Watchful Eye: Impact and Changes in the MUNI Market over the Years

1. A watchful eye - how is the MUNI market impacted by this and how has it changed over the years?

2. Securities offered through Mid Atlantic Capital Corp (MACC)Member FINRA & SIPC.

3. DRL Group LP is a branch office of and Securities are offered through Mid Atlantic Capital Corporation (MACC), a registered Broker Dealer, Member FINRA/SIPC. Confidentiality Note: The information contained in this e-mail and in any attached files is confidential and intended for the internal use of the individual named in the email. This information should not be duplicated or distributed unless an express written consent is obtained from DRL Group LP in advance. If you are not the intended recipient, please notify me immediately and delete any attachments. Thank you. The information set forth herein has been obtained from sources deemed reliable, we do not guarantee its accuracy, completeness, or fairness. We have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. You should discuss any legal, tax or financial matters with the appropriate professional. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The opinions and ideas of this piece are those of The DRL Group and do not necessarily represent the opinions of MACC or its affiliates. Bonds are subject to market and interest rate risk if sold prior to maturity.  Prices and availability may change at any time without notice. Insured bonds are subject to the claims paying ability of the insurance company. Interest income may be subject to the Alternative Minimum Tax, state or local income tax depending on residence. Discount bonds may be subject to capital gains tax. Non-rated “NR” or below investment grade bonds, lower rated bonds, carry a potential risk of default and should only be considered by sophisticated investors. More information regarding specific bonds is available on the issuer’s Official Statement which may be obtained by visiting emma.msrb.org. The Official Statement should be read carefully before investing.

4. MUNI’s defined • Tax Free income - attractive to high net worth households • Various credit qualities having a direct impact on yield • Liquid security that can be used as a tool to reduce taxable income, leverage against and as a trading vehicle • Various maturities and call dates • Various coupons including 0% • Escrowed, Pre-re, Defeasance, Junk, High Grade and Small issues • Insured vs. Non Insured

5. Expectations of yields – discussions with accounts

6. Yield curves – is it worth to chase yield? flatter curve past 15 years

7. The Street What does a typical transaction look like? - Desks take risks while deploying capital. • Desk is entitled to make money • Capital is deployed daily, cannot get “hung up” on investing, desks are trading vehicles for the firm • Brokers deserve the mark up the fee that is charged. • Structure of the desk and BD can vary

10. Filters on the ECN’s - managing the Bid wanted items • Credit Ratings - define your structure and stick with it • Insurance - know the ones that are “good and bad” • Quantity - its all about deployment of capital • Call dates - can hurt you and your desk if not careful • State - focus on a region, getting to know it is critical • Coupon - understanding what makes the structure • IDC values - (InterContinental Exchange ICE) - important for retail buyers • Inventory levels - again, all about capital • Traders levels - does not always pertain to inventory levels

11. How has the bond market changed over the past 25 years? - The Blue Book • Electronic Trade Books – tied to the ECN’s • Dealers have the ability to buy and sell securities electronically to all counter-parties based on algorithm scans and programs as the customer sees fit (trading). • Open/Closed with your counter-party – why is this important and how do you stay “open”? • Efficient market as compared to an “inefficient market” – what does this mean and why you should be interested? Sloppy? • Transparency –both good and bad? How does this hurt liquidity? • Faster pace - there are deals however the desk has to have capital to commit while making the decisions instantly - (firm order coming for sale late in the day) • Regulatory requirements have increased significantly – time and trade, best execution, bid wanted items with multiple ECN’s

12. MUNI Flow – Sectors“Other” = opportunity zones

13. MUNI bid flow - maturities

14. Working with a client on the applicable percentage of MUNI’s should be in their account • How much volatility does the client have in their portfolios currently? • How much equity/private equity does the client own? • Liquid securities compared to illiquid - how much should you have in private equity? • What is the time horizon of the client? • Does the client understand the risks of MUNI bonds? (types of bonds and insurance as well as duration) • 45-55% of investable assets traditionally is allocated into High Grade MUNI’s • Is the client paying a management fee for their existing Fixed Income account? (not a bad thing, however high grade MUNI’s might not need this)

