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Muni Swaps Gone Awry: How Issuers are Managing Recent Risks of Swaps Seattle, WA May 7, 2009

National Federation of Municipal Analysts 26th Annual Conference. Muni Swaps Gone Awry: How Issuers are Managing Recent Risks of Swaps Seattle, WA May 7, 2009. Moderator : Akiko Mitsui, CFA, Senior Analyst, Vanguard Panelists: Tom Hemmings

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Muni Swaps Gone Awry: How Issuers are Managing Recent Risks of Swaps Seattle, WA May 7, 2009

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  1. National Federation of Municipal Analysts 26th Annual Conference Muni Swaps Gone Awry:How Issuers are Managing Recent Risks of SwapsSeattle, WAMay 7, 2009 Moderator: Akiko Mitsui, CFA, Senior Analyst, Vanguard Panelists:Tom Hemmings Chief Financial Officer, Colorado Housing Finance Authority John H. Augustine Managing Director, Higher Education, Academic Medical Center and Non Profits Finance Group,Barclays Capital Lisa Kreiling, CFA, Senior Municipal Bond Analyst, PNC Capital Advisors

  2. A common floating-rate to fixed rate swap diagram Receives 67% of LIBOR Borrower Swap Dealer (Counterparty) Pays FIXED “swap rate” Pays SIFMA Net borrower interest cost: Pays fixed swap rate plus (or minus) the difference between SIFMA and 67% of LIBOR Mark-to-market value of swap (borrower): PV of (Swap payments at current fixed swap rate minus swap payments of actual fixed swap rate) Variable Rate Debt

  3. Some risks of swaps • Counterparty risk – risk that swap counterparty will default on its obligations • Termination risk – risk that swap will be terminated prior to maturity; if insured swap, may be related to ratings of swap insurer • Basis risk – risk of mismatch between floating rate received from the swap and the floating rate paid on bonds • “Risk” of collateral posting – mark-to-market value of swap exceeds threshold amount, requiring posting of cash collateral

  4. NFMA Presentation May 2009

  5. CHFA History • Created by General Assembly in 1973 • Began operations in 1974 • CHFA is a self-supportingquasi governmental authority

  6. What CHFA Does • Builds Healthy Communities • Single Family Home Finance • Multi Family Rental Finance • Business Finance • Military Housing

  7. Types of Swaps • Non AMT • SIFMA +5 basis points (bp) • AMT • SIFMA +15 bp • Taxable • LIBOR +5 bp • Trigger • If LIBOR is less than 3.5% then SIFMA +5 bp, If LIBOR is greater than 3.5% then 68% of LIBOR

  8. Swap Basis Risk Example

  9. Interest Rate Swaps as of 12/31/08 • Outstanding notional of Single Family swaps is $1,605,985,000 • Outstanding notional of Multi Family swaps is $691,705,000

  10. Contact Thomas E. Hemmings Chief Financial Officer 303.297.7331 themmings@chfainfo.com

  11. National Federation of Municipal Analysts 26th Annual Conference Muni Swaps Gone Awry:How Issuers are Managing Recent Risks of SwapsSeattle, WAMay 7, 2009 Moderator: Akiko Mitsui, CFA, Senior Analyst, Vanguard Panelists:Tom Hemmings Chief Financial Officer, Colorado Housing Finance Authority John H. Augustine Managing Director, Higher Education, Academic Medical Center and Non Profits Finance Group,Barclays Capital Lisa Kreiling, CFA, Senior Municipal Bond Analyst, PNC Capital Advisors

  12. Municipal Investment Group Muni Swaps Gone Awry: How Issuers are Managing Recent Risks of Swaps What Should Analysts Do? NFMA Twenty-Sixth Annual Conference May 5-8, 2009 Lisa Kreiling, CFA, Senior Municipal Bond Analyst

  13. The Current Environment • How much attention have analysts paid to swap portfolios? • The Jefferson County example served as an early warning that swap transactions present more credit risk than previously thought • The marked-to-market value of swaps is increasingly turning against obligors, many of whom now have to post collateral • There are several examples recently that indicate that we must pay more attention to the “What if” scenarios

  14. Formal Management Plan Does the obligor have a formal swap management plan? • Counterparty Risk What is the financial health of the counterparty? What Analysts Should Consider When Assessing Swaps • Ratings Trigger Below what rating can the swap be terminated? • Swaps Lien Are payments a parity or subordinate lien on revenues?

  15. National Federation of Municipal Analysts 26th Annual Conference Muni Swaps Gone Awry:How Issuers are Managing Recent Risks of SwapsSeattle, WAMay 7, 2009 Moderator: Akiko Mitsui, CFA, Senior Analyst, Vanguard Panelists:Tom Hemmings Chief Financial Officer, Colorado Housing Finance Authority John H. Augustine Managing Director, Higher Education, Academic Medical Center and Non Profits Finance Group,Barclays Capital Lisa Kreiling, CFA, Senior Municipal Bond Analyst, PNC Capital Advisors

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