Standard & Poor’s looks for an issuer to have on
hand sufficient liquid resources, in any combination
of revolving credit agreements or liquid fixed
income investments available, to cover the amount
of the commercial paper outstanding, as well as the
ability to cover up to 270 days of interest. Please
refer to the commercial paper criteria for more
detail on requirements.
Because the investments may be called on to meet
market events, such as a failed CP rollover or a
VRDO tender, using these investments should not
impair an issuer’s ability to meet ongoing operating
expenses. Therefore issuers who provide self-liquid-
ity should generally have a high level of liquidity
available for debt and operations. While an ‘A’ cat-
egory issuer could provide self liquidity for CP and
variable rate demand obligations, most issuers who
will be able to provide self liquidity will likely be
rated in the ‘AA’ category or ‘AAA’.
Standard & Poor’s will evaluate an issuer’s ability
to provide self-liquidity through an assessment of
investment management policies and practices, and
(2) an analysis of the fixed income portfolio. Some
institutions, such as heavily endowed colleges and
universities may be able to demonstrate overwhelm-
ing coverage of commercial paper or VRDOs with
treasury securities and cash alone. If their portfolios
are sufficiently large, or the amount of debt being
covered is very small, the analysis of the fixed
income portfolio is narrower in scope.
However, even in cases where the entire portfolio
does not need to be evaluated, Standard & Poor’s
still evaluates the capacity of management to provide
self liquidity and still asks for a liquidity procedures
letter to indicate that the cash and high quality fixed
income securities can be available when needed and
to identify the steps that the institution will take to
meet its obligations. Standard & Poor’s expects
issuers to demonstrate their capacity and willingness
to make short-term debt payments by submitting a
detailed written liquidation plan. The procedures let-
ter should conform to the timing in the legal docu-
ments such as when the institution or municipality
receives notice that there is a shortfall and when the
funds are due to the paying agent or tender agent.
The letter should also identify the individuals who
are responsible for these steps.
In an evaluation of management’s capacity,
Standard & Poor’s asks the institutions themselves
and not their financial advisors or underwriters to
prepare the procedures letter. Additional documenta-
tion such as operating cash flows and investment
balances available for operations throughout the year
may be necessary, depending on the nature of cash
flow for the issuers. Ultimately, Standard & Poor’s
will evaluate whether the issuer’s long and short-term
credit quality is sufficiently robust to withstand a call
on its assets pledged for liquidity purposes.
An issuer may also choose to use a combination
of its own assets and third-party liquidity (for
example, a bank liquidity facility) to provide liquid-
ity support. Strong lines that more closely resemble
standby bond purchase agreements may be used to
reduce the amount of available assets to cover
maturing CP or VRDOs and still allow the issuer to
pledge its own self-liquidity. In cases where a strong
line is being used to substitute for self-liquidity,
Standard & Poor’s will evaluate the strength of the
line. Weak lines, which include looser events of ter-
mination, have historically been used to cover com-
mercial paper programs, and because of the
predictable nature of commercial paper,
Standard & Poor’s accepts weak external liquidity
facilities as a source of backup for maturing com-
mercial paper if they are dedicated to the program.
Variable rate demand bonds, however, carry an
element of unpredictability because investors can
choose to put their bonds. In these cases, weak linesCommercial Paper, VRDO, And Self-Liquidityhttp://www.standardandpoors.com 21Information Requirements For Liquidity Evaluation
■A letter requesting Standard & Poor’s to conduct a
“liquidity assessment”.
■A copy of the current investment policies. (Including
policies on hedging transactions, [including use of options
and/or futures contracts] and leveraging of assets).
■Current portfolio holdings report of assets identified for
liquidity support with the information listed in point #7
(please see below).
■A list of fixed income securities approved for purchase
according to asset type, credit quality, maturity,
and sector.
■The weighted average maturities and/or durations for
the fixed income assets for each month during the past
three years.
■Documented written liquidation procedures detailing the
steps to be taken to provide same-day funds to cover a
failed CP remarketing or tendered VRDOs (see sample
liquidation letter—Exhibit 3).
■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 values, security
identifier (CUSIP number), and security specific ratings
(Standard & Poor’s ratings if applicable) should be
provided for each security in the monthly assets report.
Note: Verification of the issuer’s legal ability to use its own
assets for liquidity support may be necessary (i.e. legal opinions
or statutory proof in the case of state and local governments).Exhibit A