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

Debt Statement AnalysisHowever, swaps expose issuers to counterpartycredit risk, termination risk, basis risk, rolloverrisk, and for many housing bond issuers, amortizationrisk. Therefore, Standard & Poor’s will reviewswap transactions in conjunction with the issuer’soverall debt profile and will assign a DebtDerivative Profile score. For information on theDebt Derivative Profile Criteria please refer toCriteria: Debt Derivative Profile.In terms of capital appreciation bonds (CABS),Standard & Poor’s will use the accreting value thatis presented by the issuer in the audited financialstatements. Since this includes interest payments,Standard & Poor’s will gauge whether the valueartificially inflates the debt position by 10% ormore, and will explain in the debt section of thecredit commentary the sinking fund and pay out ofthe CABS.Table 3 Sample: Revenue Bonds and Other Debt($ 000)—Water and sewer——Solid waste—Maturing in FY: Principle Interest Principle Interest2006 1,090 2,237 8,403 1,8562007 1,121 2,181 5,208 1,1192008 1,152 2,124 1,204 1,0772009 1,210 1,065 1,151 1,0192010–2014 6,886 8,8712015–2019 6,275 7,0902020–2024 9,197 2,8682025–2030 5,298 592Less:Unamortized discount& deferred amount (1,226)Premium 479Total 31,482 27,028 15,966 5,071Changes during Water Solidthe fiscal year and sewer wasteOustanding asof July 1, 2005 33,532 24,967New issuePrinciple retired (2,050) (9,001)OtherOustanding asof June 30, 2006 31,482 15,966Overlapping DebtAnother important measure of debt that should beincluded in a debt statement is the overlapping debtissuance (or underlying debt for counties). A comprehensivedebt statement will include a separatesection on overlapping debt and the percentagesapplicable to the municipality. The rationale for thisis that the burden on the community is for all debtissued. Therefore, the community is responsible forthe debt of the school district to the same extent asthe city and the county. The taxpayers are obligatedto pay taxes to each entity, and this is one of themost important measures of how the current obligationaffects the community.Similar to the presentation of direct debt, theoverlapping debt section should also include allsecurities, not just the general obligation bonds. Acomprehensive overlapping debt section wouldinclude bonds secured by special assessments, gastax, and sales tax, among others.Future Debt/CIPStandard & Poor’s closely scrutinizes an issuer’sCIP to evaluate future debt statement changesAgain, Standard & Poor’s examines the tax-supportedobligations and revenue obligations andtheir potential impact on the issuer’s future operations,and the potential burden to the community.A typical CIP presents the expected projects for thenext five fiscal years, a list of the projects and theircost, and the funding source—whether fundedinternally, by an outside governmental agency, ordebt financed. As well, the CIP would communicatewhether the project was discretionary or non-discretionary.In addition, the issuer should also communicatethe remaining borrowing capacity, taxrate and levy capacity, or other revenue capacity ofthe obligor/issuer.Debt ExampleFor example, table 1 describes what Standard &Poor’s includes in the analysis of the gross debtposition for a city. Under gross direct debt,Standard & Poor’s included the $252.9 million generalobligation bonds and the $27 million leasedebt, since both are direct obligations of a city, andthe debt service payment is derived from the city’soperations. As well, the other tax-supported debtincludes $10.4 million sales tax revenue bonds and$16.9 million tax increment financing bonds and isalso added to the direct debt obligation of the city.Under the net direct debt, Standard & Poor’ssubtracted the city’s $25 million general obligationwater and sewer debt because system revenues werepaying the debt service. (See self-supporting debtsection). Therefore, the city’s net direct debt positiontotals $282.2 million.Table 2 shows the debt statement presented toStandard & Poor’s by the city. The debt statementincludes $252.9 million in general obligation debt,$10.4 million in sales tax revenue bonds, $16.9www.standardandpoors.com69