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

Municipal Applications For Joint Support Criteriaissuing CP notes. In addition, the depositary isinstructed to:■ Draw on the LOC for the entire amount of outstandingCP notes and hold draw proceeds untilsuch notes mature; or■ If the LOC will remain in effect by its terms untilthe last outstanding CP note matures, continue todraw on the LOC as CP notes mature until theentire program is retired.In the event that the former occurs, the depositarymust hold proceeds uninvested or invest theproceeds in qualified investments maturing whenneeded that are rated equal to or higher than therating assigned to the transaction. ■Municipal ApplicationsFor Joint Support CriteriaStandard & Poor’s Ratings Services uses its criteriafor rating jointly supported obligationswhen more than one entity is fully responsible forthe entire obligation. In this situation, a default onthe obligation would occur only if each entitydefaults. Common examples of joint supportinclude a primary obligor plus a guarantor or aprimary obligor and a letter-of-credit (LOC)provider. The risk that both entities will default isless than the risk that either one will. As a result,Table 1 Correspondence BetweenRatings And Probabilities Of DefaultRating Probability of Default (%)AAA 0.362AA+ 0.536AA 0.872AA- 1.13A+ 1.458A 1.782A- 2.479BBB+ 3.842BBB 5.876BBB- 10.637BB+ 13.179BB 18.258BB- 24.197B+ 30.565B 38.145B- 48.559CCC+ 65.517CCC 75.853CCC- 88.268the obligation may be rated higher than the ratingon the stronger obligor (supporter).SummaryThe criteria contain the following key elements:■ The rating for the jointly supported obligationwill be derived from one of three reference tables,one each for obligor pairs that have high, medium,and low default correlation (see tables 3, 4,and 5). The tables were generated with a sophisticatedcalculation of the joint default probability,including explicit default correlation assumptions.■ Obligations of very highly correlated entitiesremain ineligible for credit enhancement.■ Application of the criteria is extended to speculative-gradeentities. Previously, the criteria wereapplicable only to investment-grade obligors.■ The joint-support criteria will not be used to rateissues or issuers that receive less-formal support,such as the benefits enjoyed by many government-ownedenterprises. In other words, theseissues will continue to be rated no higher thanthe rating on the government or parent companyproviding support.Joint Probability Of Default CalculationJointPD = (PA*PB)*[DC PA*(1 PA)PB*(1 PB)]A constraint is added so that the joint PD is capped at thestronger obligor’s PD (the rating will never be lower than thaton the stronger obligor).Where: PA = the default probability of one obligorPB = the default probability of the other obligorDC = the default correlation of the two obligorswww.standardandpoors.com217