unsecured certificates of deposit, time deposits,
and banker’s acceptances.
(9) Investment in money market funds rated
‘AAAm’ or ‘AAAm-G’ by Standard & Poor’s.
(10*) Stripped securities: principal-only strips
and interest-only strips of noncallable obligations
issued by the U.S. Treasury, and REFCORP secu-
rities stripped by the Federal Reserve Bank of
New York.
(11) Any security not included in this list may be
approved by Standard & Poor’s after a review of
the specific terms of the security and its appropri-
ateness for the issue being rated.
In addition to the permitted investments listed
above, guaranteed investment contracts are also
eligible investments subject to certain terms and
conditions. (See “Public Finance Criteria:
Review Of Investment Agreements For
Municipal Revenue Bond Financings” and
“Public Finance Criteria: Joint Support To
Investment Agreements”).■Investment Agreements for Municipal Revenue Bond Financings ......................................
http://www.standardandpoors.com 53A
nalysis of municipal revenue bonds often
involves evaluating the security or pledged col-
lateral, and the investments. Issuing entities that
have operating revenues and other noninvestment
sources to provide ample protection against defaults
are usually exempt from formal restrictions on per-
mitted investments in the ratings analysis (see
“Public Finance Criteria: Investment Guidelines”).
In transactions where full and timely payment of
debt service is dependent on investment income,
however, a more structured approach is necessary.
Very often, these investments take the form of
investment agreements, and many bond issues will
have as many as three different funds invested:
■A short-term acquisition, proceeds or construc-
tion fund (where the bond proceeds are held
prior to expenditure);
■The debt service reserve fund; and
■The revenue or “float” fund (where monthly
receipts are held).
These three funds can be held in one or more
agreements.
Those agreements that are deemed necessary for
full and timely payment of debt service are subject
for review as part of the ratings process. Review
of an investment agreement involves consideration
of the strength of the provider and the structure of
the agreement.
Dependent Rating
The first aspect of Standard & Poor’s Ratings Services
assessment of the investment contract is the financial
strength of the provider. The provider’s certificate of
deposit rating is used, and is an important component
of the bond rating because the transaction is depend-
ent upon performance of the investment provider for
a portion of the revenues used to pay bondholders. In
most cases, the long-term rating of the provider must
be as high as the rating on the bonds. Note the eligi-
bility of contracts to be jointly provided by more than
one provider (see “Public Finance Criteria: Joint
Support to Investment Agreements”).
For highly rated transactions, two sets of rating
guidelines can be used. The first set of guidelines
applies to issuers seeking ‘AAA’ or ‘AA’ ratings on
bonds with investment contracts:
■For investments with terms of less than one-
year, the provider maintains a short-term rating
of ‘A-1+’;
■For terms of at least one year but less than three
years, the provider maintains a long-term rating
of ‘AA-’ and a short-term rating of ‘A-1+’; and
■For terms of three years or more, the provider
maintains a long-term rating of at least as high as
the long-term rating on the bonds.
The second set of guidelines extends the acceptable
providers for transactions rated in the ‘AAA’ or ‘AA’
categories, for agreements with terms of three years
or more, to include providers with both a long-term
rating of at least ‘AA-’ and a short-term rating of
‘A-1+’. To benefit from this, issuers must have legal
provisions in the investment contract should the
provider’s rating fall below either of the two bench-
marks. This ensures that a credit cliff does not occur
and the rating on the bonds can be preserved despite
a potential downgrade of the investment agreement
provider below the required threshold. Upon a
downgrade below ‘AA-’ or ‘A-1+’, the legal provi-
sions under the investment contract should require
the provider to do one of the following: