Public Finance Criteria

337 Pages·2006·1.22 MB·English

Public Finance
Criteria
2007
Public Finance
Criteria
2007
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To Our Readers
Standard & Poor’s Ratings Services is pleased to present the 2007 edition of Public Finance
Criteria, which we hope you will find useful. This updated overview includes criteria
developed since the publication of the last edition, as well as criteria revised to reflect events
and trends affecting public finance.
Standard & Poor’s criteria are extensive and are periodically revised. Our complete
criteria are available on Standard & Poor’s RatingsDirect, as well as on the Web at
www.standardandpoors.com.
Standard & Poor’s also regularly publishes its new and revised criteria on RatingsDirect
and on the Web, as part of our commitment to provide the most timely and comprehensive
public finance ratings information.
William L. Montrone
Managing Director
Contents
I. Introduction
Introduction to Public Finance Criteria................................................................................6
II. Cross Sector Criteria
Short-Term Debt ................................................................................................................11
Commercial Paper, VRDO, And Self Liquidity ..................................................................17
Bank Liquidity Facilities ....................................................................................................26
Municipal Swaps................................................................................................................29
Debt Derivative Profile Scores............................................................................................38
Long-Term Municipal Pools ..............................................................................................43
Investment Guidelines........................................................................................................49
Investment Agreements for Municipal Revenue Bond Financings ......................................53
Joint Support To Investment Agreements ..........................................................................55
Defeasance..........................................................................................................................57
III. Tax-Secured Debt
Introduction to Tax-Secured Debt......................................................................................60
GO Debt............................................................................................................................60
Debt Statement Analysis ....................................................................................................66
Special Tax Bonds..............................................................................................................70
Non Ad Valorem Bonds......................................................................................................75
Lottery Revenue Bonds ......................................................................................................76
Special-Purpose Districts....................................................................................................78
State Credit Enhancement Programs..................................................................................86
Appropriation-Backed Obligations ..................................................................................103
Federal Leases..................................................................................................................107
Moral Obligation Bonds..................................................................................................111
IV. General Government Utilities
Water and Sewer Ratings..................................................................................................113
Electric Utility Ratings......................................................................................................121
Solid Waste System Financings ........................................................................................127
V. Transportation
Airport Revenue Bonds....................................................................................................131
Stand-Alone Passenger Facility Charge Debt....................................................................136
Airport Multi-Tenant Special Facilities Bonds..................................................................139
Port Facilities Revenue Bonds ..........................................................................................142
Toll Road and Bridge Revenue Bonds..............................................................................145
Mass Transit Bonds Secured by Farebox Revenues..........................................................149
Parking Revenue Bonds....................................................................................................151
VI. Health Care
Not-for-Profit Health Care ..............................................................................................153
Senior Living....................................................................................................................162
Physician Groups and Faculty Practice Plans....................................................................169
Human Service Providers..................................................................................................172
VII. Education and Non-Traditional Not-for-Profits
Higher Education ............................................................................................................175
Private Elementary and Secondary Schools ......................................................................191
Charter Schools................................................................................................................194
Non-Traditional Not-for Profits ......................................................................................200
VIII. Municipal Structured Finance
Introduction to Structured Finance ..................................................................................207
