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

Municipal Structured Financeof receipts are created—a synthetic floater receiptwith a tender option and a residual interest receipt.The synthetic floaters with a tender option are supportedby a liquidity facility to cover the purchaseprice of unremarketed tendered receipts. Syntheticfloaters with a tender option are assigned a dual ratingconsisting of long-term and short-term components,such as ‘AAA/A-1+’. The long-term rating isbased on the rating of the underlying obligation andaddresses the underlying obligation’s ability to payfull and timely principal and interest. The short-termrating is based on the short-term rating of the liquidityfacility provider and addresses the likelihood ofpayment of the purchase price of tendered receipts.Residual interest synthetic floaters can beassigned a long-term rating only that reflects therating of the underlying bond. Residual interestfloater holders may experience high variability inexpected returns as a result of non-credit risks.Synthetic floaters’ ratings only address the likelihoodof the floater holder receiving par plus anyaccrued interest based on regularly scheduledprincipal and interest payments from the underlyingobligation which, in some instances, may beenhanced by a municipal bond insurance policy,or receive joint support based on the applicationof joint support criteria. Synthetic floaters’ ratings,as is the case with all of Standard & Poor’smunicipal ratings, do not address the likelihoodthat the interest payable on the receipts or theunderlying bonds may be deemed or declaredincludable in the gross income of synthetic floaterholders by the relevant authorities at any time.The ratings also do not address the likelihood ofany payments to synthetic floater holders inexcess of principal and interest, such as premiumon redemption payments from the underlyingobligations or gain share payments.Structural analysisSynthetic floaters may be structured with a numberof different interest-rate modes similar tothose found in VRDOs, such as weekly or monthly.Synthetic floaters with tender options are subjectto optional tender upon requisite notice. Inaddition, the receipts are subject to mandatorytender when certain events occur, which include,but are not limited to, a change in the interestratemode, expiration or termination of the liquidityfacility. Standard & Poor’s applies its bankliquidity facility criteria when reviewing liquiditydocuments (See Public Finance Criteria: “BankLiquidity Facilities”).The trustee collects the semi-annual fixed interestpayments from the underlying obligations and payscertain fees related to the trust. The trustee thenpays the tender option synthetic floater holder thevariable interest rate and distributes any remaininginterest after payment of additional fees, if any, tothe residual synthetic floater holder.Standard & Poor’s will apply its LOC criteriawhen requested to rate synthetic floater structuresthat have an LOC wrap on the underlying obligation.If requested, Standard & Poor’s will reviewa structure to determine whether joint supportcriteria can be applied. The joint support criteriacan be applied to both the long-term rating, aswell as to the short-term rating.(See “PublicFinance Criteria: Municipal Applications ForJoint Support Criteria”).Two different tender option structures have beenused: the put and the swap. In the put structure, thevariable interest rate is set by the remarketing agentand capped at the underlying obligation’s interestrate (minus trust fees, if applicable). In the swapstructure, a net payment is made by the depositorto a swap counterparty, as long as the syntheticfloater rate is less than the bond interest rate. If thevariable tender option rate exceeds the underlyingbond rate, the swap counterparty pays the differenceto the depositor.Standard & Poor’s examines the documents inboth structures to ensure that the interest rate settingmechanism is clearly defined and that thetrustee’s duties with respect to the depositor andholders of synthetic floaters with a tender optionare carefully outlined.Multiple assetsStandard & Poor’s will review synthetic floaterstructures that have multiple obligations depositedinto a trust either at the trust’s creation or subsequentto the trust’s creation. The rating on thereceipts can be based either on an evaluation ofthe underlying asset pool using the municipalCDO Evaluator, or by using a weak-link approachusing the ratings of each of the assets dependingon the size of the pool. If a trust structure is createdto permit multiple obligations to be deposited,Standard & Poor’s analyzes the maximum ratedefinition to ensure receipt holders are not affectedby the multiple obligations’ different maturitiesand rates of interest. The maximum rate definitioncan state the maximum rate of the receipts will beadjusted such that the receipt holders will receivethe weighted average of the obligations taking intoaccount the multiple maturities. A more conservativeapproach can state the maximum rate of thereceipts will be capped at the lowest bond rate ofthe multiple obligations.Reinvestment risk (odd-lots)In some instances, the authorized denomination ofthe underlying obligation is different than theauthorized denomination of the synthetic floaters.226 Standard & Poor’s Public Finance Criteria 2007