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

Commercial Paper, VRDO, And Self-Liquidityinvestments should not result in a liquidity crisis forthe institution or municipality. Therefore, assetsavailable for liquidity support must be above andbeyond the assets needed to meet its daily ongoingobligations. Issuers should not have to delay thepayment of obligations in the event of asset liquidationto meet tenders. In light of the cyclical natureof many portfolios Standard & Poor’s analysis willstart at the historically lowest asset point during theyear to determine the level of excess liquidity availableto the obligor (Since many obligors do nothave “excess” liquidity, only a select group of highlycreditworthy, and liquid, obligors are able to usetheir own assets to support their variable-rate debt.What types of assets are eligible forliquidity support?The bulk of the assets intended for liquidity-supportedprograms include investment-grade fixedincomesecurities that are highly liquid and have alow-market-risk profile. Examples are highlyrated short-term securities (securities rated ‘A-1+’or ‘A-1’ that mature in one year or less) or longtermpaper of equivalent credit quality such asU.S. governments and agencies, ‘AAA’, ‘AA’, or‘A’ Standard & Poor’s rated fixed-income securities.Longer-maturing assets (one year or greater)are eligible for inclusion, but coverage requirementswill be higher. Equities will not be countedtoward liquidity requirements. All securitiesshould be marked-to-market frequently (at leastmonthly) and depending on price volatility dailyvaluations may be recommended. Monthly surveillanceasset reports (Exhibit B) to be submittedto Standard & Poor’s will include the market andpar values of each security, the security identifier(CUSIP number), and the security’s rating, ifapplicable. In addition to the types of assets eligibleto be used for liquidity support, an issuermust ensure that it has the legal authority to useits own assets for liquidity support. In somecases, state constitutions or state and localstatutes may not permit an issuer to use its ownassets for liquidity support. Standard & Poor’smay require a legal opinion if necessary from theappropriate counsel—whether it is bond counsel,a state attorney general, or other legal representative—asto an issuer’s legal authority to use itsown assets for liquidity support.Exhibit A outlines the information issuers submitto initiate a portfolio evaluation for a liquidityassessment. If Standard & Poor’s has already evaluatedtheir investment portfolio, no further action isrequired. Issuers that have complex investment portfoliosmay be referred to Standard & Poor’s FundServices Group for liquidity evaluation and ongoingsurveillance requirements indicated in Exhibit B.However, the liquidity review and surveillancerequirements are substantially the same. Issuersmust be prepared to discuss the portfolio’s ongoingmanagement and surveillance.Asset management and documentation requirementsThe ability of an issuer’s investment managementteam to liquidate assets or raise cash on a same daybasis (if necessary) are key factors in the evaluationof an issuer’s ability to provide its own liquiditysupport. Very specific written liquidation proceduresare required and should detail:■ Persons responsible for executing theasset liquidation;■ The sequence of steps that must be undertaken byall parties to effect liquidation (including any thirdparties such as the tender or paying agents actingon the issuer’s behalf); If particular investments,such as fedwire securities, are custodied securitiesmust be liquidated by a certain time to qualify forsame day monies, these deadlines should be identifiedin the liquidation procedures letter;■ The timing of notifications to the appropriateparties to ensure that sufficient funds are availableto pay CP and VRDO investors on a samedaybasis, if necessary.The liquidation procedures must mirror timingrequirements specified in CP resolutions and VRDOtrust indentures for full and timely payment of debtservice. The chain of events to liquidate assets will beevaluated. The evaluation starts with a bond trustee’sreceipt of a tender notice from a bondholder or thestop issuance order executed by the CP issuing andpaying agent to an issuer’s broker-dealer. The chain ofevents ends with the deposit of liquidated assets inimmediately available funds, with the tender or payingagent to pay the purchase price of tendered bondsor maturing CP. The investment management teamwill be evaluated based on its documented proceduresto provide the required funds by the end of the daythat the trade is initiated. This liquidation letter, (Seesample letter) should be updated annually and shouldbe prepared by the institution or municipality ratherthan by a financial advisor or underwriter.Capable monitoring, frequency of portfolio valuationand oversight are vital to a successful program.An obligor’s success or failure in providingself-liquidity depends on their ability and willingnessto take on these proactive roles.Liquidation letterEach issuer of unenhanced VRDOs will be askedto provide a letter addressed to Standard &Poor’s describing its liquidation procedures indetail with the major players named and theirroles defined. The procedures described by theletter must indicate a strong likelihood of samedayliquidation.www.standardandpoors.com25