the program during which bonds are outstanding.
The number and type of runs needed to demon-
strate this fact can vary depending upon the pro-
gram’s structure. If the most vulnerable point in a
program’s amortization schedule can be specifically
identified, then cash flows demonstrating ample
reserves or coverage over that period will suffice.
For programs that allow the release of funds as
bonds mature or rely on coverage from investment
earnings to survive assumed participant defaults,
this may be more difficult and additional runs may
be necessary.
Management Considerations
The ability of a pool program to survive associated
stressed default rate assumptions remains the back-
bone of Standard & Poor’s criteria. Program man-
agement aspects, however, do play a role,
particularly in placing the pool rating within the
rating category and in establishing the rating for a
new program. Management factors analyzed
include underwriting criteria and procedures, loan
servicing track records and capabilities (including
the sensitivity of these capabilities as the program
grows), marketing processes, and participant moni-
toring and control procedures. Strong management
practices may overcome weak legal provisions if
Standard & Poor’s believes such practices will con-
tinue and thus better predict the long-term perform-
ance of the program.
Legal Structure And Required Documentation
Standard & Poor’s will review all relevant docu-
ments associated with each transaction to assess the
legal structure and ensure that it corresponds to the
assumptions presented by the program sponsor.
Documentation required to rate a pool program
includes:
■List of each asset in the pool including
obligor/borrower name, state, security pledged,
maturity, par outstanding as of closing, and rat-
ings or credit estimates.
■Cash flows summarizing total annual payments
and balances available for the life of the pool,
both with and without assumed default rates.
■All trust/legal documents, including an official
statement or offering memorandum.
■Underwriting criteria, loan or lease terms, servicing
guidelines and history of loan/lease performance.
■Information regarding program sponsor (for
example, management practices).
Additional documentation may be required depend-
ing on the nature of the transaction. Typical issues
associated with the review of legal documents include:
■Does the flow of funds outlined in the indenture
match the intended management plan?
■Does it provide sufficient timing to insure that
sufficient funds will be in desired accounts to
meet shortfalls in the event of participant
defaults?
■What is the nature of the participant loan agree-
ment (security terms, etc.), and what are the
implications for the credit quality and ongoing
functioning of the program?
■Do the legal provisions leave bondholders exposed
to extraordinary risks such as investment risk or
sudden changes in program composition or admin-
istration such as through loan prepayment, loan
de-pledging, or the release of other funds.Investment Issues
To the extent that program reserves are relied on to
provide the over-collateralization necessary to sus-
tain a particular rating, the investment of these
reserves should not pose additional risks relative to
the bond rating. Accordingly, reserves should be
invested with entities rated at least as high as the
program’s bond rating, although ‘AAA’ rated pro-
grams may use investment agreement providers
rated as low as ‘AA-’ in certain instances.
If programs utilize investment agreements that
allow the issuer to terminate the agreement, with-
out a penalty to the remaining principal within 30
days, Standard & Poor’s will treat the instrument as
a short-term investment and look to the provider’s
commercial paper rating to determine the eligibility
of the investment—but only if program cash flows
are not dependent on being able to achieve the
same interest rate on a subsequent investment
agreement. Alternatively, ‘AAA’ programs may use
providers rated as low as ‘AA-’ if certain down-
grade provisions exist within the investment con-
tract (See Public Finance Criteria: Investment
Agreements For Municipal Revenue Bond
Financings).
Finally, issuers may choose other investment
options, such as secondary guarantors or joint guar-
antee agreements to ensure a high rating for their
investment and minimize the risk of substitution.State Revolving Funds
The SRF financing vehicle has become an important
tool in many states to fund water and wastewater
infrastructure projects. Since the establishment of
the clean water SRF through revisions made in 1987
to the Clean Water Act (which targets the need to
repair or construct wastewater infrastructure
designed to handle growing populations and more
stringent environmental measures), the program has
grown and is arguably one of the most successful
federal programs of the past 20 years in terms of
projects funded per federal dollar allocated. InLong-Term Municipal Poolshttp://www.standardandpoors.com 45