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

Cross Sector Criteriathe multiple providers involved defaulted. The foundationfor the criteria is that the risk that the multipleproviders will default is less than the risk that eitherwill. As a result, the credit quality of the investmentagreement may be higher than the rating on eitherprovider (see “Criteria Update: Joint Support CriteriaRefined,” RatingsDirect, Feb. 3, 2006). Standard &Poor’s will examine each provider’s agreement toensure legal comfort with the type of obligation provided.Payments under the agreements should bemade directly to the bond trustee.The application of the joint support criteria toinvestment agreements creates additional flexibility,particularly for ‘AAA’ rated transactions, byexpanding the pool of potential investment agreementproviders. Strong credit quality could bederived like other jointly supported transactions,such as those with both a primary obligor and a letter-of-credit(LOC) supporting the bonds. The onlydistinction is that the jointly supported obligation isan investment contract rather than the obligation tomake payment of bond debt service.The rating criteria for investment agreements inbond transactions are outlined in Standard &Poor’s current criteria (see “Public FinanceCriteria: Review of Investment Agreements forMunicipal Revenue Bond Financings”). To qualifyfor a bond rating at a certain level, the jointlyderived rating of the providers should meetStandard & Poor’s investment rating guidelines.Pursuant to the joint support criteria, Standard &Poor’s will apply the appropriate reference tablebased on the correlation between providers. To theextent the investment agreement is provided jointlyby two banks, for example, Standard & Poor’swould use the medium correlation reference tablebecause both providers are in the same industry(and assuming they are not in the same region). Ifone bank was rated ‘A-’ and the other rated ‘AA’,the rating on the jointly supported investmentagreement would be evaluated at ‘AAA’ therebyqualifying the investment agreement for use in a‘AAA’ rated transaction. The same approach couldbe applied to short-term ratings by converting theindicated long-term rating of the providers into thecorresponding short-term rating. It should be notedthat monoline bond insurers remain ineligible forjoint-support criteria, reflecting the significant correlationbetween the insurer and its portfolio ofinsured obligations.Rating DependencyUsing investment agreements in rated bond transactionsleads to the possibility of a change in the bondrating due to a change in the investment agreementprovider’s rating. Like any rating which is dependenton its parts being of at least equal credit quality,with jointly supported investment agreements, thebond rating becomes dependent on the jointlyderived rating of the providers, and the correlationtable used to derive the joint rating. Due to thenature of joint support, a change in the rating ofone provider, however, does not necessarily lead to achange in the rating of the bonds. Using the exampleof the rated obligors above, if the rating on the‘AA’ entity was lowered to ‘AA-’, the rating on thebonds could be affirmed because the jointly derivedrating of the providers would still be ‘AAA’. If therating on the ‘A-’ entity was then lowered to ‘BBB+’,however, the jointly derived rating of the providerswould be ‘AA+’ and the rating on the bonds may belowered, unless remedies are taken to preserve therating. Obviously, changes in other credit factorscould separately affect the rating.Downgrade TriggersJointly supported agreementsShould the bond issuer want to preserve the bondrating in case of any adverse change to the creditquality of one of the investment agreementproviders, Standard & Poor’s will evaluate thedowngrade triggers of the agreement(s) to confirmthey are at a rating level consistent with our currentcriteria and incorporate the jointly derived rating.Remedies may be in place to preserve the bond rating—forexample, the agreement could provide thata substitute provider with a rating sufficient tomaintain the rating on the bonds will be obtained.If similar remedies are not included, the rating onthe bonds will likely drop to reflect the credit qualityof the jointly supported investment agreement.Following a rating change of one provider, if thecredit quality of the jointly supported agreement isadversely affected, the agreement should allow upto 10 business days to effect a remedy. If a remedysufficient to preserve the bond rating is not completed,the bond rating will be lowered to the levelof the jointly derived rating of the providers.Non-jointly supported agreementsThe application of joint support criteria may alsobe used as a potential remedy to preserve the bondrating if a provider’s rating is lowered in all investmentagreements, whether or not they initially usejoint support. If a provider’s rating is loweredbelow the level required for the bond rating, theagreement can specify that the provider enter intoan agreement with another provider that will allowapplication of the joint support criteria in a mannerthat will maintain the then current rating on thebonds. The multiple providers must each be fullyand independently obligated for the entire amountand all terms and conditions of the obligationunder the investment agreement. ■56 Standard & Poor’s Public Finance Criteria 2007