market—even though backup facilities are far from a
guarantee that liquidity will, in the end, be available.
For example, an obligor could be denied funds if its
banks invoked “material adverse change” clauses.
Alternatively, an obligor with insufficient liquidity
might draw down its credit line to fund other cash
needs, leaving less-than-full coverage of paper out-
standing, or issue paper beyond the expiration date
of its lines.
Obligors rated ‘A-1+’ can provide 50%-75%
coverage of CP outstanding, once again, if the
issuer can demonstrate they always have the capacity
to cover CP as it matures. In practice, this may be
hard to demonstrate on an ongoing basis, especially
for an issuer that is an active user of commercial
paper and with numerous maturity dates. The exact
amount is determined by the issuer’s overall credit
strength and its access to capital markets. Current
credit quality is an important consideration in two
respects. It indicates:
■The different likelihood of the issuer’s ever
losing access to funding in the commercial-paper
market; and
■The timeframe presumed necessary to arrange
funding should the obligor lose access. A higher-
rated entity is less likely to encounter financial
reverses of significance and—in the event of a
general contraction of the commercial-papermarket—the higher-rated credit would be less
likely to lose investors. In fact, higher-rated
obligors could actually be net beneficiaries of
a flight to quality.Issuers Can Provide Self-Liquidity
Creditworthy municipalities and nongovernmental
organizations with good liquidity and a strong
investment management function can use their own
assets to provide liquidity support for commercial
paper (CP) programs and variable rate demand
obligations (VRDO) Rather than relying on external
dedicated bank facilities, these issuers demonstrate
they have both sufficient fixed income investments
and the policies and procedures necessary to cover
either outstanding commercial paper or variable
rate demand obligations. The rating process
involves an assessment of the quality and sufficien-
cy of investments that would be used to cover the
variable rate debt or commercial paper and the
issuer’s demonstration that they have adequate policies
and procedures in place to act as a bank facility
would under the same circumstances. Therefore an
issuer should demonstrate that it could liquidate
sufficient investments and cash when necessary
under the bond documents in order to meet either a
remarketing failure of commercial paper or an
optional put for variable rate demand obligations.
Standard & Poor’s Ratings Services will evaluate
an organization or municipality’s fixed income
investments that can be used to support short-term
ratings if the issuer’s assets are sufficient, liquid,
and creditworthy to meet all debt obligations on a
full and timely basis. Because the ability to access
sufficient moneys when necessary is not related to
bank performance, commercial paper ratings and
any short-term ratings assigned to variable rate
demand bonds, are thus tied to the issuer’s long-
term credit rating, rather than to external bank
liquidity support. (See chart, “Correlation Of CP
Ratings With Long-Term Credit Ratings).Self-Liquidity For Commercial Paper And VRDOs
Commercial paper ratings are a function of market
access and long term credit quality, the rating on
the commercial paper reflects the market access
ability of the issuer to either take out the financing
with long-term paper or new commercial paper
notes. In general, commercial paper is more pre-
dictable and flexible than variable rate demand
obligations, because it is the issuer who decides on
the maturity of the commercial paper. Therefore,
while there is remarketing risk, the issuer itself
manages the remarketing risk. On the day that
remarketing proceeds must be settled, however, the
issuer will still need to have sufficient, liquid funds
on hand to cover any potential remarketing failure.Cross Sector Criteria20 Standard & Poor’s Public Finance Criteria 2007
■A letter requesting a Standard & Poor’s variable-rate
debt rating indicating that the issuer intends to use its
assets for liquidity support.
■A copy of the current investment policies. (Please include
policies on repurchase agreements, hedging transactions
[including use of options and/or futures contracts], and
leveraging of assets.)
■A list of securities approved for purchase according to
asset type, credit quality, maturity, and sector.
■The range of weighted average maturities of assets
for each month during the past three years.
■The end-of-month asset balances for the three
previous years.
■Documented written liquidation procedures detailing the
steps to be taken to provide same-day funds to cover a
failed commercial paper remarketing or tendered VRDO
(see sample liquidation letter).
■A legal opinion verifying the issuer’s legal ability to use its
own assets for VRDO/commercial paper liquidity support,
if necessary.
Note: Monthly surveillance requirements include submission of
monthly asset reports and notification of changes in investment
policies, operating procedures and personnel managing the
assets. The market and par value, security identifier (CUSIP
number), and security rating (if applicable) should be provided
for each security in the monthly assets report.Information Requirements For Liquidity Evaluation