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

Cross Sector Criteriaauthorized since ratings reflect the issuer's ongoingability to provide funds to meet maturing CP. Also,the issuer does not have to provide sources that arerated equivalent to the CP rating. This is not thecase, however, with VRDOs. The distinguishingfactor between unenhanced CP and VRDOs is theissuer's control over the timing of payment events.CP programs have predictable maturity schedules,whereas VRDOs are subject to tenders at theoption of the bondholders at any time. The unpredictablenature of VRDO tenders necessitates amore conservative approach towards the qualityand sufficiency of liquidity reserves for VRDOs.Therefore, short-term ratings on VRDOs willreflect the lowest-rated liquidity sources backingthe tender obligation.Issuers that elect to issue unenhanced CP orVRDOs and back these obligations with their ownliquid assets rather than a credit facility providedby a rated entity, must undergo a formal LiquidityAssessment review by Standard & Poor's(see Self Liquidity).Extendible Commercial PaperExtendible commercial paper is almost identical totraditional commercial paper, with one major difference:the issuer can choose to extend the maturitydate of the CP beyond the initial maturity date ofone to 270 days from issuance. Extendible CPallow an issuer to cover the liquidity risk of a failedor potential failed remarketing of its paper andavoid default by exercising its option to extend thematurity date, thus precluding a need for liquidity.Extendible CP is rated the same as traditional CP.The rating does not address the likelihood of extension—onlypayment in accordance with terms. Anextension does not constitute a default of the paper.Extendible CP Extension PeriodStandard & Poor’s does not have specific extensionperiod requirements for rating extendible CP. Theextension period for each individual extendible CPfinancing will vary on a case-by-case basis. Thequestion is: how much time does an issuer need toarrange financing to retire extendible CP? Theamount of time required will depend, in large part,upon the overall credit strength of the issuer with atrack record of market access. A higher-rated issueris less likely to be denied access to the CP marketthan a lower rated entity. Since the vast majority oftraditional CP issuers and likely ECN issuers inpublic finance are major market players (such asstates, major counties, cities, universities, hospitals,utilities and housing agencies) and rated at least ‘A’,denial of market access is remote. At the time of theECP issuance, borrowers should have taken allneeded steps to put long term financing in place, inorder to ensure a smooth take out of the CP at theend of the extension period.Partially enhanced CP programsIssuers may provide partial enhancement of CP programsby providing a credit facility for payment ofCP principal only. In most partially enhanced structures,the issuer pledges to cover interest only andrepay the enhancer bank for CP principal draws. Ifthe issuer has secured a bank facility as partialcredit replacement, and is pledging its own creditfor interest only, Standard & Poor’s will rate the CPbased on a weak-link approach, using the lower ofthe bank’s short-term rating or the issuer’s short-termrating equivalent. The reason for this is due to thefact that both principal and interest of CP must bepaid upon maturity and neither the bank nor theissuer is obligated to pay both components. If, however,the issuer is pledging its own credit support asa secondary source of payment for CP principal,Standard & Poor’s can rate the CP program basedon the issuer’s short-term rating equivalent, irrespectiveof the credit bank’s rating because theissuer is ultimately obligated to repay both principaland interest upon CP maturity.If a partially enhanced CP program rating is ultimatelybased on the bank’s short-term rating, allconditions of the LOC backed CP criteria discussedabove will apply. If the CP program rating is to bebased on the issuer’s short-term rating equivalent,all conditions of the unenhanced CP criteria shouldbe met as described above. Additionally, if theissuer is serving as a source of payment for CPprincipal, Standard & Poor’s will look to see thatthe credit facility and bond documents meetStandard & Poor’s criteria for “confirming”LOCs (see "Confirmation LOC Rating Criteria"section of "Public Finance Criteria: LOC-BackedMunicipal Debt").Commercial PaperEvaluation of an issuer’s commercial paper (CP)reflects Standard & Poor’s opinion of the issuer’sfundamental credit quality. The analytical approachis virtually identical to the one followed in assigninga long-term credit rating, and there is a strong linkbetween the short-term and long-term rating systems.Indeed, the time horizon for CP ratings is not afunction of the typical 30-day life of a commercialpapernote, the 270-day maximum maturity for themost common type of commercial paper in theU.S., or even the one-to-three-year tenor typicallyused to determine which instrument gets a short-termrating in the first place.To achieve an ‘A-1+’ CP rating, the obligor’scredit quality should be at least the equivalent of an‘AA-’ long-term rating. Similarly, for CP to be rated18 Standard & Poor’s Public Finance Criteria 2007