PubFinCriteria_2006_part1_final1.qxp

bonds. To affirm their intent to retain the bonds,
bondholders should acknowledge in writing their
understanding of the rating consequences prior to
the event occurring.

Timeliness of LOC draws.

It is necessary to synchronize the trustee’s draw
instructions under the bond indenture with the pay-
ment terms of the LOC to ensure that the LOC is
drawn upon in accordance with its terms to provide
for full and timely payment of principal, interest,
purchase price, and premium, if any.

LOC Sizing

An LOC must be for a specific amount with a defi-
nite expiration date. Other limitations reviewed
within an LOC include its terms for draws, its
terms for reinstatement, and its turnaround times
for the bank to honor an LOC draw. These terms
are reviewed in conjunction with the structure of
the bond documents to conclude that the LOC
offers full and timely coverage for the transaction.
The factors used to calculate the required amount
of LOC coverage are the following:

■Principal: the principal portion must equal the

current outstanding amount of bonds.

■Premium: the amount corresponding to the

largest premium applicable to a mandatory

redemption or tender.

■Interest: the interest portion shall be an amount

equal to the maximum number of days of interest

that could accrue calculated at either the actual

rate for fixed-rate bonds or the maximum rate

for floating-rate bonds.

For purposes of calculating the interest coverage

of the LOC, the appropriate length of the calendar

year, 360 or 365/6 days, must correspond with the

basis of calculation within the bond documents.

The LOC provider should always agree to pay with

immediately available funds. It is critical that the

LOC covers the maximum amount of interest that

can accrue in the worst-case scenario.

For direct-pay and prioritized direct-pay transac-

tions, the following worst-case scenario would

apply. In this instance, the trustee draws on the

LOC for full coverage of the longest interest period.

Following the draw, the LOC bank sends notice of

Introduction To Structured Finance

http://www.standardandpoors.com 211

IV. Bank facility drawing instructions

A. Credit facility draws must be consistent with bank document timing

B. Liquidity facility draws

1. Timing consistent with bank document


2. Amount drawn is according to remarketing proceeds on deposit, if any

V. Bank document termination events

A. Timed termination

1. Termination countdown begins only after actual receipt of notice of bank notice by trustee or other party


2. Bondholder takeout honored by bank must occur following receipt of bank termination notice

VI. Reimbursement provisions

A. Credit advances

B. Liquidity advances

VII. Miscellaneous

A. Investment instructions for unused remarketing and bank facility proceeds must be adequate to support rating

B. Trustee or other specified drawing party may not resign or be removed until appointment of a successor

C. Drawing party may not require indemnity to draw under bank facility

D. Custodian instructions to release bank bonds only after written notice of liquidity facility reinstatement from bank

E. Notices to Standard & Poor’s

1. Fixed rate conversion


2. Redemptions


3. Bank facility expiration, termination, extension, or substitution


4. Changes to legal documents


5. Defeasance


6. Acceleration

Criteria Outline for Bank-Supported Municipal Debt(continued)