February 2, 2011

1. Debt 2: Planning and Bond Sales: Accessing The Debt Market Marketing and Pricing Presenters from Public Financial Management, Inc. John H. Bonow Todd Fraizer Managing Director Managing Director bonowj@pfm.comfraizert@pfm.com C D I A C Oakland, California February 2, 2011

2. Overview • Method of Sale Alternatives • How bonds from various sectors are priced • Pricing Data, Essential Market Information and the Pricing Process • Understanding Investors and the Unique Perceptions of Each Credit in a Post-Bond Insurance World • Market Access Challenges and Related Considerations • Techniques to Access the Markets to Best Satisfy Financing Objectives

3. Marketing a Fixed Rate Bond Issue • Methods of Selling Bonds • Competitive • Negotiated • Hybrid Competitive • Negotiated for Retail-Only Order Period • Competitive sale for unsold balances • Private Placement

4. How Bonds are Competitively Sold • Issuer and financial advisor structure the bond issue and take bids from syndicates of investment banks. • Underwriters bid interest rates by maturity and a total purchase price to determine the lowest True Interest Cost (“TIC”). • Winning bidder then sells the bonds, often with a markup, to retail and institutional investors. • Generally used for General Obligation (G.O.) bond sales, enterprise fund revenue bonds, and strong credits

5. Competitive Sales – The Process • Effective outreach to the universe of potential bidders increases the number and quality of bids • Knowledge of investor preferences results in a “friendly” structure and bidding parameters COMPETITIVE SALE Create Notice of Sale Issuer & Financial Advisor pre-market the SALEto underwriters Underwriters work-up & submit bids Issuer & Financial Advisor evaluate & accept lowest conforming bid (TIC)

6. How a Negotiated Sale Works • Bonds are sold to one investment banking syndicate. • Interest rates and the purchase price result from negotiations between the issuer/financial advisor and the underwriter. • The investment banking syndicate pre-markets the bonds to retail and institutional investors. • Investors submit orders and the investment bank offers to underwrite (purchase) the entire bond issue. • Generally used for large, complex or weak credits. • Most common type of bond sale method for health care and higher education transactions.

7. Negotiated Pricings – The Process • Where does the Issuer acquire the knowledge to negotiate the best outcome (the lowest, risk-adjusted cost of capital)? • More on that later… NEGOTIATED SALE Issuer hires underwriting syndicate Syndicate pre-markets BONDS Issuer, Financial Advisor & Senior Underwriter negotiate pricing scale (Pre-pricing call) Pricing wire released & bonds offered directly to investors Underwriting syndicate takes orders Final price negotiated (Pricing call)

8. How a Hybrid Competitive Sale Works • An investment banking syndicate and a selling group take orders from retail investors over one/more days. • Interest rates and purchase terms are negotiated for the bonds sold to retail. • Remaining/unsold bond balances are then sold via a competitive sale (usually the following day). • Underwriters bid for the remaining bonds. • Maximizes access to retail investors. • Preserves competitive sale benefits.

9. How a Private Placement Works • Bonds are purchased by a Bank or another qualified investor but are not typically resold to the general public (e.g., retail investors). • Interest rates and the purchase price result from direct negotiations between the issuer/financial advisor and the purchaser. • An investment bank may not be used. • Generally used for weak or very complex credits

10. Choices when Selling Bonds • Can the same financing goals be accomplished with any method of sale/placement?

11. Competitive vs. Negotiated

12. Pricing Bonds from Different Sectors • All Bonds are not created equal (even those with identical credit ratings) • Municipal • General Obligation Bonds • Essential Service Revenue Bonds • Utilities and Special Purpose Districts • Water, Wastewater, Electric, Stormwater, etc. • Private, 501(c)3 Borrowers • Health Care • Higher Education • Industrial Development, Land-Secured, RDAs

13. Sector Differences with the Same Ratings • Investors perceive different levels of risk between sectors. • General ratings-driven yield indications are inadequate indicators of pricing levels. • Comparable issue analysis and trade data will help develop an informed pricing opinion.

14. Essential Pricing Information Elements • General market conditions • Interest rates • Supply • Secondary market activity (net buying/selling) • Sector-specific conditions (e.g., health care, RDAs, assessment districts) • Pricing performance of comparable transactions (rating, sector, size, state) • Prior issuer-specific pricing results (primary market) • Recent secondary market trades for the issuer • Does the issuer have access to this information?

