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

Other CriteriaRating AnalysisIn order to rate a credit enhancement programissue, the pension fund itself is first assigned a publicissuer credit rating. For credit enhancement programs,areas of analysis include a review of:■ Legal authorization for the extension of pensionguarantees (statutory, constitutional, or via permittedinvestment guidelines);■ Legal priority of pension fund guarantees relativeto the fund’s obligation to pay pension benefits;■ Enforceability of pension fund guarantees;■ Legally permissible guarantees or extension offund credit, including direct debt guarantees, CP,LOCs, liquidity agreements, and guaranteedinvestment contracts;■ Maximum permitted program exposure amountrelative to the pension fund’s: percentage of totalinvested assets; percentage of normal annual netcash flow (income and contributions minusrequired annual pension benefit payments); andpercentage of annual pension benefit payments;■ Types of guarantees that may be undertaken orincurred by a pension fund, by generic industrycredit risk (e.g., municipal debt guarantees, corporatedebt guarantees, small business loans, currencyrisk or interest-rate risk, etc.);■ Risk concentration limits or guidelines, as theyrelate to industry or single-issuer guarantee risk;■ Maturity or liquidity risk to the pension fund,depending on the nature and proposed types ofinstruments to be guaranteed;■ The legally available highly liquid asset portfolioand its composition in terms of credit quality,volatility, and weighted average maturity; and■ The management, monitoring, and oversight proceduresfor the legally available highly liquid assets.Asset liquidation planFor pension fund credit enhancement programs thatrequire immediate access to liquid assets, a detailedasset liquidation plan will be reviewed (seeStandard & Poor’s self liquidity criteria). The abilityof a fund’s asset management team to liquidateassets on a same day basis (if necessary) is a keyfactor in the evaluation of a pension fund creditenhancement program.Very specific written liquidation procedures arerequired and should detail:■ Persons responsible (including alternates) for executingthe asset liquidation;■ The sequence of steps that must be undertakenby all parties to effect liquidation; and■ The timing of notifications to the appropriateparties to ensure that sufficient funds are availableto pay program obligations on a same-daybasis, if necessary.Assessing CreditworthinessThe strengths associated with any specific extensionof a public pension fund’s creditworthiness will be afunction of the specific terms included in the guaranteeor LOC agreement. As with any debt instrumentthat may contain credit enhancement from an outsideparty, the credit rating value of a guarantee maybe weakened or rendered unratable if there are conditionsor provisions that would allow the guaranteeto be terminated, unenforceable, or dishonored.An analysis of the pension fund’s financial riskmanagement and operating principles will be undertakento check that execution of the credit enhancementprogram will ensure policy compliance. Ingeneral, laws, statutes, or formal policies limitingthe extension of pension fund creditworthinessreduce the potential risk to pension assets andrequired sponsor fund contributions to maintainthe solvency of the pension fund for the short-andlong-term. The absence of formal plans to manage,monitor, and limit or control the extension of pensionfund credit will impact the assessment of thepension fund.Finally, in addition to limits on the extension ofpension fund credit, the risks associated with theprojects or debts to be guaranteed will be analyzedfor their impact on the safety of pension fundassets. In situations where the parameters for theextension of pension fund credit are very broad,concerns over potential increased risk could translateinto lower pension fund ratings, and, undercertain circumstances, into added credit stress forthe sponsor governments. ■328 Standard & Poor’s Public Finance Criteria 2007