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

Secondary Market Derivative ProductsSuch a mismatch can result in the underlying obligationsnot accruing sufficient interest due to theoccurrence of a prepayment. The entire amount ofthe prepayment of the underlying obligations cannotbe passed through to the floater holdersbecause the principal denomination may be lessthan that of the synthetic floaters. Thus, the structurecould potentially have receipts outstandingwithout an underlying interest generating obligation.Even if such prepayments are held investeduntil the authorized denomination amount is met,there is a risk that the investments will not generateenough interest to pay the requisite interest amountdue to the floater holders. The documents canaddress this risk either by having the authorizeddenomination of the receipts consistent with theunderlying obligation, or make an adjustment forsuch an occurrence in the maximum rate definition.Liquidity facility analysisAlthough synthetic floaters with a tender option arevery similar to other municipal VRDOs rated byStandard & Poor’s, additional liquidity risks areassociated with these structures because holders canlose the right to tender their receipts without noticeupon certain events. If a tender option terminationevent (TOTE) occurs, synthetic floater holders losetheir tender option rights and instead receive theirpro rata share of underlying bonds or proceeds ofthe sale of the bonds, provided that the proceedsare sufficient to pay the synthetic floater holderspar plus accrued interest and, if rated, the residualinterest holder at par. If sale proceeds are insufficient,then the synthetic floater holders and theresidual interest holders receive their pro rata shareof the underlying bonds as a distribution from thetrust. If Standard & Poor’s has rated the residualinterest receipt, the distribution to residual holdersupon termination cannot be subordinate to the paymentreceived by the holder of the synthetic floaterwith a tender option. In other words, the tenderoption floater holder and the residual interestfloater holder must each receive a pro rata share ofthe underlying obligation or the sale proceeds.Termination of the tender option without noticeis acceptable for the following events:1. The issuer of the underlying obligation failsto pay principal or interest when due and suchfailure is not cured during any designated cureperiod (if applicable); if the bond rating is basedon credit enhancement, payment default is limitedto the credit enhancement provider. If the underlyingobligation’s rating is based on the applicationof joint support criteria, then the TOTE cannotoccur until both entities providing support fail topay principal and interest when due and such failureis not cured during any designated cure period(if applicable).2. The issuer of the underlying obligation files forbankruptcy; if the obligation’s rating is based oncredit enhancement, bankruptcy is limited only tothat of the credit enhancement provider. If theunderlying obligation’s rating is based on the applicationof joint support criteria, bankruptcy has toapply to both entities providing support.3. The Standard & Poor’s underlying obligation’srating falls below investment grade (below ‘BBB-’).4. The underlying obligation is deemed taxable.The occurrence of other credit-related events arereviewed for approval by Standard & Poor’s on acase-by-case basis. The analysis of “other creditrelatedevents” must be deemed by Standard &Poor’s to be remote or factored into the long-termcomponent of the dual rating.Synthetic floater structures may include some orall of the events detailed above. Standard & Poor’sbelieves that the likelihood of the occurrence of thefirst two events is already factored into the longtermcomponent of the dual rating. If the transactionis structured to include event 3, Standard &Poor’s will rate the receipts only if they are derivedfrom underlying obligations that at the time of thetrust rating, have an enhanced, unenhanced, orjointly supported rating of ‘A+’ or higher.Standard & Poor’s permits liquidity facilities generallyto terminate without notice if the events triggeringsuch terminations are consistent withstandby bond purchase agreement criteria. Theseliquidity facility termination events typically are thesame as those that terminate the tender optionsunder the trust documents. If the rating on theunderlying bond depends on credit enhancement,such as bond insurance or an LOC, the events thatresult in termination of the tender option and theliquidity facility without notice must relate only tothe credit enhancement provider, not to the issueror obligor of the underlying bond. Further, if therating on the underlying obligation is based on theapplication of joint support criteria, then the eventsthat result in termination of the tender option andthe liquidity facility without notice should relate toboth entities supporting the obligation.The purchase price of tendered securities is paidfrom remarketing proceeds, and from draws by thetender agent on the liquidity facility. As withVRDOs, the liquidity facility for the tender optionsynthetic floaters must provide coverage for the fullprincipal amount of the securities, as well as themaximum interest rate on the tender option syntheticfloaters for the maximum number of daysthat can accrue during any interest payment period.The tender agent for the receipts must have clearinstructions in the trust documents to draw uponwww.standardandpoors.com227