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

Municipal Structured FinanceJoint Probability Of Default CalculationThe joint probability of default (PD) is calculated asfollows:For the rating on each obligor, the corresponding10-year cumulative PD (displayed in Table 1) isused. After the joint PD is calculated, the number isconverted back into the closest corresponding ratingfor the 10-year time horizon. The underlyingPDs associated with each rating are consistent withthose used by Standard & Poor’s for rating CDOs.The following example is illustrative. If a Frenchbank rated ‘A+’ (PD of 1.458%) guarantees anobligation of an American manufacturing companyrated ‘BB+’ (PD of 13.179%), and the assumeddefault correlation is 15%, the jointly supportedrating would be ‘AA‘ (joint PD of 0.800%).Table 2 Default Correlation GuidelinesCorrelation Guidelines Default Correlation (%) CharacteristicsToo high No benefit (1) Affiliated companies, (2) government and its owned/supportedentities, (3) economically codependent entities, (4) both obligors inthe same country, and its sovereign government is rated speculativegrade.*High 25 Both obligors share two of the following: same industry, same region,speculative grade.*Medium 20 Both obligors share one of the following: same industry, same region,speculative grade.*Low 15 Obligors are in different industries and regions, and at least one isinvestment grade.**When rating a jointly supported foreign currency issue, the foreign currency ratings on the obligors and sovereign are relevant, but the resultis constrained by the transfer and convertibility limit.Table 3 High Correlation Reference TableAAA AA+ AA AA- A+ A A- BBB+ BBB BBB-AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAAAA+ AAA AAA AAA AAA AAA AAA AAA AAA AA+ AA+AA AAA AAA AAA AAA AAA AAA AAA AA+ AA+ AAAA- AAA AAA AAA AAA AAA AAA AAA AA+ AA+ AAA+ AAA AAA AAA AAA AAA AAA AA+ AA+ AA AA-A AAA AAA AAA AAA AAA AA+ AA+ AA AA AA-A- AAA AAA AAA AAA AA+ AA+ AA+ AA AA- A+BBB+ AAA AAA AA+ AA+ AA+ AA AA AA- A+ ABBB AAA AA+ AA+ AA+ AA AA AA- A+ A A-BBB- AAA AA+ AA AA AA- AA- A+ A A- BBB+BB+ AAA AA+ AA AA- AA- AA+ A A- A- BBB+BB AAA AA+ AA AA- AA+ AA+ A A- BBB+ BBBBB- AAA AA+ AA AA- AA+ A A- A- BBB+ BBBB+ AAA AA+ AA AA- AA+ A A- A- BBB+ BBBB AAA AA+ AA AA- AA+ A A- BBB+ BBB BBBB- AAA AA+ AA AA- AA+ A A- BBB+ BBB BBB-CCC+ AAA AA+ AA AA- AA+ A A- BBB+ BBB BBB-CCC AAA AA+ AA AA- AA+ A A- BBB+ BBB BBB-CCC- AAA AA+ AA AA- AA+ A A- BBB+ BBB BBB-D AAA AA+ AA AA- AA+ A A- BBB+ BBB BBB-218 Standard & Poor’s Public Finance Criteria 2007