The acceptability of the obligor’s proposed liqui-
dation mechanics, especially with regard to timing,
will be based on Standard & Poor’s follow-up inves-
tigation into the procedures described by the letter.
The chain of events—starting with the bond trustee’s
sell order to the obligor’s broker-dealer account rep-
resentative and ending with the deposit of liquida-
tion proceeds in immediately available funds with
the tender or paying agent to pay the purchase price
of tendered bonds—will be scrutinized for its ability
to generate the required cash by the end of the day
that the trade is initiated.
Among the factors that will be considered in ana-
lyzing the obligor’s proposed liquidation proceduresare the number of steps and parties in the liquida-
tion process, a reasonable time frame in which to
accomplish the liquidation, the experience level of
the parties involved, whether the party holding the
securities has direct access to FedWire, and the
FedWire closing time.
The credibility of the obligor’s management on
the issue of its ability to liquidate its available
assets within the timing requirements of the
VRDO structure is extremely important.
Management’s experience in managing and liqui-
dating its assets will be considered in Standard &
Poor’s evaluation of the obligor’s proposed
liquidation procedures.■Cross Sector Criteria26 Standard & Poor’s Public Finance Criteria 2007
M
ost municipal issuers lack the liquidity necessary
to fund optional and mandatory tenders or
do not wish to restrict the investment of their available
resources. If an obligor does not have sufficient
high-quality liquid assets, such as cash and cash
equivalents, to fund the tenders set forth in its
program, a liquidity facility must be provided to
pay the purchase price of bonds that cannot be
remarketed. Whether Standard & Poor’s Ratings
Services can assign a liquidity rating to a variable
rate demand obligation (VRDO) without bank
support to cover these tenders is determined on a
case-by-case basis.
These VRDOs may have credit ratings derived
from the obligor, or have credit support provided
by bond insurance policies. Liquidity support can
be provided by lines of credit or standby bond
purchase agreements (SBPAs).Lines Of Credit
Lines of credit are conditional, revocable liquidity
facilities that may be terminated without prior
notice to the holders upon the occurrence of various
events of default under the related agreement.
Based on its structure, a line of credit can be viewed
as strong or weak. Although the events that lead to
a weak line of credit terminating its commitment
without prior notice to the holders can include
events Standard & Poor’s has deemed a remote
occurrence or concluded is factored into the long-
term component of the bond issue, it generally
includes other termination events that are more
expansive in scope. Termination events for weaklines generally include covenant defaults, failure to
pay fees, and failure to pay based on trustee negli-
gence. Because a weak line of credit can terminate for
reasons beyond the obligor’s ability to pay principal
of and interest on the bonds, a line of credit provides
only supplemental liquidity coverage to an obligor’s
own liquidity.
If the liquidity facility is to be considered a strong
line of credit, the SBPA criteria detailed below will
be met. Although the line can be used to support
the obligor’s existing liquidity rating, the strong line
could also provide liquidity enhancement for the
bonds even if the obligor does not have a liquidity
rating. The short-term component of the rating on
the VRDOs will be derived from the short-term rating
of the entity providing the strong line of credit.Standby Bond Purchase Agreements (SBPAs)
Ratings criteria for SBPAs closely follow that for
letters of credit (see “LOC-Backed Municipal
Debt”). The major difference from LOCs is that
SBPAs are conditional, revocable facilities that
may be immediately terminated or suspended
without notice upon the occurrence of certain
events of default as specified under the related
agreement. Standard & Poor’s restricts the permissi-
ble events of default to those deemed to be remote
or where the likelihood of the events of default
occurring is factored into the long-term rating of
the issue. Any other termination of the SBPA must
be preceded by a mandatory tender with the pur-
chase price for the bonds provided by remarketing
proceeds and ultimately, the SBPA provider. Events