LOC-Backed Municipal Debt ..........................................................................................208
Municipal Applications for Jointly Supported Debt ........................................................217
Forward Purchase Contracts and ‘AAA’ Defeased Bonds ................................................223
Secondary-Market Derivative Products............................................................................225
IX. Housing
Introduction to Tax-Exempt Housing Bonds....................................................................230
Single-Family Whole Loan Programs................................................................................230
Single-Family Second Mortgage Loans ............................................................................243
Single Family Mortgage-Backed Securities Programs........................................................245
Property Improvement Loans ..........................................................................................247
FHA Insured Mortgages ..................................................................................................250
Ginnie Mae, Fannie Mae, and Freddie Mac Multifamily Securities..................................259
Unenhanced Affordable Housing Project Debt ................................................................262
Affordable Multifamily Housing Pooled Financings ........................................................270
Military Housing Privatizations........................................................................................276
Federally Subsidized Housing Programs ..........................................................................281
Public Housing Authority Debt........................................................................................285
Housing Finance Agencies................................................................................................290
X. Other Criteria
Bond Insurance ................................................................................................................294
Government Investment Pools (GIP)................................................................................312
Assessing Construction Risk ............................................................................................323
Pension Fund Credit Enhancement And Related Guarantee Programs ............................327
Public Pension Funds........................................................................................................329
Introduction
Introduction To Public Finance Criteria
Since beginning its credit rating activities in 1916, ■ Credibility, and
Standard& Poor’s Ratings Services has rated ■ Transparency
hundreds of thousands of securities issues, corporate Standard& Poor’s recognition as a rating agency
and governmental issuers, and structured financings. ultimately depends on investors’ willingness to
Standard& Poor’s began its ratings activities with accept its judgments. Standard& Poor’s believes it
the issuance of credit ratings on corporate and is important that all users of its ratings understand
government debt issues. Responding to market how it arrives at its ratings opinions, and it regularly
developments and needs, Standard& Poor’s has publishes ratings definitions and detailed reports on
developed and innovated methodologies and criteria ratings criteria and methodology.
and now assesses the credit quality of, and assigns Standard& Poor’s rates more than USD $34
credit ratings to, financial guarantees, recovery ratings trillionin bonds and other financial obligations of
and bank loans, private placements, mortgage-and obligors in more than 100 countries. Despite the
asset-backed securities, mutual funds, and the ability changing environment, Standard& Poor’s core
of insurance companies to pay claims, and assigns values remain the same-to provide high-quality,
market-risk ratings to managed funds. objective, value-added analytical information to
In 2005, Standard& Poor’s published more than the world’s financial markets.
500,000 ratings, including 294,000 new ratings
Credit Ratings
and 260,000 revised ratings. We have issued ratings
on debt securities in more than 100 countries. Standard& Poor’s began rating the debt of corporate
Standard& Poor’s rates and monitors developments and government issuers nearly 100 years ago. Since
pertaining to these securities and obligors from then, its credit rating criteria and methodology have
operations in 21 countries around the world. grown in sophistication and have kept pace with
Standard& Poor’s believes that over the last the introduction of new financial products. For
century credit ratings have served the U.S. securities example, Standard& Poor’s was the first major
markets extremely well, providing an effective and rating agency to assess the credit quality of, and
objective tool in the market’s evaluation and assess- assign credit ratings to, the claims-paying ability of
ment of credit risk. Standard& Poor’s recognizes insurance companies (1971), financial guarantees
the valuable role that credit-rating agencies play (1971), mortgage-backed bonds (1975), mutual
in the U.S. securities markets and is committed funds (1983), and asset-backed securities (1985).
to protecting and enhancing the reputation and A credit rating is Standard& Poor’s opinion of
future of its credit-ratings business. In this regard, the general creditworthiness of an obligor, or the
Standard& Poor’s takes great care to assure that creditworthiness of an obligor with respect to a
the market views its credit ratings as highly credible particular debt security or other financial obligation,
and relevant, and will continue to review its practices, based on relevant risk factors. A rating does not
policies, and procedures on an ongoing basis and constitute a recommendation to purchase, sell, or
modify or enhance them, as necessary, to ensure hold a particular security. In addition, a rating does
that rigorous analytics, integrity, independence, not comment on the suitability of an investment
objectivity, transparency, credibility, and quality for a particular investor.
