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

Cross Sector Criteriarating TANs and TRANs for detail on the analysisof the individual cash flows. Once that principalportion is determined, the reserve level needed toovercollateralize to the desired rating level is establishedaccording to standard requirements. Reservelevels for ‘SP-1+’ rated pools have ranged between8%-20%, reflecting the underlying credit quality ofthe participants or other structural enhancementsPool StructureAs with stand-alone cash flow note ratings,Standard & Poor’s evaluates the legal security, thelien position, and the flow of funds, including thesegregation of pledged revenues into separate debtservice repayment accounts for each participant. Inaddition, for cash flow note pool ratings,Standard & Poor’s confirms that all participants arerequired to make full repayment of principal andinterest prior to the maturity date of the note poolitself. In the case of note pools, it is important thatsegregated pledged revenues are held in accountsunder the custody of a third party.Similar to stand-alone cash flow note ratings,when repayment accounts are held with a thirdparty paying or fiscal agent, Standard & Poor’s alsoconfirms that the legal documents insulate the issuefrom paying agent or fiscal agent risk. All investments,including Guaranteed Investment Contracts,are restricted to maturities that mature no laterthan the maturity date of the TRANs.A common approach to investing note proceedsand repayment amounts is to place the money in aguaranteed investment contract—or GIC. Theseinstruments offer the investor a guaranteed returnon the amount invested at a time certain. Pleaserefer to Standard & Poor’s investment guidelinesfor information on permitted investments.Bond Anticipation NotesBond anticipation notes (BANs) are generally usedas an interim financing vehicle for capital projects.BAN debt service is typically repaid with bond proceeds,which requires the issuer to access the capitalmarkets. Standard & Poor’s assumes that mostinvestment-grade issuers have access to the publiccredit markets to sell bonds to retire BANs and theBAN ratings reflect that assumption. BorderlineTable 3 TRAN Pool Reserve Requirements (%)—Pool rating—Participant rating SP-2 SP-1 SP-1+SP-3 25 30 35SP-2 20 25SP-1 20investment-grade credits or those on CreditWatchor with negative outlooks, however, are notassumed to have ready market access and the BANrating assigned may reflect those risks.When assigning a rating to BANs, Standard &Poor’s will consider these factors:■ The issuer’s fundamental credit strengths, asreflected in its bond rating; and■ The issuer’s demonstrated experience in the publiccredit markets, including frequency of its debtissuance and the historical demand for its paper.In all cases, regardless of other strengths, thelegal authority to refinance the notes with longterm debt or cash must be in place prior BANissuance. In addition, the issuing entity must carry aStandard & Poor’s long-term bond rating, an indicationof market access, to secure a BAN rating.BANs are rated based on an approach that blendsthe issuer’s fundamental credit factors with likelyaccess to the public credit markets to issue debt. Theapproach emphasizes the issuer’s long-term bondrating as a measure of both these factors. Issuerswith healthy. stable long-term bond ratings and theappropriate authorization to issue additional longtermdebt can ususally achieve a high BAN rating.In most cases, BAN issuance takes place withinthe context of a well-managed capital plan withparticular timing constraints for long-term debtissuance; therefore, BAN issuance does not in andof itself pose a long-term credit concern. In somecases, however, BAN proceeds may be used to fundongoing expenses unrelated to capital outlay or tofinance accumulated deficits. Issuers who use BANproceeds as the first step in a plan to ultimatelybond out these non-capital costs are often experiencingfiscal stress and, possibly, the first stages oflong-and short-term credit deterioration. In suchinstances, BAN issuance may be an indication ofpotential pressure on the issuer’s long-term ratingand, in occasions of significant fiscal stress, lack ofready access to long-term capital markets to repayoutstanding BANs. In such instances, credit concerncould be reflected in a lower short-term BAN and,ultimately, long-term bond rating.Market accessIn certain cases, issuers with lower investmentgrade bond ratings but ample demand for theirpaper and market experience may achieve highinvestment grade BAN ratings. For example, a veryactive issuer in the long-term credit markets, due toa sizable ongoing capital program or other factors,may exhibit long-term credit risks reflected in along-term rating that may not necessarily curtaildemand for that debt in the public markets. Thekey factors in such circumstances is the frequencyof long-term debt issuance and predictability of16 Standard & Poor’s Public Finance Criteria 2007