PubFinCriteria_2006_part1_final1.qxp

market demand. Since the maturity of a BAN is sig-

nificantly shorter than a series of bonds, the credit

risk of a downgrade that would deny an issuer

access to the market to issue bonds to retire BANs

is significantly reduced, short of BAN issuance for

non-capital costs which might actually be a sign of

long-term distress.

Cash liquidity

A last factor that can support a high BAN rating is

the availability of cash reserves sufficient to repay

BAN issuance in case long-term debt cannot or is

not issued, providing sufficient cash to repay BANs

at maturity without the need to access the long-term

capital markets. Such instances are rare, however,

given that issuers with sufficient cash reserves on

hand to pay off short-term debt would generally

also exhibit healthy long-term credit characteristics

and, by default, ability to issue long-term debt on

demand. In such scenarios, though, adequate com-

fort should be achieved the sufficient cash would be

in place at the time of BAN maturity, and use of

cash for repayment should not significantly impact

operations. Availability of cash, however, where

other credit factors are weak does not on its own

guarantee a high BAN rating.■

Commercial Paper, VRDO, And Self Liquidity ..................................................................

http://www.standardandpoors.com 17

The following note documentation requirements are intended

as general guidelines. Standard & Poor’s will request

additional information when appropriate. Supporting

information will vary depending on the nature of the

particular financing. For example, documentation for cash

flow notes issued in anticipation of property taxes should

include relevant tax collection data.

For cash flow notes and BANs:

■Offering memorandum or official statement;

■Note indenture or resolution;

■Audits for two years; and

■Current and proposed budgets.

For cash flow notes only:

■Cash flow statements, including cash based receipts and

disbursements (see example);

■Current projection through note maturity;

■Historical projections and actual results (when available);

■Documentation of resources in other funds available for

note repayment;

■Fiscal and paying agent agreement, if applicable;

■Investment agreement, if applicable; and

■Legal opinion.

Documentation Requirements

S

tandard & Poor’s Ratings Services Public

Finance department rates the commercial paper

(CP) programs and variable rate demand obligations

(VRDOs) of governmental entities and nonprofit

organizations (including colleges, universities, and

hospitals). CP program ratings can be based on the

issuer’s creditworthiness or a third-party credit

facility. Issuers in all sectors are increasingly issuing

VRDOs and other types of variable rate debt, such

as auction rate and index bonds. These issuers seek

to lower their borrowing costs as they encounter a

significant difference between short- and long-term

tax-exempt interest rates. Also, the efficient pricing

of derivative products by broker-dealers, such as

interest rate swaps, has also impacted issuer’s

willingness to enter the short-term debt markets.

Interest rate swaps in particular can potentially lock

in interest rate savings to issuers that choose to syn-

thetically fix interest rates on VRDOs. Issuers can

also use swaps to lower fixed debt service costs by

converting fixed rate debt into variable rate debt.

Standard & Poor’s typically rates the tender obli-

gations on VRDOs based on third-party liquidity

facilities, such as LOCs and standby bond purchase

agreements (SBPAs), although some highly capitalized

issuers are increasing issuing “unenhanced” VRDOs,

where tender obligations on the debt are supported

by the issuer’s own liquidity sources.

Issuers have the option of using their own assets

to provide liquidity support as a substitute for tra-

ditional liquidity facilities both for CP programs or

VRDO tender obligations. An issuer may also

choose to use its own liquid assets in combination

with liquidity facilities to provide support for liquidity

demands. An issuer's assets and other forms of

liquidity must be sufficient, liquid and creditworthy

enough to meet all payment obligations on time

and in full. For VRDOs, self-liquidity must involve

at least 100% backup of outstanding principal and

interest through a combination of the issuer's assets

or credit facilities. Sources to back unenhanced CP

programs do not have to account for 100% of CP

Commercial Paper,

VRDO, And Self-Liquidity