Rating Agency Criteria and Other Information

Fitch Ratings:

  • Rating Guidelines for Special Tax Bonds: Provides useful insight into various factors contributing to the ratings assignment by Fitch to bonds supported by special tax revenue sources. (Fitch Site | View)

Standard & Poor’s Ratings Services:

  • General Criteria: Methodology and Assumptions: Approach to Evaluating Letter of Credit-Supported Debt, July 6, 2009 (General S&P Criteria)
    • Goal: Clarifies when ratings on LOC-supported debt may be different from rating on the LOC provider, discusses S&P (a) assumptions regarding preference risk in a number of different contexts, (b) assumptions relating to LOC enforceability, (c) assumptions regarding operational risks that relate to debt administrator preference
    • Common Risks in LOC-Supported Structures:
      • Recapture risk related to obligor bankruptcy: Assumption is that obligor becomes bankrupt immediately after making a payment to investors. Are those payments safe from “recapture” under bankruptcy filings?
        • Under section 547 of the Code, a bankrupt debtor’s estate may void and recapture certain property transfers.
        • Transferred funds may be subject to recapture if they were made during the 90 days that preceded the debtor’s bankruptcy filing.
        • Payments by a municipality are not subject to recapture according to section 926 of the Code.
        • Various payment structures affect recapture differently: (a) Direct-pay is most common – here payments are made to investors from the bank directly, so a bankruptcy of the obligor does not give rise to any recapture. (b) Prioritized direct-pay provides LOC funds on a secondary basis where obligor’s funds are not sufficient to pay debt service – documents usually provide that obligor funds must “age” for the appropriate preference period with the trustee before they can be used to pay investors. (c) Standby LOC is also common – here, the LOC funds are used only to cover payment shortfalls (what is the difference to prioritized direct-pay LOCs?). Documents usually provide that standby LOC will cover moneys that are recaptured from investors, and that standby LOC remains in effect until the longest applicable preference period has expired and the trustee has received a certificate of “no bankruptcy filing” from an authorized officer of the obligor.
        • S&P also looks at how the purchase price is paid in remarketings. Documents usually prohibit the obligor from purchasing the Bonds, thus preventing the obligor’s moneys, which may not be preference proof, from reaching investors.
        • Certain sources of funds mitigate obligor-related recapture risk, including initial debt sale proceeds, LOC draws, remarketing proceeds, funds held by the trustee for at least 90 days (or the applicable preference period, if longer), insurance proceeds paid directly to the trustee, proceeds from a refunding debt issue.
        • Recapture risk also arises where an LOC provider is granted new or additional collateral for agreeing to support previously issued debt. See In re Air Conditioning and In re Compton Corp.
      • Risk of insufficient LOC coverage
      • Enforceability risk
      • Risk of credit event
      • Risk of put termination
      • Document-related timing risk
      • Commingling risk and eligible accounts
      • Investment risk
      • Operational risks relating to debt administrator performance
      • Legal defeasance
    • Background on Confirming LOCs: [to come]
    • Joint Support Methodology: [to come]
    • LOCs and Liquidity Facilities Contrasted:
      • LOCs support debt issues, and the LOC provider bears liquidity risk and obligor credit risk.
      • Liquidity facility providers are purchasers of last resort and usually only cover liquidity risk, which is the risk that bond principal cannot be paid.
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