LOS ANGELES -- A new rating <
technique for pooled-note deals enabled a California school financing association this week to achieve the highest possible rating from Standard & Poor's Corp. without arranging a guarantee for the entire issue.
The agency assigned its SP-1-plus <
rating to $475 million tax and revenue anticipation note issue by the California School Boards Association Finance Corp., which expects to market the deal in early June.
Standard & Poor's said the deal <
marked the first time an issuer took advantage of its new note-pool rating criteria, which are based on a blended approach of individual issuer quality and common debt service reserve provisions.
Previous ratings for such pools <
usually relied on a weak-link approach, under which the creditworthiness of the weakest participant determined the overall rating for the pool. Rating agencies use the weak-link approach because pools rated that way are generally structured as several rather than joint obligations, so participants are liable only for their required amount of payments.
As a result, note pools that include <
a diverse range of credit quality historically have had to enhance their ratings with bank letters of credit or bond insurance.
But the new Standard & Poor's <
criteria allow an issuer to achieve a desired pool rating by setting aside a specified level of reserves to cover lower-rated credits in the pool. For example, a pool with a desired rating of SP-1-plus would require reserves only for participants with a rating below that level.
Applying that criteria to the California <
school board association's financing, Standard & Poor's determined that extra security totaling about 10% of the overall transaction would satisfy its requirement for a SP-1-plus rating.
A pool issuer can rely on cash reserves, <
a surety bond, or some other form of financial guarantee to provide the extra security, which is also referred to as the level of over-collateralization.
"The advantages are primarily <
cost related," said Mark Fisler, a vice president of Piper, Jaffray & Hopwood Inc., the underwriter on the California school boards note issue.
In the past, an issuer generally <
would need a letter of credit covering the entire borrowing to secure the desired rating, Mr. Fisler said. By contrast, he added, under the new rating criteria, the school board association only needed to arrange a guarantee covering $50 million of the issue.
Standard & Poor's developed the <
new note-pool criteria after receiving requests from issuers and their financiers about an alternative that would balance the weak-link approach against the broader quality of underlying issuers, said Robert Swerdling, a vice president with the agency.
The California issue represents <
the combined tax and revenue anticipation note borrowings of 169 school districts, 13 county boards of education, and 15 community college districts.
The participants, which are <
small and are borrowing relatively small amounts, "are fundamentally fairly strong," Mr. Swerdling said, adding that they provide "more than adequate liquidity" for a transaction of this nature.
Based on projected cash balances <
of the participating schools, Standard & Poor's said 92% provide debt service coverage of 1.25 times or better at the maturity date of June 30, 1993.
If any schools lack funds to make <
their individual payments on that date, up to $50 million of shortfalls will be covered by an irrevocable stand-by letter of credit from Industrial Bank of Japan. The bank's ability to pay is enhanced by a surety bond from Municipal Bond Investors Assurance Corp.
Standard & Poor's expects a <
handful of other issuers to seek ratings over the next two months using the new note-pool criteria, Mr. Swerdling said.