Diane Brosen

CONFIDENTIAL AND PROPRIETARY.

Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.

Ratings- Past and Present

Florida Government Finance Officers’ AssociationJune 1, 2009

Diane BrosenManaging Director

diane_brosen@standardandpoors.com

212-438-7973

Ratings- Past and Present

• Types of Rated Debt

• The Bond Rating Process

• The ABC’s of GO Bonds

• S&P Expectations for 2009

Types of Rated Debt

Public Finance Ratings

State and Local Government Group

• General Obligation Bonds

• Lease and Appropriation Debt

• Short Term Debt (cash flow notes, commercial paper, and variable

rate demand obligation bonds)

• State Revolving Funds and Other Pool Financings

• State Credit Enhancement Programs

• Securitizations

State and Local Government Group

• Public Pension Fund Ratings

• Revenue Bonds (Sales, Income, Hotel Tax/Convention Centers,

Lottery, Highway User Tax, Water, Sewer, Electric, Parking)

• Special Tax Bonds/Special Districts

• SWAPs/Options/Derivatives

• Charter Schools

• Tobacco Bonds

Municipal Enterprise Group

• Health Care

• Higher Education/Cultural Institutions/Other 501c3

• Housing

• Transportation

• Structured

The Bond Rating Process

S&P Rating Definition

ISSUE CREDIT RATING DEFINITION

A Standard & Poor's issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion evaluates the obligor's capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.

A Rating Is Not -

The issue credit rating is not a recommendation to purchase,

sell, or hold a financial obligation, in as much as it does not

comment as to market price or suitability for a particular

investor.

Long-Term Issue Credit Ratings

Issue credit ratings are based, in varying degrees, on the following considerations:

• Likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;

• Nature of and provisions of the obligation;

• Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.

• Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)

Investment Grade Ratings

• An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.

• An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.

• An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.

• An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

Plus (+) or minus (-) The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing

within the major rating categories.

Outlooks and CreditWatch

Rating Outlook Definitions

• A Standard & Poor's rating outlook assesses the potential direction of a long-term credit rating over the intermediate term (typically six months to two years). In determining a rating outlook, consideration is given to any changes in the economic and/or fundamental business conditions. An outlook is not necessarily a precursor of a rating change or future CreditWatch action.

• Positive means that a rating may be raised.

• Negative means that a rating may be lowered.

• Stable means that a rating is not likely to change.

• Developing means a rating may be raised or lowered.

CreditWatch

• CreditWatch highlights the potential direction of a short- or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under special surveillance by Standard & Poor's analytical staff. These may include mergers, recapitalizations, voter referendums, regulatory action, or anticipated operating developments. Ratings appear on CreditWatch when such an event or a deviation from an expected trend occurs and additional information is necessary to evaluate the current rating. A listing, however, does not mean a rating change is inevitable, and whenever possible, a range of alternative ratings will be shown. CreditWatch is not intended to include all ratings under review, and rating changes may occur without the ratings having first appeared on CreditWatch. The "positive" designation means that a rating may be raised; "negative" means a rating may be lowered; and "developing" means that a rating may be raised, lowered, or affirmed.

Requesting The Rating

• Telephone call to Rating Agencies by issuer or its representative,

followed by a written rating request

Core Services

• Traditional Credit Ratings

• Standard & Poor’s Underlying Ratings (SPURs)

• Issuer Credit Ratings (ICRs)

• Credit Assessments

Issue Credit Ratings

• Provide a Consistent, Reliable Way to Demonstrate Credit Strength

• Monitored and Updated Throughout the Life of the Issue

• Provide Significantly Enhanced Liquidity & Appeal To Investors

• Translate Into Lower Borrowing Costs, More Attractive Financial Terms

and Easier Debt Placement

• Demonstrate Credit Quality of a Debt Issue on a Stand-Alone Basis, as

if not Backed by an Insurer

• Offer Tremendous Financing Flexibility & Potential for Cost Savings

• Involve Same Full Analytical Review as Issue Ratings

• If Opt For Insurance, No Additional Cost For SPUR

• Establishes a Consistent Benchmark of General Creditworthiness of an

Entity-Regardless of Whether it has Debt Outstanding

• Establishes An Entity’s Efficiency & Effectiveness to Business &

Financial Partners & Investors

• Provides a Management Tool to the Entity

Credit Assessments

• Evaluations That Offer Prompt and Early Feedback of General

Strengths & Weaknesses of a Proposed Financing Structure

• Convenient Lower-Cost Alternative to a Traditional Rating for Public

Sector Issuers Evaluation Potential Financing Strategies

• Allow Entities to Evaluate Possible Financing Strategies Rapidly &

Efficiently

What happens next?

• Once the type of credit evaluation has been chosen, what happens

• Primary/back-up analytic team is assigned

• Rating meeting/trip/conference call is scheduled

• Key factors that affect the rating are reviewed

What happens next?

Key rating factors include:

• Basic underlying economic strength of the entity

• Review of operating and financial plans and management policies

• Review of debt and capital financing plans

• Review of the bond documents

What happens next?

