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Liquidity Assessments

In some cases, creditworthy tax-exempt debt issuers with substantial liquidity have found it cost-effective to use their liquid assets to provide liquidity support for Commercial Paper (CP) and Variable Rate Demand Obligations (VRDO) tender obligations as an alternative to bank liquidity facilities – including lines of credit and standby bond purchase agreements – that have traditionally been used to provide liquidity support. Standard & Poor’s continually receives inquiries from tax-exempt issuers – including states and local governments, housing agencies, universities, hospitals and other not-for-profit entities, regarding the use of their own assets as a substitute for bank liquidity facilities.

Liquidity Assessments, which evaluate an issuer's ability to provide liquidity support, were introduced in 2000. Issuers have indicated to S&P Global Ratings that bank liquidity facilities are often expensive and that they can be cumbersome to administer. Since the introduction of liquidity assessments to the tax-exempt market four years ago, S&P Global Ratings has provided liquidity assessments to all types of tax-exempt issuers – providing an independent view of their ability to use their own liquid assets as liquidity support.

What is included in an S&P Global Ratings’ Liquidity Assessment?
An S&P Global Ratings’ Liquidity Assessment includes the following:
• An analysis of the liquidity, market risk, and volatility of the issuer’s current cash, fixed-income portfolio holdings, and liquid assets,
• An assessment of management’s plans to provide cash, as outlined in its “Liquidation Letter” including a current maximum dollar assessment of the issuer’s ability to raise cash or provide liquidity on its own, and
• A review of the issuer’s investment policies and risk-management procedures and operations.

Issuer requests the “Liquidity Assessment” – The issuer files a formal, written request to S&P Global Ratings, providing the required information as indicated below under review and assessment.

Review and Assessment – S&P Global Ratings’ analysts review the information, conduct management meetings with the issuer’s investment personnel and/or sub-advisers, and issue the assessment.

The information that S&P Global Ratings evaluates for a Liquidity Assessment includes:
• Biographies of treasury staff & portfolio management staff,
• Liquidation procedures letter,
• Portfolio holdings report,
• Month-end balances of fixed-income portfolios, and
• Investment policy related to fixed-income portfolios and other eligible assets.

Surveillance – To maintain an ongoing assessment of the issuer’s liquidity profile, S&P Global Ratings monitors key information related to the fixed-income portfolios, including the available liquid assets, on a monthly basis. S&P Global Ratings also conducts an annual management review to identify any changes in management, policy, strategy, and operations.

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