PubFinCriteria_2006_part1_final1.qxp

(Nancy Kaufman) #1
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 ..........................................................................


http://www.standardandpoors.com 55

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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

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