15. What are the challenges in todays markets for dealers? • Current Yield environment - yields are typically low, most retail believe yields are moving up. This has been the thought for that past 3 years. • Technology - the persons with the fastest technology wins. Shops are not hiring brokers, they are hiring IT people • Interest rate risk – rising rate speculation for years – don’t get caught in the “trap” of waiting – build the portfolio now, you will have bonds called – really? Yes you will have bonds called no matter what the rates are doing at that time. • Opportunity costs for retail – how do you address this? Retail “waiting for that next big spike in rates” • Staying disciplined – tons of news each day (China – Boarder Wall – Trump – Earnings) need to stay disciplined, a trading desk is NOT an investor, only a facilitator for trades. • Supply - 420 billion slated to be called/mature in 2019, 321 billion slated to be issued

16. Tax reform for 2017 – December • Advanced Refunding bonds - gone. 17.5% of the market of new issuance 56 million of bonds. How does this impact our markets? • Specified Activity bonds (stadiums, hospitals, parking garages and airports)- left in the bill as allowed financings, however much tougher to get done. • Issuance for 2019 will be light, we will work for you to find you paper that will meet your objectives • SALT (state and local taxes) will impact many (property tax deductions as well as itemized deduction) this will impact overall sales for MUNI’s as well as clients attitude towards taxable product.

18. Material events - how do they impact the MUNI markets and the trading desks? This data was extracted from Bloomberg. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Opinions expressed herein are subject to change without notice and the division, group, subsidiary or affiliate of Mid Atlantic Capital CorpInvestments, , which is under no obligation to update or keep the information current. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Mid Atlantic Capital CorpInvestments, accepts no liability for any loss or damage of any kind arising out of the use of this report. Please contact your tax advisor regarding the suitability of tax-exempt in your portfolio. Income from municipals may be subject to state and local taxes as well as the Alternative Minimum Tax. Corporate and Municipal securities are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. As with any security, there is an inherent market risk possibility as to principal if the security is not held to maturity. The bonds that are non-rated (NR) should be considered for investment by knowledgeable and sophisticated investors. Additional information will be made available upon request.

19. MUNI bond insurance – how does this impact other credits with the large issuance?

20. Bid Flow- - how does this impact the desk, capital and the client? This data was extracted from Bloomberg. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Opinions expressed herein are subject to change without notice and the division, group, subsidiary or affiliate of Mid Atlantic Capital CorpInvestments, , which is under no obligation to update or keep the information current. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Mid Atlantic Capital CorpInvestments, accepts no liability for any loss or damage of any kind arising out of the use of this report. Please contact your tax advisor regarding the suitability of tax-exempt in your portfolio. Income from municipals may be subject to state and local taxes as well as the Alternative Minimum Tax. Corporate and Municipal securities are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. As with any security, there is an inherent market risk possibility as to principal if the security is not held to maturity. The bonds that are non-rated (NR) should be considered for investment by knowledgeable and sophisticated investors. Additional information will be made available upon request.

21. A 29 Year Look Back At Buying Opportunities – traders need to identify these for clients and the firm This data was extracted from Bloomberg. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Opinions expressed herein are subject to change without notice and the division, group, subsidiary or affiliate of Mid Atlantic Capital CorpInvestments, , which is under no obligation to update or keep the information current. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Mid Atlantic Capital CorpInvestments, accepts no liability for any loss or damage of any kind arising out of the use of this report. Please contact your tax advisor regarding the suitability of tax-exempt in your portfolio. Income from municipals may be subject to state and local taxes as well as the Alternative Minimum Tax. Corporate and Municipal securities are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. As with any security, there is an inherent market risk possibility as to principal if the security is not held to maturity. The bonds that are non-rated (NR) should be considered for investment by knowledgeable and sophisticated investors. Additional information will be made available upon request.

22. The night of the election the 10 yr traded at a 1.70% Currently the 10T is trading around a ??? March of 2017 it was trading at a 2.63% Trying to time the market typically does not work. Trading desks buy on volume, current trends, economic news and the availability of capital Yields are “politically moved” and have been for the past year. Earnings typically are taking a back seat at this time. Trump– how has this impacted yields?

23. Fragmented market, buying less than a round lot ( 1 mm) could provide better liquidity and higher yields. Flexible approach – looking at all types of bonds that meet the objectives of the client. Traders must have a disciplined bidding process – with proper technology in place, the bidding process and the precision of bidding is significantly increased in efficiency. Risk management – capital levels, concentration levels in every account, bid flow and credit changes. Opportunities and how traders and clients can take advantage of them

24. Resources For Gathering Information On Municipal Bonds Information Used To Be Hard To Find • http://www.sec.gov/investor/alerts/municipalbonds.htm • http://emma.msrb.org/Home • Look for recent disclosures and price variations. • Know the difference between customer buy/sell and inter-dealer prices.