Eligible Investment Criteria For
‘AAA’ Rated Structured Transactions
The most widespread criteria used for investment in
the secondary market relate to the category called
“eligible investments.” Eligible investments are
those securities that the trust of a structured finance
transaction is allowed to purchase for the manage-
ment of its cash flow.
Fortunately, it is also the most stable category,
rarely changing over time. At the same time, it is
important to note that one qualifying investment,
the debt obligations of the Student Loan
Marketing Association (SLMA or Sallie Mae),
will no longer qualify as an eligible investment
after Sept. 30, 2008. The enactment of the
Student Loan Marketing Association
Reorganization Act will result in the gradual dis-
solution of Sallie Mae’s GSE (government-spon-
sored enterprise) status, which allows Sallie Mae
limited access to U.S. Treasury funds. The final
dissolution date is Sept. 30, 2008. If additional
Sallie Mae debt is issued, the debt must mature
before that date. Sallie Mae debt obligations will
continue to qualify as eligible investments for
rated structured transactions until Sept. 30, 2008.
Eligible investments are typically used to tem-
porarily house (usually 30 days or less) the cashflows related to a transaction in low-risk, short-
term investments. Eligible investments may also be
used for certain reserve or cash collateral
accounts, where maturities may extend beyond the
next payment date. In instances where the invest-
ments may be invested for up to 90 days or longer,
the eligibility of investments may be further
restricted, as indicated below. In no case should
the following eligible investments have maturities
in excess of one year. Any use other than contem-
plated above may not be appropriate for struc-
tured finance transactions.
Investment requirements for escrow accounts for
refunded bonds are marked with an asterisk. Any
security used for defeasance must provide for the
timely payment of principal and interest and cannot
be callable or prepayable prior to maturity or earli-
er redemption of the rated debt (see “Public
Finance Criteria: Defeasance”).
The following investments are eligible for ‘AAA’
rated transactions:
(1*) Certain obligations of, or obligations guar-
anteed as to principal and interest by, the U.S. gov-
ernment or any agency or instrumentality thereof,
when these obligations are backed by the full faith
and credit of the United States. As Standard &
Poor’s does not explicitly rate all such obligations,
the obligation must be limited to those instruments
that have a predetermined fixed dollar amount of
principal due at maturity that cannot vary or
change. If it is rated, the obligation should not have
an ‘r’ suffix attached to its rating. For non-defea-
sance investments, interest may either be fixed or
variable. If the investments may be liquidated prior
to their maturity or are being relied on to meet a
certain yield, additional restrictions are necessary.
Interest should be tied to a single interest rate index
plus a single fixed spread (if any) and should move
proportionately with that index. These investments
include but are not limited to:
■U.S. Treasury obligations (all direct or fully guar-
anteed obligations);
■Farmers Home Administration Certificates of
Beneficial Ownership;
■General Services Administration participation
certificates;
■U.S. Maritime Administration guaranteed Title
XI financing;
■Small Business Administration guaranteed partici-
pation certificates and guaranteed pool
certificates;
■GNMA guaranteed MBS and participation cer-
tificates (defeasances only);
■U.S. Department of Housing and Urban
Development local authority bonds; andInvestment Guidelineshttp://www.standardandpoors.com 51Fully dependent financings
In credit or liquidity enhanced transactions, and certain highly structured housing
transactions, remarketing proceeds and other monies used to pay bond debt service—
whether trustee held or otherwise—should be invested in securities with ratings
appropriate for the rating assigned to the issue. (For further details see “Public
Finance Criteria: Review of Investment Agreements for Municipal Revenue
Bond Financings”).
Partially dependent financings
In transactions where certain funds may significantly contribute to the payment
of bond debt service, those funds should be invested in securities with ratings
appropriate for the rating of the issue. Other monies can be invested in
investment-grade securities.
Non-dependent financings
All funds—whether trustee held or otherwise—should be invested in
investment-grade securities.
Dependency: Determined by the level of reliance of the issue on the
performance of the investments.
Maturity: Investments should mature before they are reasonably expected
to be used, whether for scheduled debt service payments, or as a result of
redemption provisions.
Ratings maintenance of investments: If rating of investment is downgraded,
Standard & Poor’s assumes that the trustee, as fiduciary to holders, will act
in a prudent manner. Investment downgrades may lead to bond rating
downgrades, particularly in fully dependent financings.
Indenture Investment Restrictions