ing. If a properly structured moral obligation default-
ed, despite clear original legislative support, the
state’s willingness to pay on its other debt would
need to be examined.
Under certain circumstances moral obligation
debt may warrant a rating above the traditional full
category, providing there are other security features
present. These additional security features include
but are not limited to the following:
■Additional excess assets;
■Strong historical track record of the underlying
assets;
■A large pool of assets providing cross collateral-
ization; and
■Strong community support/essentiality for the
assets.
Weaker moral obligation bonds may fall further
below the issuer’s GO rating, potentially even into the
non-investment-grade rating categories, usually as a
result of significant project risks, lack of clear govern-
mental statement of intent, or structural concerns.
Standard & Poor’s has noted two types of moral
obligation bonds. In the first (and most common)case, moral obligation bonds are issued by govern-
mental or special purpose entities on behalf of gov-
ernmental units or authorities. Taxes or fees that
are legislatively or administratively mandated sup-
port the repayment of such bonds. Less common
are instances where moral obligation bonds are
issued to support loans made to private companies.
Repayment of such “private purpose” moral obliga-
tion bonds is based on revenues generated by such
private companies. This latter type of moral obliga-
tion bond can raise rating concerns.
It is conceivable that in the event of a bankruptcy
by the company for whom the moral obligation
issuer has essentially served as a conduit, any debt
service reserves pledged as security for the bonds
might be viewed as “property of the estate” of that
company, and not be immediately available to pay
debt service on the bonds. To mitigate this risk,
Standard & Poor’s will request comfort that all
debt service reserve funds or other credit support
for the bonds will not be treated as “property of
the estate” of the company and will not be stayed
from being applied to debt service payments, if
otherwise needed.■Tax-Secured Debt112 Standard & Poor’s Public Finance Criteria 2007