• Rating committee is convened

• Committee process is not a “black box”

• Committee discusses the lead analyst’s recommendation and the

pertinent facts affecting the rating

• Committee votes on the lead analyst’s recommendation

What happens next?

• Issuer is notified of the rating and the major considerations supporting

• Rating can be appealed

• If the issuer accepts the rating, rating is disseminated through our web

site, the news media and our publications

Rating Meeting/Trip/Conference Call

• “Be Prepared”

• Early submission of financial and bond documents for review is

positive

• Negotiated vs. competitive sale

• Meeting/conference call should be a dialogue – not a monologue

• It is more effective if issuers speak for themselves

• We are not rating the underwriter or financial advisor

• Issuer trips are valuable-especially for first time ratings

• “A picture is worth a thousand words”

The ABC’s of GO Bonds

Key Rating Factors

• Economy

• Finances

• Debt

• Management

Economic Factors

Significant economic factors for our ratings:

• Demographics

• Income/Wealth

• Property Valuation

• Taxpayer Base- residential/commercial/second homes. etc.

• Employment-cyclical/seasonal?

• Likelihood of future growth and development

Less significant factors for our ratings :

• Size

• Location

Sources: POS and other documents, government data, outside forecasts and projections

Financial Performance and Flexibility

• Sources of funding - revenue diversity and stability

• Financial flexibility – revenues and expenditures

• Reserve levels

• Cash flow/liquidity/investments

• Last year/this year/next year

• Tax base/tax rate/user rate limitations

• Constitutional/legislative requirements

• Structural balance

Sources: audits, issuer meetings, budgets, state statutes

Debt Burden

• Debt ratios

• Overlapping debt burden

• Balancing growth pressures and debt issues

• Ongoing maintenance

• Pension, OPEB, and contingent obligations

• Focus on fixed costs

Sources: preliminary official statement, audits, capital plans, actuarial studies

Revised representative ranges of key GO ratios

HH/PC EBI % US Debt Service As % Of ExpendituresLow Below 65% Low Below 8%Adequate 65%-90% Moderate 8%-15%Good 90%-110% Elevated 15%-20%Strong 110%-130% High Above 25%Very strong Above 130%

Market Value Per Capita Overall Net Debt Per CapitaLow Below $35,000 Very low Below $1,000Adequate $35,000-$55,000 Low $1,000-$2,000Strong $55,000-$80,000 Moderate $2,000-$5,000Very strong $80,000-$100,000 High Above $5,000Extremely strong Above $100,000

Top 10 Taxpayers Overall Net Debt As % Of Market ValueVery diverse Below 15% Low Below 3%Diverse 15% - 25% Moderate 3%-6%Moderately concentrated 25% - 40% Moderately high 6%-10%Concentrated Above 40% High Above 10%

Available Fund BalanceLow Below 1%Adequate 1%-4%Good 4%-8%Strong 8%-15%Very strong Above 15%

Management: The FMA and So Much More

• Economic factors may set the foundation for credit quality, but

• We believe most downgrades are management related

• Most upgrades also have roots in management decisions, in our

opinion

• Management factors we have observed influencing financial

performance include finance staff competency, ability and

willingness to execute strategies, management/governance

relationships, staff turnover, and the extent to which policies

and procedures exist.

• The financial management assessment focuses on a small

subset of the policies and practices subset

The Financial Management Assessment

An analysis of practices and policies in the seven areas we

believe most likely to affect credit quality.

1. Revenue and expenditure assumptions

2. Budget amendments and updates

3. Long term financial planning

4. Long term capital planning

5. Investment management policies

6. Debt management policies

7. Reserve and liquidity policies

“Strong” or“Standard” or“Vulnerable”

FMA Distribution of SLG Obligors Within Rating Categories

AAA AA A BBB Non-Inv

Strong

Standard

Vulnerable

S&P Expectations For 2009

S&P Expectations for 2009

• State and local government credit quality has weathered the downturn so far

• We believe current quarter may be pivotal as weakening economic and revenue environment, decline of reserves and tightened capital markets may reveal most vulnerable credits

• We view it as unlikely that very many will avoid hard choices of expenditure cuts or imposition of additional taxes, fees or other revenue enhancements

• Financial positions will be stressed but our criteria recognize economic cycles

• Emphasis on quality of financial management at same time that we look at 2010 budget cycle, any federal stimulus package, magnitude and duration of recession and availability of liquidity

Related Credit Reports

• Top 10 Management Characteristics Of Highly Rated Credits In

U.S. Public Finance: 6/13/2008

• Public Finance Criteria: Financial Management Assessment:

6/27/2006

• U.S. Public Finance Upgrades Continued to Outnumber

Downgrades In the First Quarter, But Ratio Has Weakened Due

To The Recession: 4/28/2009

• Public Finance Criteria: Key General Obligation Ratio Credit

Ranges - Analysis Vs. Reality: 4/2/2008

• Bond Insurance Ratings Current List

www.standardandpoors.com

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