328 Standard & Poor’s Public Finance Criteria 2007
Rating Analysis
In order to rate a credit enhancement program
issue, the pension fund itself is first assigned a pub-
lic issuer credit rating. For credit enhancement pro-
grams, areas of analysis include a review of:
■Legal authorization for the extension of pension
guarantees (statutory, constitutional, or via per-
mitted investment guidelines);
■Legal priority of pension fund guarantees relative
to the fund’s obligation to pay pension benefits;
■Enforceability of pension fund guarantees;
■Legally permissible guarantees or extension of
fund credit, including direct debt guarantees, CP,
LOCs, liquidity agreements, and guaranteed
investment contracts;
■Maximum permitted program exposure amount
relative to the pension fund’s: percentage of total
invested assets; percentage of normal annual net
cash flow (income and contributions minus
required annual pension benefit payments); and
percentage of annual pension benefit payments;
■Types of guarantees that may be undertaken or
incurred by a pension fund, by generic industry
credit risk (e.g., municipal debt guarantees, cor-
porate debt guarantees, small business loans, cur-
rency risk or interest-rate risk, etc.);
■Risk concentration limits or guidelines, as they
relate to industry or single-issuer guarantee risk;
■Maturity or liquidity risk to the pension fund,
depending on the nature and proposed types of
instruments to be guaranteed;
■The legally available highly liquid asset portfolio
and its composition in terms of credit quality,
volatility, and weighted average maturity; and
■The management, monitoring, and oversight proce-
dures for the legally available highly liquid assets.
Asset liquidation plan
For pension fund credit enhancement programs that
require immediate access to liquid assets, a detailed
asset liquidation plan will be reviewed (see
Standard & Poor’s self liquidity criteria). The abili-
ty of a fund’s asset management team to liquidate
assets on a same day basis (if necessary) is a keyfactor in the evaluation of a pension fund credit
enhancement program.
Very specific written liquidation procedures are
required and should detail:
■Persons responsible (including alternates) for exe-
cuting the asset liquidation;
■The sequence of steps that must be undertaken
by all parties to effect liquidation; and
■The timing of notifications to the appropriate
parties to ensure that sufficient funds are avail-
able to pay program obligations on a same-day
basis, if necessary.Assessing Creditworthiness
The strengths associated with any specific extension
of a public pension fund’s creditworthiness will be a
function of the specific terms included in the guaran-
tee or LOC agreement. As with any debt instrument
that may contain credit enhancement from an out-
side party, the credit rating value of a guarantee may
be weakened or rendered unratable if there are con-
ditions or provisions that would allow the guarantee
to be terminated, unenforceable, or dishonored.
An analysis of the pension fund’s financial risk
management and operating principles will be under-
taken to check that execution of the credit enhance-
ment program will ensure policy compliance. In
general, laws, statutes, or formal policies limiting
the extension of pension fund creditworthiness
reduce the potential risk to pension assets and
required sponsor fund contributions to maintain
the solvency of the pension fund for the short-and
long-term. The absence of formal plans to manage,
monitor, and limit or control the extension of pen-
sion fund credit will impact the assessment of the
pension fund.
Finally, in addition to limits on the extension of
pension fund credit, the risks associated with the
projects or debts to be guaranteed will be analyzed
for their impact on the safety of pension fund
assets. In situations where the parameters for the
extension of pension fund credit are very broad,
concerns over potential increased risk could trans-
late into lower pension fund ratings, and, under
certain circumstances, into added credit stress for
the sponsor governments.■Other Criteria