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

Cross Sector CriteriaAdditional Factors below). A high overall DDPscore, component scores, high net variable exposureratio, or a speculative transaction can be partiallyor fully mitigated as negative rating factors to theextent an issuer has sufficient liquidity reserves or arobust cash flow stream to offset the worst-casefinancial risk. On the other hand, if financial exposureis not offset at the issuer’s current rating level,this is a cause for concern and could be a reasonfor a negative rating action.Debt Derivative Profile Scoring CriteriaThe DDP is a weighted average of four factors,each of which is scored on a scale from 1 (minimalrisk) to 4 (high risk). The four factors that comprisethe DDP are:■ Issuer collateral posting and termination risk(35% weight);■ Counterparty termination credit risk (15%weight);■ Economic viability of the swap structure (15%weight); and■ Quality of swap and debt management policiesand procedures (35% weight).Standard & Poor’s has determined that moreweight should be placed on management and therisk of termination and collateral posting due tothe near and intermediate term risks inherent inthese factors. Furthermore, counterparty credit riskand the economics and cash flow strength of anindividual trade (economic viability), while importantover the long-term, are both relatively lessimportant from a near to intermediate term creditrisk perspective.We perform the DDP analysis using documentationand representations provided by the issuer(swap management policies, business plans) and theswap dealer combined with proprietary statisticalmodels. Due to the single agreement concept, scoresfor issuer collateral posting and termination riskand counterparty termination credit risk are derivedby evaluating the International Swap DealersAssociation Inc. (ISDA) document, since the legalterms and conditions are consistent for an unlimitedamount of related transactions.Termination and collateral posting riskTermination and collateral posting risk is scored ona 1 through 4 scale based on the risk that the issuerCounterparty RatingCounterparty Risk Score‘AAA’ ‘AA+’, ‘AA’, or ‘AA-’ 1‘A+’ 2‘A’ and ‘A-’ 3‘BBB+’ and lower 4will be required to post collateral or terminate aswap on an involuntary or voluntary basis. Theweighting for termination and collateral postingrisk is 35% due to the potential impact on anissuer’s liquidity reserve position.Analytically, collateral posting in favor of a swapdealer is equivalent to payment of a termination feedue to the restricted nature of collateral on anissuer’s balance sheet. To determine a final terminationand collateral posting risk score to be used inthe DDP, Standard & Poor’s will score and weightthree factors that could lead to a collateral postingor early swap termination. The three scored terminationand collateral posting risk factors include:■ The likelihood of an involuntary event of defaultor termination or collateral posting due to ratingsdowngrades, or a likelihood of voluntary terminationunder unfavorable market conditions(50% weight);■ The issuer’s historical ratings volatility (numberof downward rating or negativeoutlooks/CreditWatch listings in last three years;30% weight); and■ Average swap durations applicable to the ISDAdocument (less than 10 years, 10-15 years, 15-20years, greater than 20 years; 20% weight).We will assign the lowest termination and collateralposting risk scores for swaps with a relativelywide ratings trigger spread, low ratings volatility,and overall short swap durations (reduced likelihoodof a rating transition). There may be mitigatingfactors that would warrant a termination andcollateral posting risk score of either 1 or 4 forspecific transactions. In these cases, these transactionswill be separated apart from the other transactionsapplicable to the ISDA document forscoring purposes.Factors that warrant a termination and collateralposting risk score of 1, include:■ No material events of default or termination;and/or■ Issuer has an option to terminate the swap at anytime, for any reason, at little or no cost.Factors that warrant a termination and collateralposting risk score of 4, include:■ Events of default or termination, other than ratingstriggers, that are considered likely to occurover the life of the transaction; and/or■ Speculative transactions where there is a distinctpossibility of early, voluntary termination by theissuer (if such an option exists) under adversemarket conditions, and/or■ Unfavorable swap options (swaptions), where thedealer owns the option to impose an unfavorableor speculative transaction on an issuer.40 Standard & Poor’s Public Finance Criteria 2007