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

Municipal Structured Financethe liquidity facility in accordance with its terms inthe event that remarketing proceeds are insufficientto pay the purchase price of tendered receipts. Theliquidity facility provider should agree to use itsown funds to purchase unremarketed tenderedbonds and also agree to fund tenders in immediatelyavailable funds. The conditions’ precedent andevents of default that are permitted to automaticallyterminate the liquidity provider’s obligation topurchase tendered receipts are reviewed carefully.As with primary market transactions, a liquidityrating based on an liquidity facility can never behigher than the equivalent long-term bond rating ofthe bond issue, since the bank’s obligation to fundthe purchase price for tendered receipts is conditionedon the underlying obligor or insurer’s abilityto meet its obligations (See chart, “Correlation OfUnenhanced CP Ratings With Long-TermRatings”). The liquidity rating of the syntheticfloater with a tender option will be based on thelower of the short-term rating assigned to the bankor the short-term rating correlating to the long-termrating of the underlying bond issue due to the linkagebetween the liquidity facility and its potentialtermination under the terms of the trust documents.Therefore, the likelihood of the liquidity facilityprovider terminating its obligation to purchase tenderedreceipts is correlated to the long-term ratingof the bond issue.Municipal StripsStrips are zero coupon receipts that represent portionsof individual interest and principal paymentsfrom a deposit of underlying bonds. To rate amunicipal strip issue, there must be an outstandingStandard & Poor’s rating on the municipal bondthat is stripped, since the strip rating reflects therating assigned to the underlying bonds. Anychange to the rating of the underlying bonds willresult in an identical change to the rating assignedto the strips.As part of the custodial analysis, Standard &Poor’s requires that the documents provide that allprincipal and interest payments flow directly to thecustodian so that the custodian may forward thebond payments to strip-holders.Auction Floaters/Inverse FloatersAuction floater and inverse floater trust receipts arevariable-rate secondary-market instruments structuredto divide the interest generated from a deposit ofunderlying municipal bonds. Although the receiptsare variable rate, they do not have optional tenderrights, and thus are not eligible for short-term ratings.The receipts are created when a depositor purchasesall or a part of a fixed-rate bond issue and,after depositing the bonds with a trustee, issues twoclasses of variable-rate receipts based on the underlyingbonds. Interest on the auction floater receiptsis set periodically according to an auction biddingprocess. Inverse floater receipt holders receive theresidual interest generated by the underlying bondsafter the auction floater interest is paid and anyapplicable fees are deducted.The receipts represent the proportionate directownership of the future principal, interest, andredemption premiums, if any, generated by theunderlying bonds. The rating on the receiptsaddresses the likelihood that auction rate receiptholders will receive the underlying principal andinterest payments when due. However, the ratingdoes not address the likelihood that an auction willbe successful or that an auction rate receipt holderwill be able to resell a receipt in any auction.Structural analysisTo qualify as a ratable auction floater/inversefloater structure, the documents for a particularissue must clearly define the auction interest andresidual interest rate setting mechanisms so theinterest earned plus any applicable fees do notexceed the interest generated by the underlyingbonds. There is an inverse relationship between therate on the auction receipt and the rate on theinverse floater. The inverse floater holder receivesCorrelation Of CP Ratings WithLong-Term Corporate Credit Ratings*AAAAA+AAA+AA-BBB+BBBAA-BBB-*Dotted lines indicate combinations that are highly unusual.A-1+A-1A-2A-3228 Standard & Poor’s Public Finance Criteria 2007