designed to provide assistance and technical sup-
port to their members—that are typically local gov-
ernments. Examples of such organizations include
state-level chapters of the League of Cities, the
Association of Counties, and the Rural Water
Association. While these programs often have a cer-
tain amount of technical expertise, they may also
rely on outside financial consultants to administer
most of the financial responsibilities associated with
the pool program. Because these organizations are
usually nonprofits with limited liquidity, funds
available to be pledged as over-collateralization are
usually also limited. While these factors often limit
ratings on these entities’ pooled loan programs rela-
tive to state revolving funds, they may still attain
high investment grade ratings if managed effectively
with sufficient diversity and support.
Economic development pool programs differ
from other municipal pool programs in that, while
the program sponsor and administrator is usually a
state or local government agency, pool participants
are often private entities, and the credit quality of
these participants is generally lower. Accordingly,
these programs typically have some percentage of
pledged loans in default at any given time, in con-
trast to most government-based pools where few if
any defaults occur over the entire life of the pro-
gram. Although corporate loan defaults are more
likely, this does not pose a real threat to bond
repayment if policies and provisions exist to ensure
that default rates remain manageable given credit
support under the program. Standard & Poor’s
default model accounts for the higher risk associat-
ed with private sector borrowers, resulting in higher
required over-collateralization levels being required
for a given rating level. Nevertheless, this lower
participant credit quality, coupled with limited state
or federal equity contributions, often limits the rat-
ings on pool programs designed to promote eco-
nomic development through private lending.Lease Pools
Standard & Poor’s rates lease pools typically spon-
sored by nongovernmental entities. Assets securing
these transactions are usually equipment rather
than buildings, therefore the useful life of the equip-
ment relative to bond maturity and the likelihood
that the lessee will otherwise remain current on the
lease due to their desire to maintain possession of
the equipment are of paramount importance.
Because of their typically short duration, lease
pools rated to date generally enjoy lower required
default tolerances than do long-term debt obliga-
tions, reflecting the direct relationship between
default risk and maturity. The risk of nonappropri-
ation will lead to lower assumptions of credit quali-
ty and recovery, however, somewhat offsetting thebenefit of the short maturity. Unlike SRFs and state
bond bank pools, lease pools may also be backed
by assets in different states, and the model gives
credit for this additional diversification.
Standard & Poor’s will discuss with the pro-
gram sponsor the key criteria used in underwriting
credit risk. Staffing levels, experience of the origi-
nator’s credit personnel, and any areas of credit
specialization may also be discussed. A critical
aspect of underwriting is a review of the essentiali-
ty of the leased equipment. Standard & Poor’s
considers the following types of equipment,
among others, to be essential:
■Police and fire vehicles
■Communications equipment
■Energy management systems
■Computer hardware and software
■School buses
Credit approval policies should be well docu-
mented, highlighting internal credit authorities and
transaction approval procedures. Verification of
equipment acceptance, lessee review, documentation
requirements and internal auditing are also compo-
nents of a sound underwriting policy.
The obligation of the servicer to bill and to col-
lect is critical and can directly affect pool perform-
ance. When evaluating the strength of an
equipment lease servicing operation, it is necessary
to examine the billing and collecting procedures,
when and how delinquent obligors are notified, and
if staffing and systems adequately handle the
demands of compliance and reporting.
The substance of Standard & Poor’s legal analy-
sis depends on the structure of the transaction pre-
sented, but is typically akin to that for a synthetic
floater structure (see Public Finance—Structured
criteria for more information).Municipal Collateralized Debt Obligations
Collateralized debt obligations, or CDOs, are struc-
tured vehicles that are similar to leveraged closed
end funds. A majority of CDOs are actively man-
aged and invested in different classes. Over the last
several years, municipal assets have been used as a
portion of the assets securing some CDOs, and a
few transactions have contained only municipal
securities as collateral. At the core of the CDO is a
bankruptcy-remote, special purpose entity (SPE) that
issues securities to investors in the form of several
classes that are tranched into differently rated and
some unrated securities. Each class of securities rep-
resents a different level of risk and reward associat-
ed with the asset pool. The most senior securities
have credit ratings higher than the average ratings of
the collateral pool, with lower tranches being rated
below the seniors. The first-loss tranche is equity (or
preferred shares) that is typically not rated.Cross Sector Criteria48 Standard & Poor’s Public Finance Criteria 2007