Public Finance: U.S. Third Party Liquidity Facility-Supported Variable Rate Demand Obligation Rating Methodology

Executive Summary

This document describes KBRA’s general rating methodology as it pertains to variable rate demand obligations (VRDOs) and commercial paper (CP) issued by tax supported and revenue supported municipal credits and financial guarantors. In these instances, an external third party (commercial bank or other financial institution) provides a conditional liquidity facility to support the demand feature (optional or mandatory tender) or CP roll-over. These facilities are only drawn upon in the event of a failed bond remarketing or inability to roll-over CP debt. VRDOs are long-term securities, with interest rates that periodically reset (e.g., daily or weekly) based on an index, and a demand feature that allows the investor to put or tender the Bonds at par plus accrued interest. These securities allow municipalities to finance long-term capital projects at short-term interest rates, thus potentially reducing the cost of capital. CP is a short-term obligation, with maturities…