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 Surety Agreement Many issuers have elected to fund debt service reserve fund requirements with surety policies issued by monoline insurance companies (“Traditional Surety”) instead of cash. This funding of the requirement with a Traditional Surety has exposed issuers to various risks (refer to discussion of this topic:” Cash Funded Reserves versus Surety“). Sound Capital has developed an alternative funding mechanism with a Forward Purchase Agreement (“Surety Delivery Agreement”) which provides all of the benefits associated with a Traditional Surety, but provides significant structural enhancements. Structure Provider would enter into a Surety Delivery Agreement for which a single upfront payment (“Premium”) would be made to the Provider by the Issuer for the right to receive the following a collateralized surety in lieu of a cash funded reserve. Pursuant to the Surety Delivery Agreement, the Provider would deliver a security every six-months which mature on or prior to the next bond payment date. At the final term of the contract the issuer makes returns the collateral to the Provider Benefits The Surety Delivery Agreement provides the same benefit as a Traditional Surety, namely the reduction in par amount of bonds issued, and other benefits which compare favorably to the Traditional Surety. There is significantly less exposure to counterparty risk with the Surety Delivery Agreement structure. Unlike the Traditional Surety, which would require another funding of the reserve requirement upon the occurrence of a provider downgrade below AAA under most documentation, the Surety Delivery Agreement would not create a condition wherein a downgrade of the provider results in the need to once again fund a reserve. In addition, the issuer assumes the short term credit risk of the investment delivered (Treasuries, Agencies or Commercial Paper – determined at the election of the issuer when entering into the contract). The Surety Delivery Agreement is also transferable to a refunding transactions reserve fund, unlike many Traditional Surety’s which terminate upon a refunding. Therefore, the cost of this structure would be a known, single upfront fee for the term of the contract. On the other hand, Traditional Surety documentation usually forces a termination upon a refunding. Historically, insurers have only provided suretys on issues they have insured. Therefore, not only would an issuer have to pay a second surety premium when refunding, but today they are not even sure they will be able to procure a surety at that time because either (a) there are no AAA insurers, (b) the economics of insuring the bonds do not justify purchasing the insurance, (c) the insurer elects not to provide a surety due to a variety of reasons (i.e.: issuer credit deterioration) or (d) the economic cost of the surety exceeds the cost of cash funding. |
