rating TANs and TRANs for detail on the analysis
of the individual cash flows. Once that principal
portion is determined, the reserve level needed to
overcollateralize to the desired rating level is estab-
lished according to standard requirements. Reserve
levels for ‘SP-1+’ rated pools have ranged between
8%-20%, reflecting the underlying credit quality of
the participants or other structural enhancementsPool Structure
As with stand-alone cash flow note ratings,
Standard & Poor’s evaluates the legal security, the
lien position, and the flow of funds, including the
segregation of pledged revenues into separate debt
service repayment accounts for each participant. In
addition, for cash flow note pool ratings,
Standard & Poor’s confirms that all participants are
required to make full repayment of principal and
interest prior to the maturity date of the note pool
itself. In the case of note pools, it is important that
segregated pledged revenues are held in accounts
under the custody of a third party.
Similar to stand-alone cash flow note ratings,
when repayment accounts are held with a third
party paying or fiscal agent, Standard & Poor’s also
confirms that the legal documents insulate the issue
from paying agent or fiscal agent risk. All invest-
ments, including Guaranteed Investment Contracts,
are restricted to maturities that mature no later
than the maturity date of the TRANs.
A common approach to investing note proceeds
and repayment amounts is to place the money in a
guaranteed investment contract—or GIC. These
instruments offer the investor a guaranteed return
on the amount invested at a time certain. Please
refer to Standard & Poor’s investment guidelines
for information on permitted investments.Bond Anticipation Notes
Bond anticipation notes (BANs) are generally used
as an interim financing vehicle for capital projects.
BAN debt service is typically repaid with bond pro-
ceeds, which requires the issuer to access the capital
markets. Standard & Poor’s assumes that most
investment-grade issuers have access to the public
credit markets to sell bonds to retire BANs and the
BAN ratings reflect that assumption. Borderlineinvestment-grade credits or those on CreditWatch
or with negative outlooks, however, are not
assumed to have ready market access and the BAN
rating assigned may reflect those risks.
When assigning a rating to BANs, Standard &
Poor’s will consider these factors:
■The issuer’s fundamental credit strengths, as
reflected in its bond rating; and
■The issuer’s demonstrated experience in the pub-
lic credit markets, including frequency of its debt
issuance and the historical demand for its paper.
In all cases, regardless of other strengths, the
legal authority to refinance the notes with long
term debt or cash must be in place prior BAN
issuance. In addition, the issuing entity must carry a
Standard & Poor’s long-term bond rating, an indi-
cation of market access, to secure a BAN rating.
BANs are rated based on an approach that blends
the issuer’s fundamental credit factors with likely
access to the public credit markets to issue debt. The
approach emphasizes the issuer’s long-term bond
rating as a measure of both these factors. Issuers
with healthy. stable long-term bond ratings and the
appropriate authorization to issue additional long-
term debt can ususally achieve a high BAN rating.
In most cases, BAN issuance takes place within
the context of a well-managed capital plan with
particular timing constraints for long-term debt
issuance; therefore, BAN issuance does not in and
of itself pose a long-term credit concern. In some
cases, however, BAN proceeds may be used to fund
ongoing expenses unrelated to capital outlay or to
finance accumulated deficits. Issuers who use BAN
proceeds as the first step in a plan to ultimately
bond out these non-capital costs are often experi-
encing fiscal stress and, possibly, the first stages of
long-and short-term credit deterioration. In such
instances, BAN issuance may be an indication of
potential pressure on the issuer’s long-term rating
and, in occasions of significant fiscal stress, lack of
ready access to long-term capital markets to repay
outstanding BANs. In such instances, credit concern
could be reflected in a lower short-term BAN and,
ultimately, long-term bond rating.
Market access
In certain cases, issuers with lower investment
grade bond ratings but ample demand for their
paper and market experience may achieve high
investment grade BAN ratings. For example, a very
active issuer in the long-term credit markets, due to
a sizable ongoing capital program or other factors,
may exhibit long-term credit risks reflected in a
long-term rating that may not necessarily curtail
demand for that debt in the public markets. The
key factors in such circumstances is the frequency
of long-term debt issuance and predictability ofCross Sector Criteria16 Standard & Poor’s Public Finance Criteria 2007
—Pool rating—
Participant rating SP-2 SP-1 SP-1+
SP-3 25 30 35
SP-2 20 25
SP-1 20Table 3 TRAN Pool Reserve Requirements (%)