continue as fundamental premises of its operations. Standard& Poor’s credit ratings and symbols
originally applied to debt securities. As described
Standard& Poor’s Role In The Financial Markets
below, Standard& Poor’s has developed credit ratings
Standard& Poor’s is the world’s foremost provider that may apply to an issuer’s general creditworthiness
of independent credit ratings, indices, risk evalua- or to a specific financial obligation. Standard&
tion, investment research, data and information, Poor’s has historically maintained separate and
and operates under the basic principles of: well-established rating scales for long-term and
■ Independence short-term instruments. Over the years, these credit
■ Objectivity ratings have achieved wide investor acceptance as
6 Standard & Poor’s Public Finance Criteria 2007
Introduction To Public Finance Criteria
easily usable tools for differentiating credit quality, financial obligation, as it does not take into account
because a Standard& Poor’s credit rating is judged the nature of and provisions of the obligation, its
by the market to be reliable and credible. standing in bankruptcy or liquidation, statutory
preferences, or the legality and enforceability of the
Rating Process
obligation. In addition, it does not take into account
Standard& Poor’s provides a rating only when there the creditworthiness of the guarantors, insurers, or
is adequate information available to form a credible other forms of credit enhancement on the obligation.
opinion and only after applicable quantitative, The issuer credit rating is not a recommendation to
qualitative, and legal analyses are performed. purchase, sell or hold a financial obligation issued
The analytical framework is divided into several by an obligor, as it does not comment on market
categories to ensure salient qualitative and quantitative price or suitability for a particular investor.
issues are considered. The rating process is not Issuer credit ratings are based on current infor-
limited to an examination of various financial mation furnished by obligors or obtained by
measures. Proper assessment of credit quality involves Standard& Poor’s from other sources it considers
an evaluation of the basic underlying economic reliable. Standard& Poor’s does not perform an
strength of the entity, as well as the effectiveness of audit in connection with any issuer credit rating
the governing process to manage performance and and may, on occasion, rely on unaudited financial
address problems. Standard& Poor’s assembles a information. Issuer credit ratings may be changed,
team of analysts with appropriate expertise to suspended, or withdrawn as a result of changes in,
review information pertinent to the rating. A lead or unavailability of, such information, or based on
analyst is responsible for the conduct of the rating other circumstances. Issuer credit ratings can be
process. Several of the members of the analytical either long-term or short-term. Short-term issuer
team may meet and/or discuss with management credit ratings reflect the obligor’s creditworthiness
of the organization to review, in detail, key factors over a short-term time horizon, usually one to
that have an effect on the rating, including operating three years.
and financial plans and management policies. The Most Public Finance ratings are issue ratings. A
meeting also helps analysts develop the qualitative Standard& Poor’s issue credit rating is a current
assessment of management itself, an important opinion of the creditworthiness of an obligor with
factor in the rating decision. respect to a specific financial obligation, a specific
Following this review and discussion, a rating class of financial obligations, or a specific financial
committee meeting is convened. At the meeting, program. It takes into consideration the creditwor-
the committee discusses the lead analyst’s recom- thiness of guarantors, insurers, or other forms of
mendationand the pertinent facts supporting credit enhancement on the obligation. The issue
the rating. Finally, the committee votes on credit rating is not a recommendation to purchase,
the recommendation. sell, or hold a financial obligation, inasmuch as it
The issuer is subsequently notified of the rating does not comment as to market price or suitability
and the major considerations supporting it. A rating for a particular investor.
can be appealed prior to its publication, if meaningful Issue credit ratings are based on current information
new or additional information is to be presented furnished by the obligors or obtained by Standard&
by the issuer. Obviously, there is no guarantee Poor’s from other sources it considers reliable.
that any new information will alter the rating Standard& Poor’s does not perform an audit in
committee’s decision. connection with any credit rating and may, on
Once a final rating is assigned, it is disseminated occasion, rely on unaudited financial information.
to the public via Standard& Poor’s free web site Credit ratings may be changed, suspended, or
(www.standardandpoors.com), through the news withdrawn as a result of changes in, or unavailability
media and through Standard& Poor’s publications. of, such information, or based on other circumstances.
