PubFinCriteria_2006_part1_final1.qxp

(Nancy Kaufman) #1
of receipts are created—a synthetic floater receipt
with a tender option and a residual interest receipt.
The synthetic floaters with a tender option are sup-
ported by a liquidity facility to cover the purchase
price of unremarketed tendered receipts. Synthetic
floaters with a tender option are assigned a dual rat-
ing consisting of long-term and short-term compo-
nents, such as ‘AAA/A-1+’. The long-term rating is
based on the rating of the underlying obligation and
addresses the underlying obligation’s ability to pay
full and timely principal and interest. The short-term
rating is based on the short-term rating of the liquidi-
ty facility provider and addresses the likelihood of
payment of the purchase price of tendered receipts.
Residual interest synthetic floaters can be
assigned a long-term rating only that reflects the
rating of the underlying bond. Residual interest
floater holders may experience high variability in
expected returns as a result of non-credit risks.
Synthetic floaters’ ratings only address the like-
lihood of the floater holder receiving par plus any
accrued interest based on regularly scheduled
principal and interest payments from the underly-
ing obligation which, in some instances, may be
enhanced by a municipal bond insurance policy,
or receive joint support based on the application
of joint support criteria. Synthetic floaters’ rat-
ings, as is the case with all of Standard & Poor’s
municipal ratings, do not address the likelihood
that the interest payable on the receipts or the
underlying bonds may be deemed or declared
includable in the gross income of synthetic floater
holders by the relevant authorities at any time.
The ratings also do not address the likelihood of
any payments to synthetic floater holders in
excess of principal and interest, such as premium
on redemption payments from the underlying
obligations or gain share payments.
Structural analysis
Synthetic floaters may be structured with a num-
ber of different interest-rate modes similar to
those found in VRDOs, such as weekly or month-
ly. Synthetic floaters with tender options are sub-
ject to optional tender upon requisite notice. In
addition, the receipts are subject to mandatory
tender when certain events occur, which include,
but are not limited to, a change in the interest-
rate mode, expiration or termination of the liq-
uidity facility. Standard & Poor’s applies its bank
liquidity facility criteria when reviewing liquidity
documents (See Public Finance Criteria: “Bank
Liquidity Facilities”).
The trustee collects the semi-annual fixed interest
payments from the underlying obligations and pays
certain fees related to the trust. The trustee then
pays the tender option synthetic floater holder the

variable interest rate and distributes any remaining
interest after payment of additional fees, if any, to
the residual synthetic floater holder.
Standard & Poor’s will apply its LOC criteria
when requested to rate synthetic floater structures
that have an LOC wrap on the underlying obliga-
tion. If requested, Standard & Poor’s will review
a structure to determine whether joint support
criteria can be applied. The joint support criteria
can be applied to both the long-term rating, as
well as to the short-term rating.(See “Public
Finance Criteria: Municipal Applications For
Joint Support Criteria”).
Two different tender option structures have been
used: the put and the swap. In the put structure, the
variable interest rate is set by the remarketing agent
and capped at the underlying obligation’s interest
rate (minus trust fees, if applicable). In the swap
structure, a net payment is made by the depositor
to a swap counterparty, as long as the synthetic
floater rate is less than the bond interest rate. If the
variable tender option rate exceeds the underlying
bond rate, the swap counterparty pays the differ-
ence to the depositor.
Standard & Poor’s examines the documents in
both structures to ensure that the interest rate set-
ting mechanism is clearly defined and that the
trustee’s duties with respect to the depositor and
holders of synthetic floaters with a tender option
are carefully outlined.
Multiple assets
Standard & Poor’s will review synthetic floater
structures that have multiple obligations deposited
into a trust either at the trust’s creation or subse-
quent to the trust’s creation. The rating on the
receipts can be based either on an evaluation of
the underlying asset pool using the municipal
CDO Evaluator, or by using a weak-link approach
using the ratings of each of the assets depending
on the size of the pool. If a trust structure is creat-
ed to permit multiple obligations to be deposited,
Standard & Poor’s analyzes the maximum rate
definition to ensure receipt holders are not affect-
ed by the multiple obligations’ different maturities
and rates of interest. The maximum rate definition
can state the maximum rate of the receipts will be
adjusted such that the receipt holders will receive
the weighted average of the obligations taking into
account the multiple maturities. A more conserva-
tive approach can state the maximum rate of the
receipts will be capped at the lowest bond rate of
the multiple obligations.
Reinvestment risk (odd-lots)
In some instances, the authorized denomination of
the underlying obligation is different than the
authorized denomination of the synthetic floaters.

Municipal Structured Finance

226 Standard & Poor’s Public Finance Criteria 2007

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