the multiple providers involved defaulted. The foun-
dation for the criteria is that the risk that the multiple
providers will default is less than the risk that either
will. As a result, the credit quality of the investment
agreement may be higher than the rating on either
provider (see “Criteria Update: Joint Support Criteria
Refined,” RatingsDirect, Feb. 3, 2006). Standard &
Poor’s will examine each provider’s agreement to
ensure legal comfort with the type of obligation pro-
vided. Payments under the agreements should be
made directly to the bond trustee.
The application of the joint support criteria to
investment agreements creates additional flexibility,
particularly for ‘AAA’ rated transactions, by
expanding the pool of potential investment agree-
ment providers. Strong credit quality could be
derived like other jointly supported transactions,
such as those with both a primary obligor and a let-
ter-of-credit (LOC) supporting the bonds. The only
distinction is that the jointly supported obligation is
an investment contract rather than the obligation to
make payment of bond debt service.
The rating criteria for investment agreements in
bond transactions are outlined in Standard &
Poor’s current criteria (see “Public Finance
Criteria: Review of Investment Agreements for
Municipal Revenue Bond Financings”). To qualify
for a bond rating at a certain level, the jointly
derived rating of the providers should meet
Standard & Poor’s investment rating guidelines.
Pursuant to the joint support criteria, Standard &
Poor’s will apply the appropriate reference table
based on the correlation between providers. To the
extent the investment agreement is provided jointly
by two banks, for example, Standard & Poor’s
would use the medium correlation reference table
because both providers are in the same industry
(and assuming they are not in the same region). If
one bank was rated ‘A-’ and the other rated ‘AA’,
the rating on the jointly supported investment
agreement would be evaluated at ‘AAA’ thereby
qualifying the investment agreement for use in a
‘AAA’ rated transaction. The same approach could
be applied to short-term ratings by converting the
indicated long-term rating of the providers into the
corresponding short-term rating. It should be noted
that monoline bond insurers remain ineligible for
joint-support criteria, reflecting the significant cor-
relation between the insurer and its portfolio of
insured obligations.Rating Dependency
Using investment agreements in rated bond transac-
tions leads to the possibility of a change in the bond
rating due to a change in the investment agreement
provider’s rating. Like any rating which is dependent
on its parts being of at least equal credit quality,with jointly supported investment agreements, the
bond rating becomes dependent on the jointly
derived rating of the providers, and the correlation
table used to derive the joint rating. Due to the
nature of joint support, a change in the rating of
one provider, however, does not necessarily lead to a
change in the rating of the bonds. Using the exam-
ple of the rated obligors above, if the rating on the
‘AA’ entity was lowered to ‘AA-’, the rating on the
bonds could be affirmed because the jointly derived
rating of the providers would still be ‘AAA’. If the
rating on the ‘A-’ entity was then lowered to ‘BBB+’,
however, the jointly derived rating of the providers
would be ‘AA+’ and the rating on the bonds may be
lowered, unless remedies are taken to preserve the
rating. Obviously, changes in other credit factors
could separately affect the rating.Downgrade Triggers
Jointly supported agreements
Should the bond issuer want to preserve the bond
rating in case of any adverse change to the credit
quality of one of the investment agreement
providers, Standard & Poor’s will evaluate the
downgrade triggers of the agreement(s) to confirm
they are at a rating level consistent with our current
criteria and incorporate the jointly derived rating.
Remedies may be in place to preserve the bond rat-
ing—for example, the agreement could provide that
a substitute provider with a rating sufficient to
maintain the rating on the bonds will be obtained.
If similar remedies are not included, the rating on
the bonds will likely drop to reflect the credit quali-
ty of the jointly supported investment agreement.
Following a rating change of one provider, if the
credit quality of the jointly supported agreement is
adversely affected, the agreement should allow up
to 10 business days to effect a remedy. If a remedy
sufficient to preserve the bond rating is not com-
pleted, the bond rating will be lowered to the level
of the jointly derived rating of the providers.
Non-jointly supported agreements
The application of joint support criteria may also
be used as a potential remedy to preserve the bond
rating if a provider’s rating is lowered in all invest-
ment agreements, whether or not they initially use
joint support. If a provider’s rating is lowered
below the level required for the bond rating, the
agreement can specify that the provider enter into
an agreement with another provider that will allow
application of the joint support criteria in a manner
that will maintain the then current rating on the
bonds. The multiple providers must each be fully
and independently obligated for the entire amount
and all terms and conditions of the obligation
under the investment agreement.■Cross Sector Criteria56 Standard & Poor’s Public Finance Criteria 2007