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

Long-Term Municipal Poolsthe program during which bonds are outstanding.The number and type of runs needed to demonstratethis fact can vary depending upon the program’sstructure. If the most vulnerable point in aprogram’s amortization schedule can be specificallyidentified, then cash flows demonstrating amplereserves or coverage over that period will suffice.For programs that allow the release of funds asbonds mature or rely on coverage from investmentearnings to survive assumed participant defaults,this may be more difficult and additional runs maybe necessary.Management ConsiderationsThe ability of a pool program to survive associatedstressed default rate assumptions remains the backboneof Standard & Poor’s criteria. Program managementaspects, however, do play a role,particularly in placing the pool rating within therating category and in establishing the rating for anew program. Management factors analyzedinclude underwriting criteria and procedures, loanservicing track records and capabilities (includingthe sensitivity of these capabilities as the programgrows), marketing processes, and participant monitoringand control procedures. Strong managementpractices may overcome weak legal provisions ifStandard & Poor’s believes such practices will continueand thus better predict the long-term performanceof the program.Legal Structure And Required DocumentationStandard & Poor’s will review all relevant documentsassociated with each transaction to assess thelegal structure and ensure that it corresponds to theassumptions presented by the program sponsor.Documentation required to rate a pool programincludes:■ List of each asset in the pool includingobligor/borrower name, state, security pledged,maturity, par outstanding as of closing, and ratingsor credit estimates.■ Cash flows summarizing total annual paymentsand balances available for the life of the pool,both with and without assumed default rates.■ All trust/legal documents, including an officialstatement or offering memorandum.■ Underwriting criteria, loan or lease terms, servicingguidelines and history of loan/lease performance.■ Information regarding program sponsor (forexample, management practices).Additional documentation may be required dependingon the nature of the transaction. Typical issuesassociated with the review of legal documents include:■ Does the flow of funds outlined in the indenturematch the intended management plan?■■■Does it provide sufficient timing to insure thatsufficient funds will be in desired accounts tomeet shortfalls in the event of participantdefaults?What is the nature of the participant loan agreement(security terms, etc.), and what are theimplications for the credit quality and ongoingfunctioning of the program?Do the legal provisions leave bondholders exposedto extraordinary risks such as investment risk orsudden changes in program composition or administrationsuch as through loan prepayment, loande-pledging, or the release of other funds.Investment IssuesTo the extent that program reserves are relied on toprovide the over-collateralization necessary to sustaina particular rating, the investment of thesereserves should not pose additional risks relative tothe bond rating. Accordingly, reserves should beinvested with entities rated at least as high as theprogram’s bond rating, although ‘AAA’ rated programsmay use investment agreement providersrated as low as ‘AA-’ in certain instances.If programs utilize investment agreements thatallow the issuer to terminate the agreement, withouta penalty to the remaining principal within 30days, Standard & Poor’s will treat the instrument asa short-term investment and look to the provider’scommercial paper rating to determine the eligibilityof the investment—but only if program cash flowsare not dependent on being able to achieve thesame interest rate on a subsequent investmentagreement. Alternatively, ‘AAA’ programs may useproviders rated as low as ‘AA-’ if certain downgradeprovisions exist within the investment contract(See Public Finance Criteria: InvestmentAgreements For Municipal Revenue BondFinancings).Finally, issuers may choose other investmentoptions, such as secondary guarantors or joint guaranteeagreements to ensure a high rating for theirinvestment and minimize the risk of substitution.State Revolving FundsThe SRF financing vehicle has become an importanttool in many states to fund water and wastewaterinfrastructure projects. Since the establishment ofthe clean water SRF through revisions made in 1987to the Clean Water Act (which targets the need torepair or construct wastewater infrastructuredesigned to handle growing populations and morestringent environmental measures), the program hasgrown and is arguably one of the most successfulfederal programs of the past 20 years in terms ofprojects funded per federal dollar allocated. Inwww.standardandpoors.com45