Such a mismatch can result in the underlying obli-
gations not accruing sufficient interest due to the
occurrence of a prepayment. The entire amount of
the prepayment of the underlying obligations can-
not be passed through to the floater holders
because the principal denomination may be less
than that of the synthetic floaters. Thus, the struc-
ture could potentially have receipts outstanding
without an underlying interest generating obliga-
tion. Even if such prepayments are held invested
until the authorized denomination amount is met,
there is a risk that the investments will not generate
enough interest to pay the requisite interest amount
due to the floater holders. The documents can
address this risk either by having the authorized
denomination of the receipts consistent with the
underlying obligation, or make an adjustment for
such an occurrence in the maximum rate definition.
Liquidity facility analysis
Although synthetic floaters with a tender option are
very similar to other municipal VRDOs rated by
Standard & Poor’s, additional liquidity risks are
associated with these structures because holders can
lose the right to tender their receipts without notice
upon certain events. If a tender option termination
event (TOTE) occurs, synthetic floater holders lose
their tender option rights and instead receive their
pro rata share of underlying bonds or proceeds of
the sale of the bonds, provided that the proceeds
are sufficient to pay the synthetic floater holders
par plus accrued interest and, if rated, the residual
interest holder at par. If sale proceeds are insuffi-
cient, then the synthetic floater holders and the
residual interest holders receive their pro rata share
of the underlying bonds as a distribution from the
trust. If Standard & Poor’s has rated the residual
interest receipt, the distribution to residual holders
upon termination cannot be subordinate to the pay-
ment received by the holder of the synthetic floater
with a tender option. In other words, the tender
option floater holder and the residual interest
floater holder must each receive a pro rata share of
the underlying obligation or the sale proceeds.
Termination of the tender option without notice
is acceptable for the following events:
- The issuer of the underlying obligation fails
to pay principal or interest when due and such
failure is not cured during any designated cure
period (if applicable); if the bond rating is based
on credit enhancement, payment default is limited
to the credit enhancement provider. If the underly-
ing obligation’s rating is based on the application
of joint support criteria, then the TOTE cannot
occur until both entities providing support fail to
pay principal and interest when due and such fail-
ure is not cured during any designated cure period
(if applicable).- The issuer of the underlying obligation files for
bankruptcy; if the obligation’s rating is based on
credit enhancement, bankruptcy is limited only to
that of the credit enhancement provider. If the
underlying obligation’s rating is based on the appli-
cation of joint support criteria, bankruptcy has to
apply to both entities providing support. - The Standard & Poor’s underlying obligation’s
rating falls below investment grade (below ‘BBB-’). - The underlying obligation is deemed taxable.
The occurrence of other credit-related events are
reviewed for approval by Standard & Poor’s on a
case-by-case basis. The analysis of “other credit-
related events” must be deemed by Standard &
Poor’s to be remote or factored into the long-term
component of the dual rating.
Synthetic floater structures may include some or
all of the events detailed above. Standard & Poor’s
believes that the likelihood of the occurrence of the
first two events is already factored into the long-
term component of the dual rating. If the transac-
tion is structured to include event 3, Standard &
Poor’s will rate the receipts only if they are derived
from underlying obligations that at the time of the
trust rating, have an enhanced, unenhanced, or
jointly supported rating of ‘A+’ or higher.
Standard & Poor’s permits liquidity facilities gen-
erally to terminate without notice if the events trig-
gering such terminations are consistent with
standby bond purchase agreement criteria. These
liquidity facility termination events typically are the
same as those that terminate the tender options
under the trust documents. If the rating on the
underlying bond depends on credit enhancement,
such as bond insurance or an LOC, the events that
result in termination of the tender option and the
liquidity facility without notice must relate only to
the credit enhancement provider, not to the issuer
or obligor of the underlying bond. Further, if the
rating on the underlying obligation is based on the
application of joint support criteria, then the events
that result in termination of the tender option and
the liquidity facility without notice should relate to
both entities supporting the obligation.
The purchase price of tendered securities is paid
from remarketing proceeds, and from draws by the
tender agent on the liquidity facility. As with
VRDOs, the liquidity facility for the tender option
synthetic floaters must provide coverage for the full
principal amount of the securities, as well as the
maximum interest rate on the tender option syn-
thetic floaters for the maximum number of days
that can accrue during any interest payment period.
The tender agent for the receipts must have clear
instructions in the trust documents to draw upon
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