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

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

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Commercial Paper, VRDO, And Self-Liquidity‘A-1’, the long-term credit rating would need to beat least ‘A-’. When an obligor has multiple lienpositions, Standard & Poor’s will look to the longtermrating on the intended takeout financing toevaluate the correlation between the short-andlong-term ratings. For example, if an obligor issuessubordinate lien CP but intends to ultimately retirethe CP using senior lien debt, it is the long-termrating on the senior lien debt that will determinethe short-term rating. (See chart “Correlation OfCP Ratings With Long-Term Credit Ratings”).Conversely, knowing the long-term rating willnot fully determine a CP rating, considering theoverlap in rating categories. However, the range ofpossibilities is always narrow. To the extent thatone of two CP ratings might be assigned at a givenlevel of long-term credit quality (e.g., if the longtermrating is ‘A’), overall strength of the creditwithin the rating category is the main consideration.For example, a marginal ‘A’ category credit likelywould have its commercial paper rated ‘A-2’, whereasa stronger ‘A’ category will likely receive an ‘A-1’.Backup PoliciesStandard & Poor’s deems it prudent for obligorsthat issue commercial paper to make arrangementsin advance for alternative sources of liquidity. Thisalternative, backup liquidity protects an obligorfrom defaulting if they are unable to roll over theirmaturing paper with new notes, because of ashrinking overall CP market or investor concernsabout the obligor that might make CP investorsreluctant to extend additional credit to the obligor.Many developments affecting a single obligor orgroup of obligors—including bad economic conditions,a lawsuit, management changes, a ratingchange—could make commercial-paper investorsflee the credit.Given the size of the CP market, backup facilitiescould not be relied on with a high degree of confidencein the event of widespread disruption. A generaldisruption of CP markets could be a highly volatilescenario, under which most bank lines would representunreliable claims on whatever cash would bemade available through the banking system to supportthe market. Standard & Poor’s neither anticipatesthat such a scenario is likely to develop, norassumes that it never will.<strong>The</strong> norm for public finance obligors is 1x coverageof outstanding CP with excess liquid assets orbank facilities in an amount that equals all suchpaper outstanding providing the backup support.Under some exceptional circumstances, Standard &Poor’s will assign a strong short-term rating withcoverage of less-than 1x, if the obligor has a longtermrating of ‘AA-’ or higher, and can demonstratethrough some combination of their own resourcesor alternative bank facilities, that they will alwayshave the capacity to cover all CP as it matures,including in the event of a call on the liquid assetsof the obligor. In these cases, it is possible thatStandard & Poor’s will assign a strong short-termrating with coverage levels in the range of, but nolower than, 50%-to-75% of CP outstanding as longas they have 1x coverage of all maturing CP.Determinants in the acceptable level of coverage ofCP are the planned use of CP proceeds and intendedtakeout financing. Standard & Poor’s will generallylook for relatively higher coverage ratios if thepurpose of the CP issue is to finance operations andto manage intra-year cash flows. Higher coveragelevels will also be expected when the issuer intendsto retire the CP with its own cash. Coverage can belower when the obligor intends to issue long-termdebt to retire outstanding CP.Available cash or marketable securities are idealto provide backup, although it will likely be necessaryto “haircut” their apparent value to accountfor potential fluctuation in value. Marketability ofliquid assets is also critical. <strong>The</strong> vast majority ofcommercial paper issuers rely on bank facilities(lines of credit) for alternative liquidity.This high standard for back-up liquidity has provideda sense of security to the commercial-paperCorrelation Of CP Ratings WithLong-Term Credit Ratings*AAAAA+AAA+AA-BBB+BBBAA-BBB-*Dotted lines indicate combinations that are highly unusual.A-1+A-1A-2A-3www.standardandpoors.com19

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