Private Equity Credit Enhancement Program Glossary
An agreement between an issuer of bonds and a trustee, on behalf of the bondholders, setting forth the terms of the bonds.
Noncancellable insurance purchased by the issuer from a monoline bond insurer pursuant to which the insurer promises to make scheduled payments of interest and principal on a bond issue if the issuer/obligor fails to make timely payments. When the bond issue is insured, the investor relies upon the creditworthiness of the insurer rather than the issuer.
Collateralized Letter of Credit
A letter of credit issued by a fronting bank, which has pledged AAA-rated collateral to CalSTRS, in order for CalSTRS to issue a confirming letter of credit. CalSTRS is the beneficiary of the pledged collateral. This structure is typically used when the fronting bank has a low credit rating or no credit rating.
Short-term debt obligations commonly maturing in 270 days or less.
Confirming Letter of Credit
A letter of credit issued by CalSTRS that confirms a fronting bank’s letter of credit. The CalSTRS confirming letter of credit is drawn upon in the event the fronting bank fails to pay upon a draw. CalSTRS is in the second loss position. The credit rating of the bond issue is based on CalSTRS’ rating.
A financial institution, such as a bank or a pension plan such as CalSTRS, that provides credit enhancement by issuing a letter of credit, which guarantees to investors that principal and interest payments will be made as scheduled, or a liquidity facility which provides liquidity support for the bond issue. When the bond issue is credit enhanced, the investor relies upon the creditworthiness of the credit enhancer rather than the issuer.
Letter of Credit
An instrument issued by a bank or pension plan that unconditionally promises to make debt service payments and provide liquidity support on a bond issue up to a stated amount for a specified period upon receipt of proper notice in the event of a default. Letters of credit are usually required for variable rate bond issues.
This form of credit enhancement is an availability to purchase securities under specific situations. The bonds or commercial paper that this facility supports may be remarketed on a daily, weekly or monthly basis. There is a need to have their marketability guaranteed. If there is a failed remarketing, CalSTRS may be required to “purchase” these bonds and receive pre-agreed interest payments. In the case of commercial paper, this commitment may be revocable under certain circumstances.
An insurer that writes only financial guaranty insurance.
The obligor is the beneficiary of the funds raised by the bond issuance and is responsible for paying off the bonds.
An agreement between the credit enhancer and underlying obligor setting forth the terms and conditions of the letter of credit.
Standby Letter of Credit
A letter of credit that is drawn upon only if there are insufficient funds from other sources.
Standby Bond Purchase Agreement
An agreement between the credit enhancer and underlying obligor setting forth the terms and conditions of the liquidity facility.
A financial institution with fiduciary responsibilities to bondholders (investors) to make principal and interest payments as well as administer all other aspects of the bond indenture.