the liquidity facility in accordance with its terms in
the event that remarketing proceeds are insufficient
to pay the purchase price of tendered receipts. The
liquidity facility provider should agree to use its
own funds to purchase unremarketed tendered
bonds and also agree to fund tenders in immediate-
ly available funds. The conditions’ precedent and
events of default that are permitted to automatical-
ly terminate the liquidity provider’s obligation to
purchase tendered receipts are reviewed carefully.
As with primary market transactions, a liquidity
rating based on an liquidity facility can never be
higher than the equivalent long-term bond rating of
the bond issue, since the bank’s obligation to fund
the purchase price for tendered receipts is condi-
tioned on the underlying obligor or insurer’s ability
to meet its obligations (See chart, “Correlation Of
Unenhanced CP Ratings With Long-Term
Ratings”). The liquidity rating of the synthetic
floater with a tender option will be based on the
lower of the short-term rating assigned to the bank
or the short-term rating correlating to the long-term
rating of the underlying bond issue due to the link-
age between the liquidity facility and its potential
termination under the terms of the trust documents.
Therefore, the likelihood of the liquidity facility
provider terminating its obligation to purchase ten-
dered receipts is correlated to the long-term rating
of the bond issue.Municipal Strips
Strips are zero coupon receipts that represent por-
tions of individual interest and principal payments
from a deposit of underlying bonds. To rate a
municipal strip issue, there must be an outstanding
Standard & Poor’s rating on the municipal bond
that is stripped, since the strip rating reflects the
rating assigned to the underlying bonds. Any
change to the rating of the underlying bonds will
result in an identical change to the rating assigned
to the strips.
As part of the custodial analysis, Standard &
Poor’s requires that the documents provide that all
principal and interest payments flow directly to the
custodian so that the custodian may forward the
bond payments to strip-holders.Auction Floaters/Inverse Floaters
Auction floater and inverse floater trust receipts are
variable-rate secondary-market instruments structured
to divide the interest generated from a deposit of
underlying municipal bonds. Although the receipts
are variable rate, they do not have optional tender
rights, and thus are not eligible for short-term ratings.
The receipts are created when a depositor pur-
chases all or a part of a fixed-rate bond issue and,
after depositing the bonds with a trustee, issues twoclasses of variable-rate receipts based on the under-
lying bonds. Interest on the auction floater receipts
is set periodically according to an auction bidding
process. Inverse floater receipt holders receive the
residual interest generated by the underlying bonds
after the auction floater interest is paid and any
applicable fees are deducted.
The receipts represent the proportionate direct
ownership of the future principal, interest, and
redemption premiums, if any, generated by the
underlying bonds. The rating on the receipts
addresses the likelihood that auction rate receipt
holders will receive the underlying principal and
interest payments when due. However, the rating
does not address the likelihood that an auction will
be successful or that an auction rate receipt holder
will be able to resell a receipt in any auction.
Structural analysis
To qualify as a ratable auction floater/inverse
floater structure, the documents for a particular
issue must clearly define the auction interest and
residual interest rate setting mechanisms so the
interest earned plus any applicable fees do not
exceed the interest generated by the underlying
bonds. There is an inverse relationship between the
rate on the auction receipt and the rate on the
inverse floater. The inverse floater holder receivesMunicipal Structured Finance228 Standard & Poor’s Public Finance Criteria 2007
AAAAA+AAAA-A+AA-BBB+BBBBBB-A-1+A-1A-2A-3
*Dotted lines indicate combinations that are highly unusual.Correlation Of CP Ratings With
Long-Term Corporate Credit Ratings*