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

Cross Sector Criteria7. The occurrence of a final, non-appealable judgmentagainst the obligor requiring payment bythe obligor and such judgment is not satisfiedwithin a period of at least 60 days from the dateon which such judgment was rendered. In thecase of bonds rated based solely on pledgedrevenues, such judgment must be determined tobe payable from the pledged revenues serving asthe security source for the bonds.8. A debt moratorium, debt restructuring, debtadjustment or comparable extraordinary restrictionis declared by, or imposed on, the obligor’s paritybonds. Such imposition should be as a result of afinding or ruling of a governmental authoritywith jurisdiction over the obligor.Standard & Poor’s factors the likelihood of thefirst two events into the long-term rating on thebonds, and considers the occurrence of events 3,4and 8 to be remote. Termination without notice forevent 5 is permitted only for issues that are rated atleast ‘A+’. Should the bank’s obligation terminatewithout notice due to event 5 and bondholdersretain tender option rights, the obligor should bethe next source to fund unremarketed tenderedbonds. If the obligor is unwilling to be a source fortenders, then the tender option rights should beterminated in the bond documents should event 5occur. For event 7, the fact that the decision is finaland non-appealable, coupled with the 60 day period,gives the obligor sufficient time to arrange for thesatisfaction of the judgment.Insured liquidity facilitiesStandard & Poor’s allows the following events toresult in a termination or suspension event withoutnotice of an SBPA for issues that have an insurancepolicy securing the principal and interest onthe bonds:1. Insurer declaration of insolvency or admission ofinability to pay its debts in writing, or a proceedingis commenced against the insurer by an oversightbody or court of appropriate jurisdictionthe effect of which would be to declare theinsurer insolvent.2. Insurer default under any bond insurance policy,fee surety bond associated with the issue, or suretybond issued by it insuring or supporting thepayment of principal and interest onmunicipal obligations.3. Issuer substitution of the insurer or cancellationof the insurance policy without the liquiditybank’s written consent, provided that a correspondingcovenant requiring the issuer to receivethe liquidity bank’s consent is included inthe documents.4. Insurer contests or repudiates the validity orenforceability of the bond insurance policy, orfee surety bond associated with the issue, or anyprovision thereof affecting the obligation of theinsurer to pay thereunder.5. A finding or ruling by a court or governmentalauthority with jurisdiction to rule on the validityof the bond insurance policy that the policy, orany provision thereof affecting the obligation ofthe insurer to pay thereunder, is not valid andbinding on the insurer.6. Standard & Poor’s reduces the insurer’s financialenhancement rating to below investment grade(below ‘BBB-’), or the rating is suspended orwithdrawn for credit-related reasons.7. The IRS declares the bonds being rated taxable.The likelihood of events 1 and 2 has been factoredinto the rating on the bonds. Standard & Poor’sconsiders events 3 through 5 remote. Event 6 ispermitted only for issues that are rated atleast ‘A+’.Standard & Poor’s does not allow events such asfailure to pay fees under the SBPA, failure to payany subordinate debt or debt not rated byStandard & Poor’s, or covenant defaults to lead totermination without notice of the bank’s obligationto purchase tendered bonds. The likelihood of theseevents occurring is not factored into the long-termrating. If such events exist, either the bank maydeclare an event of default under the liquidity documentand bondholders will be required to tendertheir bonds pursuant to a mandatory tender, whichis ultimately funded by the SBPA provider, or thedocument will be reviewed as a line of credit insupport of an obligor’s own liquidity coverage.Standard & Poor’s requires a mandatory tenderto occur before the expiration or termination of theSBPA because the short-term rating of the issue isbased on the bank (other than in the case of thetermination events without notice outlined above),thus bank funds need to be available to take outall bondholders.Termination By The BankThe SBPA may only permit its obligation topurchase tendered bonds to terminate “upon theoccurrence” of the permitted automatic terminationevent. In certain agreements, attempts havebeen made to define the SBPA provider’s terminationtime as “on the day of the occurrence of theevent of termination” or “on the business dayprior to the occurrence of the event of termination”.Both of these constructions leave open the possibilitythat the SBPA provider may fund a tender payment,but then could attempt to recover thatpayment from the bondholder by virtue of the28 Standard & Poor’s Public Finance Criteria 2007