LOS ANGELES -- A San Diego local governments' note pool this week became the second deal to achieve the best rating possible from Standard & Poor's Corp. under a new rating technique that reduces the need for large letters of credit.
The agency assigned an SP-1-plus rating to a proposed $94.3 million tax and revenue anticipation note issue by the San Diego Area Local Governments. The pooled deal provides cash flow borrowings for 25 school districts, six fire districts, and two cities.
"About 90% of the San Diego issue would be rated SP-1-plus and about 10% SP-1 on a stand-alone basis," Standard & Poor's said in a release.
Previous ratings for such pools depended on a weak-link approach, meaning the creditworthiness of the weakest participant set the overall rating for the pool. To enhance the rating in such cases, issuers often had to arrange bank letters of credit or bond insurance for the entire deal.
Two years ago, the San Diego local governments pooled issue included a letter of credit covering the full deal. Last year, the issue was split into two series and sold stand-alone based on the SP-1-plus and SP-1 ratings.
This year, however, the San Diego deal took advantage of new notepool rating criteria from Standard & Poor's that allow an issuer to achieve a higher rating for an entire note pool by setting aside a specified level of reserves that compensates for lower-rated credits in the pool.
In the San Diego case, the extra security for the pool, known as the level of overcollateralization, totals 10% of the principal amount. Banca Nazionale del Lavoro will provide an irrevocable standby letter of credit for $9.4 million to address any issuer defaults.
This reserve level exceeds the minimum required under Standard & Poor's analysis, the rating agency said. Debt service on the note issue is payable from unrestricted fiscal 1993 moneys of the individual participants.
Sutro & Co. tentatively plans to bring the San Diego deal to market Thursday.
Standard & Poor's last week also assigned its SP-1-plus rating to a $475 million tax and revenue anticipation note issue by the California School Boards Association Finance Corp.
Under the new rating criteria, the school board association needed to arrange a guarantee covering only $50 million of the issue.
Piper, Jaffray & Hopwood Inc. priced that issue yesterday with a 4% coupon to yield 3.50%.
Mark Fisler, a vice president of Piper Jaffray, said that a conference call last Friday with numerous short-term institutional investors reveled they were comfortable with the new rating structure.
A Standard & Poor's official said the agency has received "a large number of phone calls" for market participants who are curious whether the new rating criteria will fit certain pools across the country.
Separately, Standard & Poor's this week assigned an SP-1-plus rating to a $5 million pooled note issue by the San Bernardino Area Local Governments. But the rating agency did not require overcollateralization for that deal because the five pool participants provided "very strong security for note repayment without a letter of credit."
