■Substitute to a provider with a rating of at least
‘AA-/A-1+’ willing to offer substantially similar
rates and terms as the original agreement;
■Secure credit enhancement to the investment
agreement from a provider rated at least
‘AA-/A-1+’;
■Collateralize the agreement to a level sufficient to
maintain the rating on the bonds; or
■Terminate the agreement, only with the bond
issuer’s consent, and payment to the issuer of all
invested principal plus accrued interest to the
termination date.
Any of the provisions above should be resolved
within 30 days of the downgrade of the provider.
The provision to terminate the agreement with
issuer consent (fourth option) above is only accept-
able to the extent the related bond document stipu-
lates that in the event the issuer elects to terminate
the investment agreement, the issuer takes appropri-
ate rating notification actions. Standard & Poor’s
needs to review the alternate investment(s) for con-
sistency with the original financing, and the ability
of the alternate investment(s) to support the rating
on the bonds. In all instances, Standard & Poor’s
will need to be notified to verify that one of the
remedies will be utilized.
These guidelines shall not apply unless the
provider, under the investment agreement, agrees to
effect any of the (first through third options) above
at its own cost, unless the termination option
(fourth option) above is accepted by the issuer.
Exceptions may occur only in certain instances
where a substantial number of investment agree-
ments with multiple providers lead to more than
ample liquidity at a given rating level, as may be
the case with some state housing finance agency
issues under parity bond resolutions or state revolv-
ing fund programs. A likely scenario for termina-
tion to occur would be if market conditions result
in reinvestment rates equal to or higher than that of
the original agreement thereby providing sufficient
investment earnings for the bond issue.
Unlike parity resolutions, stand alone issues typi-
cally have minimal excesses built into the structure
and therefore are less likely to have the financial
capacity necessary to withstand the consequences of
a drop in prevailing interest rates—possibly requir-
ing an upfront payment to enter into a substitute
investment agreement providing similar rates and
terms to the original agreement, or accepting a
lower reinvestment rate. Without this “make-whole
provision”, the investment agreement would not be
eligible to be used for bonds rated higher than the
provider’s rating.
Standard & Poor’s views the performance of the
provider under the make-whole provision as inte-gral to preserving the bond rating. If it is assumed
that prevailing interest rates have fallen and that
the termination option is not practical, the agree-
ment will continue using one of the remaining three
options. The collateralization option requires not
only sufficient levels and types of collateral, but
also appropriate legal opinions that protect the col-
lateral in the case of an insolvency of the provider
(see below). The remaining options of finding a
substitute provider or enhancement for the agree-
ment may require costs for the provider depending
on market conditions.
Following either of these sets of guidelines, bond
issues rated in the ‘AAA’ and ‘AA’ categories may
utilize investment agreements with eligible
providers with ratings as low as ‘AA-/A-1+’. Issuers
should recognize that use of lower rated providers
involves requirements that should be considered at
the bidding stage so that the potential providers are
aware of the additional requirements that make the
agreements acceptable for rated transactions. Note
that this criteria only applies to transactions rated
in the ‘AAA’ and ‘AA’ categories. On transactions
dependent on investment earnings, for bonds rated
’AA-’ and below, Standard & Poor’s applies a
straight weak-link approach, whereby the rating of
the bonds cannot be any higher than that of the
lowest rating of any dependent provider.
In addition, transactions structured to have the
investment agreement as the only security for the
bonds, such as an escrow, cannot benefit from this
criteria, as the bonds are solely dependent upon
payment from the investment agreement provider. If
there is no additional security for the bonds, the
rating of the bonds is capped at the rating of the
investment agreement provider.General Terms
The second aspect reviewed is the structure of the
agreement to ensure it works appropriately with the
mechanics of the financing. Standard & Poor’s
reviews the general terms of the investment contract
for consistency with the legal documents and the
assumptions under the cash flows. Standard & Poor’s
will compare the interest rate under the investment
agreement, basis for calculating interest, the interest
accrual dates and payment dates under the contract.
Additionally, the investment agreement’s maturity
date should match the maturity date of the applicable
fund, or the cash flows should model Standard &
Poor’s then-current minimum reinvestment assump-
tions after the investment agreement maturity date.
To the extent that investment agreements are
obtained subsequent to the initial rating, Standard &
Poor’s will review all outstanding agreements each
time the rating is reviewed to assure that the terms of
the agreements are appropriate for the bond rating.Cross Sector Criteria54 Standard & Poor’s Public Finance Criteria 2007