails surrounding the procedures and requirementsof the facilities will also be evaluated. Thecontracting government department should regularlymonitor the facilities and have measures in placethat will rapidly address any contract violations. ■110 Standard & Poor’s Public Finance Criteria 2007