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

Municipal Structured FinanceIntroduction To Structured FinanceStructured municipal financings are an integralpart of the municipal debt market. Structureddebt includes conventional transactions—such asbonds, notes, and commercial paper (CP)—securedby various types of credit and liquidity facilities,and secondary-market derivative products—such asprincipal and interest strips, custodial receipts, andtender option bonds.Standard & Poor’s Ratings Services rates primarymarket structured debt on the basis of third-partycredit or liquidity support without regard to theissuer’s underlying rating. To substitute the thirdpartycredit provider’s rating for that of the issuer,the credit provider must secure debt service payments,and/or, in the case of bonds with demandoptions, guarantee payment of tenders.In the secondary market, a municipal trust structureis used to issue receipts and act as a conduit forthe payment of principal, interest, and premiums, ifany, from the underlying obligation to the derivativereceipt holder. The rating of the derivative is determinedby the rating on the underlying bonds, whichmust have a current Standard & Poor’s rating.However, the rating on the derivative may also beenhanced by using credit and/or liquidity support.Standard & Poor’s assigns a long-term or noterating to fixed-rate municipal bonds and notes. Adual rating (for example, ‘AAA/A-1+’) is assignedto municipal variable-rate demand obligations(VRDOs) and generally benefit from credit and/orliquidity enhancment. The first component of thedual rating reflects the likelihood of payment ofprincipal and interest when due. The second componentaddresses the demand feature of the bondand the likelihood of payment of the purchase priceof tendered bonds. In the case of short-term variable-ratenotes, Standard & Poor’s note rating symbols(for example, ‘SP-1+/A-1+’) are used for thefirst component of the rating instead of long-termsymbols. For municipal commercial paper programs,Standard & Poor’s commercial paper symbolsare used (for example, ‘A-1+’).Documentation RequirementsThe primary documents needed to rate structured issuesare listed below. While the list is fairly standard, additionaldocuments may be requested in order to complete a rating.Primary market issues■ Rating request.■ Trust indenture.■ Letter of credit or SBPA as applicable.■ Authorizing resolution.■ Remarketing agreement.■ Paying/tender agent agreement.■ Depository agreement (commercial paper issues only).■ Preference opinion, if requested.■ Enforceability opinion(s), if requested.■ Offering memorandum.Secondary market issues■ Rating request.■ Custody/trust agreement.■ Offering memorandum, if requested.■ Cash flow verification, if requested.■ Offering memorandum for underlying security.■ Tender option agreement, if applicable.■ Broker-dealer agreement, if applicable.■ Auction agent agreement, if applicable.■ Market agent agreement, if applicable.■ Credit or liquidity support documents.■ Tax opinion.■ Enforceability opinion(s), if applicable.■ True sale opinion, if applicable.Outlooks are generally placed on VRDOs thathave credit provided by other than an LOC bank.The outlook will reflect the outlook of the obligoror bond insurer as applicable. Commercial paperratings, due to the tenor of the security do notreceive outlooks. ■www.standardandpoors.com207