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

Investment GuidelinesEligible Investment Criteria For‘AAA’ Rated Structured TransactionsThe most widespread criteria used for investment inthe secondary market relate to the category called“eligible investments.” Eligible investments arethose securities that the trust of a structured financetransaction is allowed to purchase for the managementof its cash flow.Fortunately, it is also the most stable category,rarely changing over time. At the same time, it isimportant to note that one qualifying investment,the debt obligations of the Student LoanMarketing Association (SLMA or Sallie Mae),will no longer qualify as an eligible investmentafter Sept. 30, 2008. The enactment of theStudent Loan Marketing AssociationReorganization Act will result in the gradual dissolutionof Sallie Mae’s GSE (government-sponsoredenterprise) status, which allows Sallie Maelimited access to U.S. Treasury funds. The finaldissolution date is Sept. 30, 2008. If additionalSallie Mae debt is issued, the debt must maturebefore that date. Sallie Mae debt obligations willcontinue to qualify as eligible investments forrated structured transactions until Sept. 30, 2008.Eligible investments are typically used to temporarilyhouse (usually 30 days or less) the cashIndenture Investment RestrictionsFully dependent financingsIn credit or liquidity enhanced transactions, and certain highly structured housingtransactions, remarketing proceeds and other monies used to pay bond debt service—whether trustee held or otherwise—should be invested in securities with ratingsappropriate for the rating assigned to the issue. (For further details see “PublicFinance Criteria: Review of Investment Agreements for Municipal RevenueBond Financings”).Partially dependent financingsIn transactions where certain funds may significantly contribute to the paymentof bond debt service, those funds should be invested in securities with ratingsappropriate for the rating of the issue. Other monies can be invested ininvestment-grade securities.Non-dependent financingsAll funds—whether trustee held or otherwise—should be invested ininvestment-grade securities.Dependency: Determined by the level of reliance of the issue on theperformance of the investments.Maturity: Investments should mature before they are reasonably expectedto be used, whether for scheduled debt service payments, or as a result ofredemption provisions.Ratings maintenance of investments: If rating of investment is downgraded,Standard & Poor’s assumes that the trustee, as fiduciary to holders, will actin a prudent manner. Investment downgrades may lead to bond ratingdowngrades, particularly in fully dependent financings.flows related to a transaction in low-risk, shortterminvestments. Eligible investments may also beused for certain reserve or cash collateralaccounts, where maturities may extend beyond thenext payment date. In instances where the investmentsmay be invested for up to 90 days or longer,the eligibility of investments may be furtherrestricted, as indicated below. In no case shouldthe following eligible investments have maturitiesin excess of one year. Any use other than contemplatedabove may not be appropriate for structuredfinance transactions.Investment requirements for escrow accounts forrefunded bonds are marked with an asterisk. Anysecurity used for defeasance must provide for thetimely payment of principal and interest and cannotbe callable or prepayable prior to maturity or earlierredemption of the rated debt (see “PublicFinance Criteria: Defeasance”).The following investments are eligible for ‘AAA’rated transactions:(1*) Certain obligations of, or obligations guaranteedas to principal and interest by, the U.S. governmentor any agency or instrumentality thereof,when these obligations are backed by the full faithand credit of the United States. As Standard &Poor’s does not explicitly rate all such obligations,the obligation must be limited to those instrumentsthat have a predetermined fixed dollar amount ofprincipal due at maturity that cannot vary orchange. If it is rated, the obligation should not havean ‘r’ suffix attached to its rating. For non-defeasanceinvestments, interest may either be fixed orvariable. If the investments may be liquidated priorto their maturity or are being relied on to meet acertain yield, additional restrictions are necessary.Interest should be tied to a single interest rate indexplus a single fixed spread (if any) and should moveproportionately with that index. These investmentsinclude but are not limited to:■ U.S. Treasury obligations (all direct or fully guaranteedobligations);■ Farmers Home Administration Certificates ofBeneficial Ownership;■ General Services Administration participationcertificates;■ U.S. Maritime Administration guaranteed TitleXI financing;■ Small Business Administration guaranteed participationcertificates and guaranteed poolcertificates;■ GNMA guaranteed MBS and participation certificates(defeasances only);■ U.S. Department of Housing and UrbanDevelopment local authority bonds; andwww.standardandpoors.com51