Managing Municipal Debt in Today’s Market

1. August 13-17, 2011 Managing Municipal Debt in Today’s Market NASACT 2011 Conference Alex Wallace Managing Director U.S. Bancorp Municipal Securities Group

2. Municipal Issuance Municipal Supply* Tax-Exempt Rates Below Historical Averages* 5yr MMD 10yr MMD 30yr MMD Source: SDC *2011 YTD 1/1 - 8/1 Source: TM3 *Comparison of 8/11/2011 AAA MMD v. 10-yr Historical MMD averages Municipal Issuance by Mode* Municipal Issuance by Market Access* Source: SDC *2011 YTD 1/1 - 8/1 Source: SDC *2011 YTD 1/1 - 8/1

3. Municipal Market Issues Coming into 2011

4. 2011 Municipal Issuance Source: Thompson Reuters

5. Municipal Defaults (7/2009 – 8/2011) Source: Municipal Market Advisors *GO/ Wtr/Swr/ Sales Tx

6. Municipal Yield Curve Short Term - Short-term: • MMF’s • Corporations • Banks - Intermediate: • Intermediate Bond Funds • Retail • SMA’s - Long-term • Bond Funds • Insurance Companies • Bank Trusts • Hedge Funds (Arbs. / TOBs) Long Term Source: TM3

7. Historic Long-Term Rates High Grade Municipal Index 30-yr Spot (Jan 1990 – Present) LONG TERM MARKET 20 year UST Average Sept., 15, 2008 Lehman Brothers Bankruptcy filing 20 year MMD Average MMD Historic Low UST Historic Low

8. Long-term Ratios: MMD and US Treasury 143% 128% 107% 99% August 1, 2011: 105% 85% April 15, 2009: 1st BAB Deal Jan. 1, 2011: ARRA Expires

9. Credit Spreads - Shorter duration - Current coupons not attractive - Use of web-based portals such as Buy___Bonds.com - Use of Mini-Bonds Source: TM3

10. Municipal Bond Fund Flows YTD 2011 $22bn Outflows Jan. 1, 2011

11. Historic Short-Term Rates Short Term Indices: SIFMA & LIBOR (Jan 1990 – Present) LONG TERM MARKET

12. Short-term Ratios: SIFMA and LIBOR

13. Variable Rate Issuance Crossover Buyers Cross-over Buyers Include: • Corporations • Taxable Funds • Foreign Banks • Hedge Funds • Insurance Companies 13

14. Money Market Fund Flows Money Market Fund Assets and SIFMA Max MMF Assets: $528bn (8/19/08) MMF Assets Today:$301bn (7/26/11)

15. Municipal Market Credit Expirations - Fixed Rate Bonds - Direct Placements - Floating Rate Notes Source: Bond Buyer

16. Alternative Structures

17. Alternative Structures (cont’d) Source: TM3 As of 8/4/2011

18. Impact of US Treasury Downgrade • Increased fears downgrade may force already fragile recovery into “double dip” • Initial market reaction counter-intuitive • “Flight-to-quality” to Treasuries (Despite downgrade, still seen as “safe”) • 10yr Treasuries dropped to its lowest level since Jan. 2009 • Long-term impact on municipal market unknown • Possibility credit spreads may widen • Certain sectors have already been affected and will remain under pressure • GARVEES • Housing Securities • Hospitals • Build America Bonds may be exposed to potential timing and subsidy-reduction risks • Increased uncertainty has dampened primary issuance to approximately $2.8B for the week, the slowest August week since 2003

19. Emerging Trends • Issuer confidence • Absolute rate levels • Ratios • Counterparty risks (credit enhancement, swaps, and remarketing) • Investor base dynamics (cross-buyers, money and bond fund flows) • Synchronizing disclosure in the public and private markets (especially on parity debt) • New product development • Basel III implementation • Issuers’ debt mix and methods of sale • Continued availability of alternative debt instruments • Floating Rate Notes • Direct Purchases • Put Bonds • Potential return of BABs? • Increases in municipal downgrades / defaults

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