PubFinCriteria_2006_part1_final1.qxp

Withdrawal/Deposits

Certain bond financings present uncertainty given

the possibility of prepayment of the collateral secur-

ing the bonds. To address the risks of the frequency

and size of the prepayments, investment agreement

providers, particularly in housing bond transac-

tions, are increasingly becoming more restrictive in

the amount of funds they will accept, the length of

time they will hold such amounts, and the use of

lockout periods in an effort to increase the pre-

dictability of the investments held with the

providers. As a result, investment agreements often

have limitations with respect to deposit and dura-

tion of the investment. Standard & Poor’s will

review the contract to ensure that the investment

agreement and cash flows are consistent. To the

extent the agreement places limits on the amount of

the investment, for example, the cash flows should

then model these limits by reflecting amounts above

the limits held at minimum reinvestment rates

rather than the investment agreement rate.

Additionally, certain bond structures, such as

escrows, may include unscheduled bond payment

events that require the trustee to withdraw all

funds from the investment agreement prior to the

expiration date. If, for example, bond proceeds are

held invested during an escrow period, and the

structure calls for the investment agreement to

fund a mandatory redemption of the bonds should

there be a failed remarketing, the trustee would

have to withdraw all of the funds with limited

notice to the provider. Standard & Poor’s first

reviews the agreement for any lockout provisions

that could prevent the withdrawal of funds. The

investment agreement will also likely include a

withdrawal notice provision which Standard &

Poor’s reviews to verify the availability of funds to

pay bondholders when necessary and in accor-

dance with the legal documents. Remedies should

be in place for any inconsistencies between the

bond documents and the investment agreement.

Grace Period

While the rating of the provider takes into account

the likelihood of the provider to pay under the con-

tract, the default section of the investment agree-

ment may incorporate a grace period that may not

be factored into the payment structure of the

bonds. Investment agreement providers typically

build in a grace period to account for potential

administrative delays. The provider is not deemed

to be in default unless payment is not made when

due and after a specified grace period, such as one

business day after which the Trustee gives notice to

the provider. Note that investment agreements

involving guarantees may also have additional

structural notice periods that can affect when funds

are received. The structure should allow for these

grace periods by adjusting the investment agree-

ment interest payment dates to compensate and

taking into account interest accrual periods.

Collateral

Following a downgrade event, the provider may opt

to post collateral so as to maintain the rating on the

bonds. Standard & Poor’s determines the amount

of collateral posted on a case-by-case basis at the

time of posting and based on the type of collateral

posted. In addition, the collateral must be pledged

to the trustee and Standard & Poor’s should receive

a legal opinion stating that in the event of the

provider’s insolvency, the trustee will be able to ter-

minate the agreement and sell the collateral without

regard to the insolvency of the provider.■

Joint Support To Investment Agreements ..........................................................................

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tandard & Poor’s Ratings Services criteria for

jointly supported obligations, whereby each

obligor is fully responsible for the entire obligation,

may also be applied to investment agreements.

These agreements provide full or partial credit sup-

port in public finance transactions, and are impor-

tant factors in determining the bond rating,

especially in housing. Investment agreements also

provide reinvestment of various funds of municipal

issuers, such as bond proceeds.

As with any jointly supported bond, the multiple

providers must each be fully and independently obli-

gated for the entire amount, and all terms and condi-

tions of the obligation under the investment

agreement. Therefore, a default on the obligation

under the investment agreement would only occur if

Joint Support To Investment Agreements