S&P Global Ratings withdrew ratings on bonds covered by three state intercept programs.

“We identified certain programmatic weaknesses for the three affected programs in New York, Virginia and Indiana that raise uncertainty as to whether the state will make full debt service payment consistent with our timeliness of payments criteria after a local entity defaults,” S&P said.

Monday's withdrawals affect one of two Indiana state intercept programs, the one with lower coverage, which lost its A rating.

S&P Global Ratings withdrew ratings for three state intercept programs. Bloomberg News

The ratings withdrawal impacts two Indiana bond issues. S&P also withdrew ratings on various New York and Virginia local government issues based on state aid intercept programs.

During the course of a recent review, S&P determined that it incorrectly applied its state credit enhancement programs criteria to these bonds without the enhanced provisions. These criteria specify that state support can enhance the creditworthiness of the underlying borrower only if that support, combined with the structural features of the program, is expected to result in full and timely payment of debt service.

In Indiana, S&P raised similar concerns over timeliness of payment in February when it placed the AA-plus rating of the state’s higher coverage intercept program on credit watch negative. S&P had flagged the rating after learning in a routine portfolio review that the program’s administration, overseen by the state treasurer, worked differently from the way the agency had understood.

In May Indiana passed legislation to address the agency’s concerns.

“The two Indiana state aid intercept ratings were governed by the same statute but they differed in terms of the bond provisions,” S&P said.

“The Indiana state aid intercept program with enhancements and rated AA+ with a stable outlook includes certain bond provisions that enhance the likelihood of payments being made before a local entity defaults. In our review, we determined that bonds under the lower-rated program did not have the same level of enhancements and bond document language that met our Timeliness of Payments criteria.”

“It comes down to two school districts with older bond documents with ambiguous language about how long the trustee has to address the situation with those school systems,” said the Indiana Finance Authority. “The state would become involved only if the trustees of the respective school districts indicated action is needed -- and it appears that the timing of that notification is ambiguous in the original bond documents.”

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