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Fitch Explains Bank Bond Rating Policy
NEW YORK-(Business Wire)-October 3, 2008 - Fitch Ratings now assigns ratings, upon request, to bank bonds, i.e. variable rate demand obligations (VRDOs) issued by U.S. municipal entities that have been tendered but not remarketed, and are purchased by the liquidity provider in accordance with the liquidity support agreement. Fitch will assign ratings to bank bonds of outstanding and new- issue VRDOs. Bank bond ratings are announced publicly through rating action commentaries and are also included in Fitch's ratings feeds, accompanied by bank bond CUSIP numbers if they have been issued.
Fitch bases bank bond ratings on the long-term component of the rating on the VRDOs, without giving consideration to any credit support that might be provided by the bank. For example, bank bonds corresponding to bank letter-of-credit supported VRDOs would derive their rating solely from the long-term rating of the VRDO's underlying obligor, not the bank. Ratings for bank bonds corresponding to insured VRDOs would be based on the higher of the insurer's financial strength rating or the long-term rating of the VRDO's underlying obligor, assuming the insurance policy survives the bank's purchase of the obligation. If the insurance policy does not apply to bank bonds, then the bank bond rating would be based on the long-term rating of the VRDO's underlying obligor.
Assignment of the bank bond rating is done in conjunction with a review of the obligor, considering an actual or potential tender of bonds to the bank, the burdensome aspects of which generally include a ramp-up in the interest rates applicable to the bank bonds and possibly an accelerated repayment of principal following a cure period. The effect of these and other negative factors on the obligor's long-term creditworthiness would be assessed based on a number of considerations, including the materiality of bank bonds and VRDOs to total debt, the cure period, interest rate levels, and the obligor's access to alternate sources of liquidity support and to the long-term capital markets.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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