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

Cross Sector CriteriaShort-Term DebtNote RatingsShort-term debt instruments rated by Standard &Poor’s Ratings Services include cash flow notessuch as tax and revenue anticipation notes (TRANs),bond anticipation notes (BANs) and cash flow notepools. Note ratings differ from bond ratings in thatmany long-term credit risks are mitigated by thecomparatively short repayment period. Conversely,liquidity factors that enhance note security may notallay long-term credit concerns or provide additionalcomfort regarding the issuer’s ability to pay its debtobligations over the long-term.A strong liquidity position is a primary determinantin the assignment of a cash flow note rating. Thereis no exact debt service coverage benchmark thatdetermines a specific rating. Financial and cashmanagement and the quality of the pledged revenuestream, which includes the reliability of the pledgedrevenue source, are additional factors consideredwhen determining a note rating. Moreover, thequality of financial reports—including audits, issuerconstructed historic and projected monthly cashflow statements, and budget projections—areadditional credit factors.Municipal note issues are divided into two majorcategories requiring different rating approaches:cash flow notes and bond anticipation notes (BANs).Cash flow notes are generally referred to as taxanticipation notes (TANs), revenue anticipationnotes (RANs) or tax and revenue anticipationnotes (TRANs).TRANs, TANs and RANsState and local governments typically issue cashflow notes to address a mismatch between thereceipt of revenues and disbursements for ongoingoperations. Many issuers receive major revenuesunevenly during a fiscal year, while operatingexpenditures typically follow a level monthly pattern.For example, a school district may receive thebulk of its annual property taxes in June; however,it needs to make salary and benefit expendituresevenly each month. The district may issue cashflow notes to bridge the gap between receipts anddisbursements during the period when cash balancesare insufficient.The ratings on cash flow notes—TRANs, TANs,and RANs—rely on:■ The security pledged to retire the notes;■ The notes’ legal structure;■ The issuer’s historical and projected liquidityposition, as reflected by its cash management andbudgetary practices;■ The reliability of the issuer’s primary revenuesources; and■ The issuer’s overall fiscal health.Structural AnalysisSecurityThe specific security pledged to retire cash flownotes plays a role in the assignment of a note rating.State and local statutes governing short-term debtissuance and the resolution authorizing issuance ofa particular note usually define the security. Thesecurity may range from a single tax or generalfund revenue pledge, to a full faith and credit GOpledge. Broad unlimited-tax GO pledges are viewedmost favorably since all of the issuer’s resources arepledged to note repayment. While the pledge of aspecific narrow revenue source may be viewed lessfavorably than a combination of revenue sources,the analysis hinges on the quality and consistencyof the revenue in question. In most cases, a narrowbut generally reliable single tax pledge can achievethe same rating as a broader full faith and creditGO pledge.Flow of funds-segregation of pledged revenuesThe monthly flow of funds takes on added importancefor cash flow notes because of the potential strainon resources required on one maturity date torepay a note. The issuer must ensure that sufficientresources are available to make the note paymentat maturity.The segregation of pledged revenues in separatenote repayment accounts prior to note maturityreduces the likelihood that weak budget and financialperformance will interfere with full and timely paymentof debt service. However, sufficient resourcesto pay debt service at note maturity—after allexpenditures are made—is most critical in theassignment of a high investment-grade note rating.www.standardandpoors.com11