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

Investment Agreements For Municipal Revenue Bond Financingsunsecured certificates of deposit, time deposits,and banker’s acceptances.(9) Investment in money market funds rated‘AAAm’ or ‘AAAm-G’ by Standard & Poor’s.(10*) Stripped securities: principal-only stripsand interest-only strips of noncallable obligationsissued by the U.S. Treasury, and REFCORP securitiesstripped by the Federal Reserve Bank ofNew York.(11) Any security not included in this list may beapproved by Standard & Poor’s after a review ofthe specific terms of the security and its appropriatenessfor the issue being rated.In addition to the permitted investments listedabove, guaranteed investment contracts are alsoeligible investments subject to certain terms andconditions. (See “Public Finance Criteria:Review Of Investment Agreements ForMunicipal Revenue Bond Financings” and“Public Finance Criteria: Joint Support ToInvestment Agreements”). ■Investment Agreements ForMunicipal Revenue Bond FinancingsAnalysis of municipal revenue bonds ofteninvolves evaluating the security or pledged collateral,and the investments. Issuing entities thathave operating revenues and other noninvestmentsources to provide ample protection against defaultsare usually exempt from formal restrictions on permittedinvestments in the ratings analysis (see“Public Finance Criteria: Investment Guidelines”).In transactions where full and timely payment ofdebt service is dependent on investment income,however, a more structured approach is necessary.Very often, these investments take the form ofinvestment agreements, and many bond issues willhave as many as three different funds invested:■ A short-term acquisition, proceeds or constructionfund (where the bond proceeds are heldprior to expenditure);■ The debt service reserve fund; and■ The revenue or “float” fund (where monthlyreceipts are held).These three funds can be held in one or moreagreements.Those agreements that are deemed necessary forfull and timely payment of debt service are subjectfor review as part of the ratings process. Reviewof an investment agreement involves considerationof the strength of the provider and the structure ofthe agreement.Dependent RatingThe first aspect of Standard & Poor’s Ratings Servicesassessment of the investment contract is the financialstrength of the provider. The provider’s certificate ofdeposit rating is used, and is an important componentof the bond rating because the transaction is dependentupon performance of the investment provider fora portion of the revenues used to pay bondholders. Inmost cases, the long-term rating of the provider mustbe as high as the rating on the bonds. Note the eligibilityof contracts to be jointly provided by more thanone provider (see “Public Finance Criteria: JointSupport to Investment Agreements”).For highly rated transactions, two sets of ratingguidelines can be used. The first set of guidelinesapplies to issuers seeking ‘AAA’ or ‘AA’ ratings onbonds with investment contracts:■ For investments with terms of less than oneyear,the provider maintains a short-term ratingof ‘A-1+’;■ For terms of at least one year but less than threeyears, the provider maintains a long-term ratingof ‘AA-’ and a short-term rating of ‘A-1+’; and■ For terms of three years or more, the providermaintains a long-term rating of at least as high asthe long-term rating on the bonds.The second set of guidelines extends the acceptableproviders for transactions rated in the ‘AAA’ or ‘AA’categories, for agreements with terms of three yearsor more, to include providers with both a long-termrating of at least ‘AA-’ and a short-term rating of‘A-1+’. To benefit from this, issuers must have legalprovisions in the investment contract should theprovider’s rating fall below either of the two benchmarks.This ensures that a credit cliff does not occurand the rating on the bonds can be preserved despitea potential downgrade of the investment agreementprovider below the required threshold. Upon adowngrade below ‘AA-’ or ‘A-1+’, the legal provisionsunder the investment contract should requirethe provider to do one of the following:www.standardandpoors.com53