‘A-1’, the long-term credit rating would need to be
at least ‘A-’. When an obligor has multiple lien
positions, Standard & Poor’s will look to the long-
term rating on the intended takeout financing to
evaluate the correlation between the short-and
long-term ratings. For example, if an obligor issues
subordinate lien CP but intends to ultimately retire
the CP using senior lien debt, it is the long-term
rating on the senior lien debt that will determine
the short-term rating. (See chart “Correlation Of
CP Ratings With Long-Term Credit Ratings”).
Conversely, knowing the long-term rating will
not fully determine a CP rating, considering the
overlap in rating categories. However, the range of
possibilities is always narrow. To the extent that
one of two CP ratings might be assigned at a given
level of long-term credit quality (e.g., if the long-
term rating is ‘A’),overall strength of the credit
within the rating category is the main consideration.
For example, a marginal ‘A’ category credit likely
would have its commercial paper rated ‘A-2’, where-
as a stronger ‘A’ category will likely receive an ‘A-1’.
Backup Policies
Standard & Poor’s deems it prudent for obligors
that issue commercial paper to make arrangements
in advance for alternative sources of liquidity. This
alternative, backup liquidity protects an obligor
from defaulting if they are unable to roll over their
maturing paper with new notes, because of a
shrinking overall CP market or investor concerns
about the obligor that might make CP investors
reluctant to extend additional credit to the obligor.
Many developments affecting a single obligor or
group of obligors—including bad economic condi-
tions, a lawsuit, management changes, a rating
change—could make commercial-paper investors
flee the credit.
Given the size of the CP market, backup facilities
could not be relied on with a high degree of confi-
dence in the event of widespread disruption. A general
disruption of CP markets could be a highly volatile
scenario, under which most bank lines would repre-
sent unreliable claims on whatever cash would be
made available through the banking system to support
the market. Standard & Poor’s neither anticipates
that such a scenario is likely to develop, nor
assumes that it never will.
The norm for public finance obligors is 1x cover-
age of outstanding CP with excess liquid assets or
bank facilities in an amount that equals all such
paper outstanding providing the backup support.
Under some exceptional circumstances, Standard &
Poor’s will assign a strong short-term rating with
coverage of less-than 1x, if the obligor has a long-
term rating of ‘AA-’ or higher, and can demonstrate
through some combination of their own resources
or alternative bank facilities, that they will always
have the capacity to cover all CP as it matures,
including in the event of a call on the liquid assets
of the obligor. In these cases, it is possible that
Standard & Poor’s will assign a strong short-term
rating with coverage levels in the range of, but no
lower than, 50%-to-75% of CP outstanding as long
as they have 1x coverage of all maturing CP.
Determinants in the acceptable level of coverage of
CP are the planned use of CP proceeds and intend-
ed takeout financing. Standard & Poor’s will gener-
ally look for relatively higher coverage ratios if the
purpose of the CP issue is to finance operations and
to manage intra-year cash flows. Higher coverage
levels will also be expected when the issuer intends
to retire the CP with its own cash. Coverage can be
lower when the obligor intends to issue long-term
debt to retire outstanding CP.
Available cash or marketable securities are ideal
to provide backup, although it will likely be neces-
sary to “haircut” their apparent value to account
for potential fluctuation in value. Marketability of
liquid assets is also critical. The vast majority of
commercial paper issuers rely on bank facilities
(lines of credit) for alternative liquidity.
This high standard for back-up liquidity has pro-
vided a sense of security to the commercial-paperCommercial Paper, VRDO, And Self-Liquidityhttp://www.standardandpoors.com 19AAAAA+AAAA-A+AA-BBB+BBBBBB-A-1+A-A-A-
*Dotted lines indicate combinations that are highly unusual.Correlation Of CP Ratings With
Long-Term Credit Ratings*