- The occurrence of a final, non-appealable judg-
ment against the obligor requiring payment by
the obligor and such judgment is not satisfied
within a period of at least 60 days from the date
on which such judgment was rendered. In the
case of bonds rated based solely on pledged
revenues, such judgment must be determined to
be payable from the pledged revenues serving as
the security source for the bonds. - A debt moratorium, debt restructuring, debt
adjustment or comparable extraordinary restriction
is declared by, or imposed on, the obligor’s parity
bonds. Such imposition should be as a result of a
finding or ruling of a governmental authority
with jurisdiction over the obligor.
Standard & Poor’s factors the likelihood of the
first two events into the long-term rating on the
bonds, and considers the occurrence of events 3,4
and 8 to be remote. Termination without notice for
event 5 is permitted only for issues that are rated at
least ‘A+’. Should the bank’s obligation terminate
without notice due to event 5 and bondholders
retain tender option rights, the obligor should be
the next source to fund unremarketed tendered
bonds. If the obligor is unwilling to be a source for
tenders, then the tender option rights should be
terminated in the bond documents should event 5
occur. For event 7, the fact that the decision is final
and non-appealable, coupled with the 60 day period,
gives the obligor sufficient time to arrange for the
satisfaction of the judgment.
Insured liquidity facilities
Standard & Poor’s allows the following events to
result in a termination or suspension event without
notice of an SBPA for issues that have an insurance
policy securing the principal and interest on
the bonds: - Insurer declaration of insolvency or admission of
inability to pay its debts in writing, or a proceed-
ing is commenced against the insurer by an over-
sight body or court of appropriate jurisdiction
the effect of which would be to declare the
insurer insolvent. - Insurer default under any bond insurance policy,
fee surety bond associated with the issue, or surety
bond issued by it insuring or supporting the
payment of principal and interest on
municipal obligations. - Issuer substitution of the insurer or cancellation
of the insurance policy without the liquidity
bank’s written consent, provided that a corre-
sponding covenant requiring the issuer to receive
the liquidity bank’s consent is included in
the documents.
4. Insurer contests or repudiates the validity or
enforceability of the bond insurance policy, or
fee surety bond associated with the issue, or any
provision thereof affecting the obligation of the
insurer to pay thereunder.
5. A finding or ruling by a court or governmental
authority with jurisdiction to rule on the validity
of the bond insurance policy that the policy, or
any provision thereof affecting the obligation of
the insurer to pay thereunder, is not valid and
binding on the insurer.
6. Standard & Poor’s reduces the insurer’s financial
enhancement rating to below investment grade
(below ‘BBB-’), or the rating is suspended or
withdrawn for credit-related reasons.
7. The IRS declares the bonds being rated taxable.
The likelihood of events 1 and 2 has been factored
into the rating on the bonds. Standard & Poor’s
considers events 3 through 5 remote. Event 6 is
permitted only for issues that are rated at
least ‘A+’.
Standard & Poor’s does not allow events such as
failure to pay fees under the SBPA, failure to pay
any subordinate debt or debt not rated by
Standard & Poor’s, or covenant defaults to lead to
termination without notice of the bank’s obligation
to purchase tendered bonds. The likelihood of these
events occurring is not factored into the long-term
rating. If such events exist, either the bank may
declare an event of default under the liquidity docu-
ment and bondholders will be required to tender
their bonds pursuant to a mandatory tender, which
is ultimately funded by the SBPA provider, or the
document will be reviewed as a line of credit in
support of an obligor’s own liquidity coverage.
Standard & Poor’s requires a mandatory tender
to occur before the expiration or termination of the
SBPA because the short-term rating of the issue is
based on the bank (other than in the case of the
termination events without notice outlined above),
thus bank funds need to be available to take out
all bondholders.
Termination By The Bank
The SBPA may only permit its obligation to
purchase tendered bonds to terminate “upon the
occurrence” of the permitted automatic termina-
tion event. In certain agreements, attempts have
been made to define the SBPA provider’s termination
time as “on the day of the occurrence of the
event of termination” or “on the business day
prior to the occurrence of the event of termination”.
Both of these constructions leave open the possibility
that the SBPA provider may fund a tender pay-
ment, but then could attempt to recover that
payment from the bondholder by virtue of theCross Sector Criteria28 Standard & Poor’s Public Finance Criteria 2007