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

Cross Sector CriteriaThe acceptability of the obligor’s proposed liquidationmechanics, especially with regard to timing,will be based on Standard & Poor’s follow-up investigationinto the procedures described by the letter.The chain of events—starting with the bond trustee’ssell order to the obligor’s broker-dealer account representativeand ending with the deposit of liquidationproceeds in immediately available funds withthe tender or paying agent to pay the purchase priceof tendered bonds—will be scrutinized for its abilityto generate the required cash by the end of the daythat the trade is initiated.Among the factors that will be considered in analyzingthe obligor’s proposed liquidation proceduresare the number of steps and parties in the liquidationprocess, a reasonable time frame in which toaccomplish the liquidation, the experience level ofthe parties involved, whether the party holding thesecurities has direct access to FedWire, and theFedWire closing time.The credibility of the obligor’s management onthe issue of its ability to liquidate its availableassets within the timing requirements of theVRDO structure is extremely important.Management’s experience in managing and liquidatingits assets will be considered in Standard &Poor’s evaluation of the obligor’s proposedliquidation procedures. ■Bank Liquidity FacilitiesMost municipal issuers lack the liquidity necessaryto fund optional and mandatory tenders ordo not wish to restrict the investment of their availableresources. If an obligor does not have sufficienthigh-quality liquid assets, such as cash and cashequivalents, to fund the tenders set forth in itsprogram, a liquidity facility must be provided topay the purchase price of bonds that cannot beremarketed. Whether Standard & Poor’s RatingsServices can assign a liquidity rating to a variablerate demand obligation (VRDO) without banksupport to cover these tenders is determined on acase-by-case basis.These VRDOs may have credit ratings derivedfrom the obligor, or have credit support providedby bond insurance policies. Liquidity support canbe provided by lines of credit or standby bondpurchase agreements (SBPAs).Lines Of CreditLines of credit are conditional, revocable liquidityfacilities that may be terminated without priornotice to the holders upon the occurrence of variousevents of default under the related agreement.Based on its structure, a line of credit can be viewedas strong or weak. Although the events that lead toa weak line of credit terminating its commitmentwithout prior notice to the holders can includeevents Standard & Poor’s has deemed a remoteoccurrence or concluded is factored into the longtermcomponent of the bond issue, it generallyincludes other termination events that are moreexpansive in scope. Termination events for weaklines generally include covenant defaults, failure topay fees, and failure to pay based on trustee negligence.Because a weak line of credit can terminate forreasons beyond the obligor’s ability to pay principalof and interest on the bonds, a line of credit providesonly supplemental liquidity coverage to an obligor’sown liquidity.If the liquidity facility is to be considered a strongline of credit, the SBPA criteria detailed below willbe met. Although the line can be used to supportthe obligor’s existing liquidity rating, the strong linecould also provide liquidity enhancement for thebonds even if the obligor does not have a liquidityrating. The short-term component of the rating onthe VRDOs will be derived from the short-term ratingof the entity providing the strong line of credit.Standby Bond Purchase Agreements (SBPAs)Ratings criteria for SBPAs closely follow that forletters of credit (see “LOC-Backed MunicipalDebt”). The major difference from LOCs is thatSBPAs are conditional, revocable facilities thatmay be immediately terminated or suspendedwithout notice upon the occurrence of certainevents of default as specified under the relatedagreement. Standard & Poor’s restricts the permissibleevents of default to those deemed to be remoteor where the likelihood of the events of defaultoccurring is factored into the long-term rating ofthe issue. Any other termination of the SBPA mustbe preceded by a mandatory tender with the purchaseprice for the bonds provided by remarketingproceeds and ultimately, the SBPA provider. Events26 Standard & Poor’s Public Finance Criteria 2007