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In sharing the following information,
we hope to provide qualitative insights into the thinking
of our underwriters
so that you, our state and local government customers,
gain a better understanding of what drives credit decisions,
pricing, and structural suitability concerns from a lender’s
standpoint.
When evaluating a lease-financing request, we take into
consideration many factors, both qualitative and quantitative,
so that we can ascertain the strength of administrative
and managerial strategies and controls, and establish a
trend of financial performance over time. This helps to
put the financing request and the fiscal health of the
municipal borrower into proper context.
Further, our financial analysis involves much more than
just reviewing year-end financial statements which reflect
only a snap shot in time. We calculate numerous ratios,
and a range of other financial data, such as growth in
revenues and expenditures; the amounts and reasons for
interfund transfers; primary revenue sources and expenditure
items; the composition of assets and liabilities; and actual
financial performance relative to budget.
Principal among the many factors analyzed are the following:
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The
municipal borrower’s credit quality (inclusive
of financial strength) |
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The
municipal borrower’s recognition of lease payments
as debt within the then current fiscal year and its intent
to pay same |
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The
essentiality of the asset to be financed and other project
considerations; and |
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The
structural provisions of the lease financing. |
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Credit
Quality – Analysis begins with a general
credit assessment of the municipal borrower, taking
into consideration five major categories – debt,
economy, finances, management strengths, and the municipal
borrower’s willingness to pay. |
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Recognition
as Debt/Intent to Pay – Comparisons
are made for consistency with the municipal borrower’s
regular administrative approval and budgeting processes – recognition
of debt can be evidenced by the municipal borrower’s
treatment of the periodic obligations under similar
financing instruments in its audited financial statements;
the intent to pay can be demonstrated by how the municipal
borrower recognizes the financing in its authorization
and administration processes. |
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Essentiality/Project
Considerations – The
function that a particular asset will serve is a key
element in the credit analysis of lease-financing and
covers a broad spectrum from the “very essential” to
the “very useful to have”. The goal is
to ascertain the likelihood of non-appropriation in
light of the essentiality of the asset being financed,
and to apply a corresponding credit score and interest
rate based upon the perceived risk of non-appropriation
for the particular financing. The more integral the
asset is to the core functions of a government, the
less likely it is that the government will fail to
appropriate funds to repay the periodic obligations
which will become due within the next fiscal year.
We ask ourselves questions which take into consideration
a variety of scenarios,
which include:
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Will
the asset wear out over time? |
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Is
the asset being used in a proven and customary manner? |
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Will
the asset be vulnerable to new innovations or technological
obsolescence within the desired term of the financing? |
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Is
the asset being used in a proven and customary manner? |
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A
comment about Technology Risk – Technology
Risk is an inherent factor in the lease of technologically
driven assets, such as computing, telecommunications,
and copier equipment. Customarily, when high-technology
equipment is involved, amortization schedules are
kept appropriately short to offset this risk as it
relates to non-appropriation. |
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Structural
Suitability Considerations – The desired
structured is evaluated with consideration given
to the following criteria:
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Length
of Lease – the lease term should not extend beyond
the useful life of the property
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Equity
Ownership – is equity built up proportionately as payments are made over the financing term, which Increases the likelihood of continuing appropriations, or are payments made for the rental or use of the asset over time.
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Capital
Contributions – Is a down payment being made which demonstrates the municipal borrower’s commitment to the project and encourages the organization to keep annual rent payments current so as not to lose the contributed capital.
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Triple Net – is the municipal borrower assuming costs for taxes, insurance, and maintenance.
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