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

Cross Sector Criteria■ Payment of fees to the trustee, escrow agent,accountant or issuer may be made from theescrow only if they are provided for in the cashflow statement and the escrow deposit agreement.Defeasing variable rate debt presents a unique situationas the interest rate on the bonds in escrowcontinues to reset, and the bondholders’ put optionmay not be extinguished when the indenture is discharged.For additional criteria related to legallydefeased variable rate debt, see the “Defeasance”section of “Public Finance Criteria: LOC-BackedMunicipal Debt”.Finally, Standard & Poor’s should be notified ofany substantive changes in the structure of thetransaction including, among other things, enteringinto a forward purchase contract or changing thedefinition of eligible securities.Cash flow verificationA report provided by a third-party accounting firmthat verifies the accuracy, adequacy, and timelinessof the funds escrowed to pay bondholders isreviewed. The report should verify that the anticipatedreceipts from escrow securities would be sufficientto pay principal and interest when due.Legal opinionsStandard & Poor’s may look for legal comfort oncertain issues:■ For public-purpose and Bankruptcy Code issuers,a legal defeasance opinion that indicates that thelien of the prior indenture or resolution has beendischarged and released.■ If cash contributions, rather than bond proceeds,fund all or part of the escrow an opinion indicatingthat, in the event of an insolvency of the contributor,the escrow fund and any payments onthe defeased bonds would not be recoverable as apreference pursuant to Section 547(b) of theBankruptcy Code.■ A bankruptcy opinion if excess earnings or residualsare allowed to be removed from the escrowprior to maturity or earlier call date(s) and theentity may be involved in substitution and reinvestmentprocedures.Standard & Poor’s does not require legal defeasanceor preference opinions in connection with thedefeasance of bonds issued by entities deemedmunicipalities (states, counties, or cities) that areeligible to file a bankruptcy petition under Chapter9 of the Bankruptcy Code.Economic Defeasance CriteriaStandard & Poor’s reviews the following documentationto analyze economically defeased transactions:■ Escrow deposit agreement: The criteria are identicalto those listed above under legal defeasance.■ Cash flow verification: The criteria are identicalto those listed above under legal defeasance.■ Legal opinions: Issuers typically fall into one offour categories—-municipal, conduit, bankruptcycode, and public-purpose issuers. The legal opinionsnecessary to analyze an economicallydefeased issue are outlined below for each type ofissuer and allow Standard & Poor’s to assess thelikelihood that an issuer will file or would beinvoluntarily filed under the Bankruptcy Code.Municipal issuersFor those issuers whose status as a “municipality”under Chapter 9 of the Bankruptcy Code is uncertain,an opinion is requested to verify whether theissuer is a municipality eligible to file underChapter 9 of the Bankruptcy Code.ConduitsConduits typically are municipally sponsoredorganizations, such as housing, health care, or economicdevelopment authorities. Standard & Poor’shas determined that conduits have little incentive tofile for bankruptcy protection. In cases where alegal defeasance opinion cannot be provided, but arating of ‘AAA’ is desired, a bankruptcy opinion isrequested to address cases where a non-bankruptcyremotethird party deposits funds through a conduitto defease bonds.Bankruptcy Code issuers (Chapter 7 or 11)Standard & Poor’s will look for legal comfort thatin an insolvency of the depositor, the escrow fundsand any payments on the defeased bonds would notbe recoverable as a preference under Section 547(b)of the Bankruptcy Code; will not be subject toautomatic stay under Section 362(a) of theBankruptcy Code; and would not be consideredpart of the estate of the depositor under Section541 of the Bankruptcy Code in order for the defeasancerating to be higher than the existing rating onthe obligor’s long-term debt.Public-purpose issuersPublic-purpose issuers are entities that are not consideredmunicipalities and are not “monied, business,or commercial corporations” under Section 303(a) ofthe Bankruptcy Code. These include private collegesand universities, hospitals, not-for-profit corporations,or other charitable institutions. Although theseentities are not subject to involuntary filing under theBankruptcy Code, Standard & Poor’s believes thatthe possibility of a voluntary filing exists. Therefore,the highest rating that can be assigned to the economicallydefeased debt of these type of issuers is the58 Standard & Poor’s Public Finance Criteria 2007