All initial ratings are assigned and released only Issue credit ratings can be either long-term or
by request. short-term. Short-term ratings are generally
assigned to those obligations considered short term
Rating Types
in the relevant market. In the U.S., for example,
A Standard& Poor’s issuer credit rating is a current that means obligations with an original maturity of
opinion of an obligor’s overall financial capacity (its no more than 365 days-including commercial
creditworthiness) to pay its financial obligations. paper. Short-term ratings are also used to indicate
This opinion focuses on the obligor’s capacity and the creditworthiness of an obligor with respect to
willingness to meet its financial commitments as put features on long-term obligations. The result is
they come due. It does not apply to any specific a dual rating, in which the short-term ratings
www.standardandpoors.com 7
Introduction
address the put feature, in addition to the usual Issue credit ratings can be either long-term or
long-term rating. Medium-term notes are assigned short-term. Short-term ratings are generally
long-term ratings. assigned to those obligations considered short term
A Standard& Poor’s Underlying Rating (SPUR) in the relevant market. In the U.S., for example,
is a rating of the stand-alone capacity of an issue that means obligations with an original maturity of
to pay debt service on a credit-enhanced debt issue, no more than 365 days-including commercial paper.
without giving effect to the enhancement that Short-term ratings are also used to indicate the
applies to it. creditworthiness of an obligor with respect to put
Issue and issuer long term ratings are divided into features on long-term obligations. The result is
several categories ranging from ‘AAA’ reflecting the a dual rating, in which the short-term ratings
strongest credit quality to ‘D’ reflecting the lowest. address the put feature, in addition to the usual
Long-term ratings from ‘AA’ to ‘CCC’ may be modi- long-term rating. Medium-term notes are assigned
fiedby the addition of a plus or minus sign to show long-term ratings.
relative standing within the major rating categories.
Long-Term Issue Credit Ratings
A Standard& Poor’s commercial paper rating is
a current assessment of the likelihood of timely Issue credit ratings are based in varying degrees, on
payment of debt having an original maturity of no the following considerations:
more than 365 days. Ratings are graded into several ■ Likelihood of payment-capacity and willingness
categories, ranging from ‘A’ for the highest-quality of the obligor to meet its financial commitment
obligations to ‘D’ for the lowest. on an obligation in accordance with the terms of
A Standard& Poor’s U.S. municipal note rating
the obligation;
reflects the liquidity factors and market access risks
■ Nature of and provisions of the obligation; and
unique to notes. Notes due in three years or less
■ Protection afforded by, and relative position of,
will likely receive a note rating. Notes maturing
the obligation in the event of bankruptcy, reorga-
beyond three years will most likely receive a long-
nization, or other arrangement under the laws
term debt rating. The following criteria will be used
in making that assessment: of bankruptcy and other laws affecting creditors’
■ Amortization schedule-the larger the final maturity rights.
The issue ratings definitions are expressed in
relative to other maturities, the more likely it will
terms of default risk. As such, they pertain to senior
be treated as a note; and
obligations of an entity. Junior obligations are typi-
■ Source of payment-the more dependent the issue
cally rated lower than senior obligations, to reflect
is on the market for its refinancing, the more
the lower priority in bankruptcy, as noted above.
likely it will be treated as a note.
AAA
Municipal Issue Ratings Definitions
An obligation rated ‘AAA’ has the highest rating
A Standard& Poor’s issue credit rating is a current assigned by Standard& Poor’s. The obligor’s
opinion of the creditworthiness of an obligor with capacity to meet its financial commitment on
respect to a specific financial obligation, a specific the obligation is extremely strong.
class of financial obligations, or a specific financial
AA
program. It takes into consideration the creditwor-
thiness of guarantors, insurers, or other forms of An obligation rated ‘AA’ differs from the highest-
credit enhancement on the obligation. The issue rated obligations only to a small degree. The obligor’s
credit rating is not a recommendation to purchase, capacity to meet its financial commitment on the
sell, or hold a financial obligation, inasmuch as it obligation is very strong.
does not comment as to market price or suitability A
for a particular investor.
