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

Commercial Paper, VRDO, And Self-Liquiditymarket demand. Since the maturity of a BAN is significantlyshorter than a series of bonds, the creditrisk of a downgrade that would deny an issueraccess to the market to issue bonds to retire BANsis significantly reduced, short of BAN issuance fornon-capital costs which might actually be a sign oflong-term distress.Cash liquidityA last factor that can support a high BAN rating isthe availability of cash reserves sufficient to repayBAN issuance in case long-term debt cannot or isnot issued, providing sufficient cash to repay BANsat maturity without the need to access the long-termcapital markets. Such instances are rare, however,given that issuers with sufficient cash reserves onhand to pay off short-term debt would generallyalso exhibit healthy long-term credit characteristicsand, by default, ability to issue long-term debt ondemand. In such scenarios, though, adequate comfortshould be achieved the sufficient cash would bein place at the time of BAN maturity, and use ofcash for repayment should not significantly impactoperations. Availability of cash, however, whereother credit factors are weak does not on its ownguarantee a high BAN rating. ■Documentation RequirementsThe following note documentation requirements are intendedas general guidelines. Standard & Poor’s will requestadditional information when appropriate. Supportinginformation will vary depending on the nature of theparticular financing. For example, documentation for cashflow notes issued in anticipation of property taxes shouldinclude relevant tax collection data.For cash flow notes and BANs:■ Offering memorandum or official statement;■ Note indenture or resolution;■ Audits for two years; and■ Current and proposed budgets.For cash flow notes only:■ Cash flow statements, including cash based receipts anddisbursements (see example);■ Current projection through note maturity;■ Historical projections and actual results (when available);■ Documentation of resources in other funds available fornote repayment;■ Fiscal and paying agent agreement, if applicable;■ Investment agreement, if applicable; and■ Legal opinion.Commercial Paper,VRDO, And Self-LiquidityStandard & Poor’s Ratings Services PublicFinance department rates the commercial paper(CP) programs and variable rate demand obligations(VRDOs) of governmental entities and nonprofitorganizations (including colleges, universities, andhospitals). CP program ratings can be based on theissuer’s creditworthiness or a third-party creditfacility. Issuers in all sectors are increasingly issuingVRDOs and other types of variable rate debt, suchas auction rate and index bonds. These issuers seekto lower their borrowing costs as they encounter asignificant difference between short- and long-termtax-exempt interest rates. Also, the efficient pricingof derivative products by broker-dealers, such asinterest rate swaps, has also impacted issuer’swillingness to enter the short-term debt markets.Interest rate swaps in particular can potentially lockin interest rate savings to issuers that choose to syntheticallyfix interest rates on VRDOs. Issuers canalso use swaps to lower fixed debt service costs byconverting fixed rate debt into variable rate debt.Standard & Poor’s typically rates the tender obligationson VRDOs based on third-party liquidityfacilities, such as LOCs and standby bond purchaseagreements (SBPAs), although some highly capitalizedissuers are increasing issuing “unenhanced” VRDOs,where tender obligations on the debt are supportedby the issuer’s own liquidity sources.Issuers have the option of using their own assetsto provide liquidity support as a substitute for traditionalliquidity facilities both for CP programs orVRDO tender obligations. An issuer may alsochoose to use its own liquid assets in combinationwith liquidity facilities to provide support for liquiditydemands. An issuer's assets and other forms ofliquidity must be sufficient, liquid and creditworthyenough to meet all payment obligations on timeand in full. For VRDOs, self-liquidity must involveat least 100% backup of outstanding principal andinterest through a combination of the issuer's assetsor credit facilities. Sources to back unenhanced CPprograms do not have to account for 100% of CPwww.standardandpoors.com17