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

Senior Livinging” criteria may apply. In some cases, even if theobligated group is adequately “ring-fenced” fromcredit risk of non-obligated affiliates, other factorscontribute to a closer linkage than the legal structurealone may suggest.In general, the rating model looks like this:Strategic Importance: The Probability Of SupportThe single most important judgment thatStandard & Poor’s rating analysts will make iswhether the management team of the rated organizationwould let the non-obligated community failin a worst-case scenario. To understand this, it isimportant to understand the strategic importance ofnon-obligated facilities. Non-obligated communitiesthat further the mission and strategic intent of therated organization, that are located near existingobligated communities, and that have the same or asimilar name will likely be viewed as closely connectedto the rated organization. An organization islikely to provide at least some assistance to a troubledcommunity, or be hesitant to divest of a projectthat has strategic importance. Another relatedconcept is that the obligated entity may have a“moral obligation” to support a community, particularlyif it is co-branded and located in a contiguousor market with existing communities or sharesa common sponsor—often a religious entity. Thisconcept is based on the supposition that a ratedentity may, from a practical standpoint, be forcedto support a non-obligated facility, if not doing socould potentially cause damage to an organization’sreputation or standing within a community. Forexample, if a “John Doe House”, a (fictional)CCRC, adds a second campus in close geographicproximity and calls it “John Doe House South”,and the campuses are associated with each otherfrom a marketing perspective, the parent or evenJohn Doe House management would likely supporta troubled John Doe House South rather thanabandon it to bankruptcy or closure.Financial Relationships Among PartiesOther evidence of linkage or separation can bedetected from an analysis of the financial commitmentsamong the obligated and non-obligated entities,as well as the obligated group’s track record indealing with affiliated projects. Most obvious areasto examine include inter-company loans, cash transfersor other movement of funds or undertaking ofliabilities among obligated and non-obligated entities.Another important, but more subtle financialrelationship that exists between obligated and nonobligatedentities (or between a parent and its obligatedand non-obligated affiliates) is related tomanagement services. Management relationshipsand fees charged for management services should beclearly formulated and documented in the form of acontract. Waiving or subordinating management feesfor projects that are experiencing financial difficultyis one means of providing support for an entity thatfalls short of explicit cash transfers, loans or subsidies.Similarly, an undefined fee methodology (orcharging of higher or lower fees to communitiesbased on financial health) can be a way to assist anailing community. An organization’s track record inthis regard is germane to assessing the degree oflinkage or separation of an obligated group. A historyof divesting of under-performing organizations isalso helpful in this area.Scope And Management ResourcesOne of the most qualitative and least tangible areasof analysis is the question of the commitment ofmanagement resources toward non-obligated ventures,and the magnitude of the non-obligated projectsrelative to the obligated group. Even if theobligated group is legally “ring-fenced” and has nohistory of financial support for non-obligated projects,significant growth activities can pose creditrisk, by potentially stretching the resources of theobligated group’s management team or causingmanagement to lose focus on core operations.Related to this, the sheer scope of non-recoursedebt relative to the obligated group may be a creditconcern, for example if non-recourse debt is ordersof magnitude larger than the obligated group debtand financial resources.Ring-FencingConsolidated Entity RatingParent and All Subsidiaries(Obligated and Non-Obligated)Assumes Full LinkageDegrees of Linkage/Ring-FencingRating Continnum (Maximum 3 Notches)Obligated Group RatingOnly OG EntitiesAssumes Full Ring FencingMore LinkedMore Ring-Fencedwww.standardandpoors.com167