An obligation rated ‘A’ is somewhat more susceptible
Issue credit ratings are based on current information
to the adverse effects of changes in circumstances
furnished by the obligors or obtained by Standard&
and economic conditions than obligations in higher-
Poor’s from other sources it considers reliable.
rated categories. However, the obligor’s capacity to
Standard& Poor’s does not perform an audit in
meet its financial commitment on the obligation is
connection with any credit rating and may, on
still strong.
occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or with- BBB
drawn as a result of changes in, or unavailability of,
An obligation rated ‘BBB’ exhibits adequate protection
such information, or based on other circumstances.
parameters. However, adverse economic conditions
8 Standard & Poor’s Public Finance Criteria 2007
Introduction To Public Finance Criteria
or changing circumstances are more likely to lead also will be used upon the filing of a bankruptcy
to a weakened capacity of the obligor to meet its petition or the taking of a similar action if payments
financial commitment on the obligation. on an obligation are jeopardized.
BB, B, CCC, CC, and C Plus (+) or minus (-)
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ The ratings from ‘AA’ to ‘CCC’ may be modified
are regarded as having significant speculative char- by the addition of a plus (+) or minus (-) sign to
acteristics. ‘BB’ indicates the least degree of specula- show relative standing within the major rating
tion and ‘C’ the highest. While such obligations will categories.
likely have some quality and protective characteris-
NR
tics, these may be outweighed by large uncertainties
An issue designated NR is not rated.
or major exposures to adverse conditions.
BB Short-Term Issue Credit Ratings
Notes
An obligation rated ‘BB’ is less vulnerable to non-
payment than other speculative issues. However, A Standard& Poor’s U.S. municipal note rating
it faces major ongoing uncertainties or exposure reflects the liquidity factors and market access risks
to adverse business, financial, or economic condi- unique to notes. Notes due in three years or less
tions, which could lead to the obligor’s inade- will likely receive a note rating. Notes maturing
quate capacity to meet its financial commitment beyond three years will most likely receive a long-
on the obligation. term debt rating. The following criteria will be used
in making that assessment:
B
■ Amortization schedule-the larger the final maturity
An obligation rated ‘B’ is more vulnerable to non-
relative to other maturities, the more likely it will
payment than obligations rated ‘BB’, but the oblig-
be treated as a note; and
or currently has the capacity to meet its financial
■ Source of payment-the more dependent the issue
commitment on the obligation. Adverse business,
is on the market for its refinancing, the more
financial, or economic conditions will likely impair
the obligor’s capacity or willingness to meet its likely it will be treated as a note.
financial commitment on the obligation. Note rating symbols are as follows:
CCC SP-1
An obligation rated ‘CCC’ is currently vulnerable Strong capacity to pay principal and interest. An
to nonpayment and is dependent upon favorable issue determined to possess a very strong capacity
business, financial, and economic conditions for the to pay debt service is given a plus (+) designation.
obligor to meet its financial commitment on the SP-2
obligation. In the event of adverse business, finan-
Satisfactory capacity to pay principal and interest,
cial, or economic conditions, the obligor is not like-
with some vulnerability to adverse financial and
ly to have the capacity to meet its financial
economic changes over the term of the notes.
commitment on the obligation.
SP-3
CC
Speculative capacity to pay principal and interest.
An obligation rated ‘CC’ is currently highly vulner-
able to nonpayment. Commercial Paper
C A Standard& Poor’s commercial paper rating is a
The ‘C’ rating may be used to cover a situation current assessment of the likelihood of timely pay-
where a bankruptcy petition has been filed or simi- ment of debt having an original maturity of no
lar action has been taken, but payments on this more than 365 days. Ratings are graded into sever-
obligation are being continued. al categories, ranging from ‘A’ for the highest-quali-
ty obligations to ‘D’ for the lowest. These
D
categories are as follows:
An obligation rated ‘D’ is in payment default. The
A-1
‘D’ rating category is used when payments on an
obligation are not made on the date due even if the This designation indicates that the degree of safety
applicable grace period has not expired, unless regarding timely payment is strong. Those issues
Standard& Poor’s believes that such payments will determined to possess extremely strong safety charac-
be made during such grace period. The ‘D’ rating teristics are denoted with a plus sign (+) designation.
www.standardandpoors.com 9