PubFinCriteria_2006_part1_final1.qxp

issuing CP notes. In addition, the depositary is

instructed to:

■Draw on the LOC for the entire amount of out-

standing CP notes and hold draw proceeds until

such notes mature; or

■If the LOC will remain in effect by its terms until

the last outstanding CP note matures, continue to

draw on the LOC as CP notes mature until the

entire program is retired.

In the event that the former occurs, the deposi-

tary must hold proceeds uninvested or invest the

proceeds in qualified investments maturing when

needed that are rated equal to or higher than the

rating assigned to the transaction.■

Municipal Applications For Joint Support Criteria

http://www.standardandpoors.com 217

S

tandard & Poor’s Ratings Services uses its crite-

ria for rating jointly supported obligations

when more than one entity is fully responsible for

the entire obligation. In this situation, a default on

the obligation would occur only if each entity

defaults. Common examples of joint support

include a primary obligor plus a guarantor or a

primary obligor and a letter-of-credit (LOC)

provider. The risk that both entities will default is

less than the risk that either one will. As a result,

the obligation may be rated higher than the rating

on the stronger obligor (supporter).

Summary

The criteria contain the following key elements:

■The rating for the jointly supported obligation

will be derived from one of three reference tables,

one each for obligor pairs that have high, medi-

um, and low default correlation (see tables 3, 4,

and 5).The tables were generated with a sophisti-

cated calculation of the joint default probability,

including explicit default correlation assumptions.

■Obligations of very highly correlated entities

remain ineligible for credit enhancement.

■Application of the criteria is extended to specula-

tive-grade entities. Previously, the criteria were

applicable only to investment-grade obligors.

■The joint-support criteria will not be used to rate

issues or issuers that receive less-formal support,

such as the benefits enjoyed by many govern-

ment-owned enterprises. In other words, these

issues will continue to be rated no higher than

the rating on the government or parent company

providing support.

Municipal Applications

For Joint Support Criteria

A constraint is added so that the joint PD is capped at the

stronger obligor’s PD (the rating will never be lower than that

on the stronger obligor).

Where: PA = the default probability of one obligor

PB = the default probability of the other obligor

DC = the default correlation of the two obligors

Joint Probability Of Default Calculation

JointPD = (PA*PB)*[DC PA*(1 PA) PB*(1 PB)]

Rating Probability of Default (%)

AAA 0.362

AA+ 0.536

AA 0.872

AA- 1.13

A+ 1.458

A 1.782

A- 2.479

BBB+ 3.842

BBB 5.876

BBB- 10.637

BB+ 13.179

BB 18.258

BB- 24.197

B+ 30.565

B 38.145

B- 48.559

CCC+ 65.517

CCC 75.853

CCC- 88.268

Table 1Correspondence Between

Ratings And Probabilities Of Default