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

Commercial Paper, VRDO, And Self-LiquidityStandard & Poor’s looks for an issuer to have onhand sufficient liquid resources, in any combinationof revolving credit agreements or liquid fixedincome investments available, to cover the amountof the commercial paper outstanding, as well as theability to cover up to 270 days of interest. Pleaserefer to the commercial paper criteria for moredetail on requirements.Because the investments may be called on to meetmarket events, such as a failed CP rollover or aVRDO tender, using these investments should notimpair an issuer’s ability to meet ongoing operatingexpenses. Therefore issuers who provide self-liquidityshould generally have a high level of liquidityavailable for debt and operations. While an ‘A’ categoryissuer could provide self liquidity for CP andvariable rate demand obligations, most issuers whowill be able to provide self liquidity will likely berated in the ‘AA’ category or ‘AAA’.Standard & Poor’s will evaluate an issuer’s abilityto provide self-liquidity through an assessment ofinvestment management policies and practices, and(2) an analysis of the fixed income portfolio. Someinstitutions, such as heavily endowed colleges anduniversities may be able to demonstrate overwhelmingcoverage of commercial paper or VRDOs withtreasury securities and cash alone. If their portfoliosare sufficiently large, or the amount of debt beingcovered is very small, the analysis of the fixedincome portfolio is narrower in scope.However, even in cases where the entire portfoliodoes not need to be evaluated, Standard & Poor’sstill evaluates the capacity of management to provideself liquidity and still asks for a liquidity proceduresletter to indicate that the cash and high quality fixedincome securities can be available when needed andto identify the steps that the institution will take tomeet its obligations. Standard & Poor’s expectsissuers to demonstrate their capacity and willingnessto make short-term debt payments by submitting adetailed written liquidation plan. The procedures lettershould conform to the timing in the legal documentssuch as when the institution or municipalityreceives notice that there is a shortfall and when thefunds are due to the paying agent or tender agent.The letter should also identify the individuals whoare responsible for these steps.In an evaluation of management’s capacity,Standard & Poor’s asks the institutions themselvesand not their financial advisors or underwriters toprepare the procedures letter. Additional documentationsuch as operating cash flows and investmentbalances available for operations throughout the yearmay be necessary, depending on the nature of cashflow for the issuers. Ultimately, Standard & Poor’swill evaluate whether the issuer’s long and short-termcredit quality is sufficiently robust to withstand a callon its assets pledged for liquidity purposes.An issuer may also choose to use a combinationof its own assets and third-party liquidity (forexample, a bank liquidity facility) to provide liquiditysupport. Strong lines that more closely resemblestandby bond purchase agreements may be used toreduce the amount of available assets to covermaturing CP or VRDOs and still allow the issuer topledge its own self-liquidity. In cases where a strongline is being used to substitute for self-liquidity,Standard & Poor’s will evaluate the strength of theline. Weak lines, which include looser events of termination,have historically been used to cover commercialpaper programs, and because of thepredictable nature of commercial paper,Standard & Poor’s accepts weak external liquidityfacilities as a source of backup for maturing commercialpaper if they are dedicated to the program.Variable rate demand bonds, however, carry anelement of unpredictability because investors canchoose to put their bonds. In these cases, weak linesExhibit AInformation Requirements For Liquidity Evaluation■ A letter requesting Standard & Poor’s to conduct a“liquidity assessment”.■ A copy of the current investment policies. (Includingpolicies on hedging transactions, [including use of optionsand/or futures contracts] and leveraging of assets).■ Current portfolio holdings report of assets identified forliquidity support with the information listed in point #7(please see below).■ A list of fixed income securities approved for purchaseaccording to asset type, credit quality, maturity,and sector.■ The weighted average maturities and/or durations forthe fixed income assets for each month during the pastthree years.■ Documented written liquidation procedures detailing thesteps to be taken to provide same-day funds to cover afailed CP remarketing or tendered VRDOs (see sampleliquidation letter—Exhibit 3).■ Monthly surveillance requirements include submissionof monthly asset reports and notification of changes ininvestment policies, operating procedures, and personnelmanaging the assets. The market and par values, securityidentifier (CUSIP number), and security specific ratings(Standard & Poor’s ratings if applicable) should beprovided for each security in the monthly assets report.Note: Verification of the issuer’s legal ability to use its ownassets for liquidity support may be necessary (i.e. legal opinionsor statutory proof in the case of state and local governments).www.standardandpoors.com21