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

Joint Support To Investment AgreementsWithdrawal/DepositsCertain bond financings present uncertainty giventhe possibility of prepayment of the collateral securingthe bonds. To address the risks of the frequencyand size of the prepayments, investment agreementproviders, particularly in housing bond transactions,are increasingly becoming more restrictive inthe amount of funds they will accept, the length oftime they will hold such amounts, and the use oflockout periods in an effort to increase the predictabilityof the investments held with theproviders. As a result, investment agreements oftenhave limitations with respect to deposit and durationof the investment. Standard & Poor’s willreview the contract to ensure that the investmentagreement and cash flows are consistent. To theextent the agreement places limits on the amount ofthe investment, for example, the cash flows shouldthen model these limits by reflecting amounts abovethe limits held at minimum reinvestment ratesrather than the investment agreement rate.Additionally, certain bond structures, such asescrows, may include unscheduled bond paymentevents that require the trustee to withdraw allfunds from the investment agreement prior to theexpiration date. If, for example, bond proceeds areheld invested during an escrow period, and thestructure calls for the investment agreement tofund a mandatory redemption of the bonds shouldthere be a failed remarketing, the trustee wouldhave to withdraw all of the funds with limitednotice to the provider. Standard & Poor’s firstreviews the agreement for any lockout provisionsthat could prevent the withdrawal of funds. Theinvestment agreement will also likely include awithdrawal notice provision which Standard &Poor’s reviews to verify the availability of funds topay bondholders when necessary and in accordancewith the legal documents. Remedies shouldbe in place for any inconsistencies between thebond documents and the investment agreement.Grace PeriodWhile the rating of the provider takes into accountthe likelihood of the provider to pay under the contract,the default section of the investment agreementmay incorporate a grace period that may notbe factored into the payment structure of thebonds. Investment agreement providers typicallybuild in a grace period to account for potentialadministrative delays. The provider is not deemedto be in default unless payment is not made whendue and after a specified grace period, such as onebusiness day after which the Trustee gives notice tothe provider. Note that investment agreementsinvolving guarantees may also have additionalstructural notice periods that can affect when fundsare received. The structure should allow for thesegrace periods by adjusting the investment agreementinterest payment dates to compensate andtaking into account interest accrual periods.CollateralFollowing a downgrade event, the provider may optto post collateral so as to maintain the rating on thebonds. Standard & Poor’s determines the amountof collateral posted on a case-by-case basis at thetime of posting and based on the type of collateralposted. In addition, the collateral must be pledgedto the trustee and Standard & Poor’s should receivea legal opinion stating that in the event of theprovider’s insolvency, the trustee will be able to terminatethe agreement and sell the collateral withoutregard to the insolvency of the provider. ■Joint Support To Investment AgreementsStandard & Poor’s Ratings Services criteria forjointly supported obligations, whereby eachobligor is fully responsible for the entire obligation,may also be applied to investment agreements.These agreements provide full or partial credit supportin public finance transactions, and are importantfactors in determining the bond rating,especially in housing. Investment agreements alsoprovide reinvestment of various funds of municipalissuers, such as bond proceeds.As with any jointly supported bond, the multipleproviders must each be fully and independently obligatedfor the entire amount, and all terms and conditionsof the obligation under the investmentagreement. Therefore, a default on the obligationunder the investment agreement would only occur ifwww.standardandpoors.com55