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

Municipal Structured Financeissuer, and they should mature at such times and insuch amounts as will be sufficient to cover the fulland timely payment of all principal, premium (ifany), and interest on the bonds.Certain additional criteria apply to effect a legaldefeasance in the variable-rate mode. Standard &Poor’s short-term rating addresses the likelihood offull and timely payment of purchase price. If, as inlegal defeasance, the indenture were to be discharged,the put feature would no longer be availableto the bondholders—a risk inconsistent withthe rating on the transaction. To maintain theintegrity of the rating and ensure full and timelypayment of debt service, as well as purchase price,Standard & Poor’s looks for the following:■ That defeasance be eliminated in all variable-ratemodes; or■ That the defeasance period in variable-rate modesbe limited by requiring a mandatory redemptionor purchase in whole to be scheduled no laterthan the first possible purchase date (whethermandatory or optional) or interest adjustmentdate; or■ That the trustee receive written evidence fromStandard & Poor’s that the defeasance would notresult in the reduction or withdrawal of the thencurrentratings.To ensure that sufficient money will be providedin the variable-rate mode for future payments tobondholders, defeasance deposits must be made atthe maximum rate allowable on the bonds due tothe interest reset feature of the bonds. The escrowagreement should address not only the interest resetfeature, but also the potential of bondholders’ tenderingtheir bonds during the defeasance period andthe resulting liquidity issues that arise. To accountfor possible tenders, escrow funds must either beheld in cash or in an investment that matures orwould be redeemable at par no later than the firstpossible purchase date (whether mandatory oroptional) or interest adjustment date.The residual interest or the difference betweenthe maximum floating rate provided for by theescrow fund and the actual variable rate of interestmay also raise concerns during the defeasanceperiod. If this excess flows back to the underlyingobligor and the obligor were to file for bankruptcyduring the defeasance period, a bankruptcycourt might apply the automatic stay provisionsand delay future payments out of the escrow fund.To address this scenario, Standard & Poor’s willlook for either that the residual interest flow backto the credit provider or a legal opinion statingthat the bankruptcy of the obligor would not, bythe application of the automatic stay provisions ofSection 362(a) of the U.S. Bankruptcy Code, delaythe use of money in the escrow fund to pay principaland interest on the bonds. Alternatively, if theunderlying obligor carries an investment-grade rating,Standard & Poor’s may be able to concludethat the likelihood of the obligor going bankruptduring the defeasance period is consistent with therating on the bonds, and the legal opinion wouldnot be needed.The trustee and any other participant integralto the tender process (sending or receivingnotices, transferring money, or paying bondholders)must remain in their position during a defeasancewhere bondholders have retained their rightto tender the bonds.Trustee’s RoleIn LOC-backed transactions, the trustee is obligatedto fulfill its fiduciary responsibilities. Standard &Poor’s relies on the trustee to follow the terms ofthe bond documents and to draw upon the LOC inaccordance with its terms. In standby LOC transactions,the trustee should remain in place beyond thepayment in full of the bonds (including maturity)until the applicable preference period has expired.IndemnityThe trustee may not require indemnity for drawsupon the LOC or for accelerations. If the trustee isallowed to require an indemnity prior to acceleratingthe maturity of the bonds, bondholders might beexposed to credit-cliff risk. An acceleration of atransaction’s maturity often occurs in response to anevent of default resulting from nonreinstatement ofLOC interest coverage. If the trustee in this instancewere allowed to wait for satisfactory indemnitybefore taking action required by the indenture, thebonds would remain outstanding without correspondingcredit support for interest coverage.Resignation or removal of the trusteeNo resignation or removal of the trustee should beeffective until the appointment of a successortrustee. Full and timely payment is compromisedany time a vacancy exists in the position of trustee.Terms of the transaction must provide for theappointment of a successor trustee prior to the resignationor removal of the trustee then in effect.Either the LOC must be transferable or a new LOCmust be issued to the successor trustee.In many deals, draws on the LOC are made, andpurchase price for optional and mandatory tendersis paid by the tender agent or some other party,rather than by the trustee. In these transactions, thesame concern with respect to a vacancy in thatposition would exist, and as a result, the provisionsused for the resignation/removal of the trusteewould also apply to the resignation/removal of theparty in question.214 Standard & Poor’s Public Finance Criteria 2007