15. Municipal Market: Supply/Demand Impact • Overall supply & demand factors still drive the market • Low supply levels combined with consistent demand pushed rates lower throughout the summer of 2010 • Credit spreads tightened as investors ventured out the credit curve in search of yield throughout the summer of 2010 • Last quarter of 2010, supply-demand dynamics shifted, putting upward pressure on rates and spreads through year-end • Sustained heavy supply calendar through December 2010 • Reduction in demand with large mutual fund outflows since November

16. Demand – Mass Exodus from Munis • Since November 1st, the municipal market has seen $30B flow out of mutual funds • The municipal market saw net inflows of $32B in the first ten months, but gave nearly all of it back in just ten weeks

17. Recent Market Rate Movement Late 2010 / Early 2011 AAA MMD Rate Movement • Dramatic movement in rates from November 1st through end of the year • Supply/demand dynamics have put upward pressure on rates • Unrelenting media attack and political rhetoric Source: Bloomberg & TM3

18. Recent Market Rate Movement Mid-Late January AAA MMD Rate Reversal Source: Bloomberg & TM3 • Low supply has helped keep rates in check • Recent relative-value (“cross-over”) buyers have helped reverse course

19. Credit Uncertainty Persists Credit Spread Movement (since 2008) Source: TM3 * 10 Year Maturity • Low yields on high-grades pushed investors out the credit curve in search of yield throughout 2010 • 2010 year-end saw a small spike in credit spreads at the end of 2010

20. Issuer-specific Secondary Market Trades • Issuers can look at the trading performance of prior bond issues to assess demand and yield ranges. Secondary Market Trading Activity for Select Parity Maturities from the Same Issuer

21. Credit Analysis has Changed • Prior to 2008 municipal credit analysis was often homogenized • Bond Insurance used for a majority of transactions • Underlying bond ratings were not emphasized • Credit analysis varied by investor • The loss of bond insurance has put a strong focus on credit/risk analysis • Rating agencies are hyper-aware of their conclusions • Investors undertake their own credit review • Issues with the same credit ratings are differentiated • (example) Aa3 rating health care ≠ Aa3 general obligation

22. Outreach to Investors is Important • Securing Investment Grade Ratings does not Ensure a Good Pricing Result • Skepticism about the “accuracy” of credit ratings • Press releases add to herd mentalities • “Companies are in trouble!” = buy munis or treasuries • “Municipal defaults will expand!” = buy stocks • Develop an investor relations program for each credit • Find out who typically owns your kind of bond and who actually owns your bonds • Expand the demand base for your credit

23. Know Who Owns Your Bonds (and Why) • Concentration among a few investors is not unusual • Creates opportunities to find an investors in times of market difficulty • Helps focus the effort to broaden demand • Comparison of actual holders to “typical” holders is important • Why does not investor X own MY bonds?

24. Market Access Challenges • Industry-wide threats of default • International unrest • Net selling among mutual bond funds • Fear on behalf of retail investors • Federal and state budget uncertainty • Persistent confusion on the direction of inflation • Sector-specific concerns • Redevelopment Agency revenue, health care reform, water supply, etc.

25. Accessing the Markets to Satisfy Financing Objectives • Be clear on financing objectives • Minimum proceeds goal? • Cost of capital target? • Determine flexibility in the plan of finance • Are long amortizations essential? • Can short-term maturities be managed? • What investors are buying and what are they buying? • Consistent with objectives, tailor the offering to what investors want/demand.

26. Nuts and Bolts of a Negotiated Sale

27. Underwriting Spread Components

28. Priority of Orders

29. Order Period(s)

30. Price Talk

31. Pricing Lingo Bump To add a basis point in price Cut To subtract a basis point in price 5 handle 5%-5.99% coupon (interest rate) Blocks Size of maturity or order Going away order Order to a “buy and hold” investor Tighten Lower the yields Loosen Raise the yields Nickel 5 basis points Sloppy Prices are too cheap Basis point (“bip” or “tick”) 1/100 of 1% (i.e., change 0.05% = a 5 bip adjustment)

32. Preliminary Pricing Thoughts – Retail

33. Retail Orders • Syndicate and selling group members supported the shorter maturities in the transaction. • To focus potential demand, only one term bond was offered to retail. • Note: adjusting for oversubscriptions, $100.135M of bonds (before adjustments) are left after the retail-only order period.

34. (Initial) Preliminary Pricing Wire – Institutional • Underwriter desires to avoid risk and proposes to “term up” the longer-dated Serial bonds. • Maturities with some retail demand but remaining par have been “bifurcated.” • Coupon structure reflects institutional investor desires (e.g., premium) • Takedowns have been lowered to institutional levels.

35. (Revised) Preliminary Pricing Wire – Institutional • Slope of yield curve (e.g., 0.76% from 2023-2030) would result in a higher weighted cost if the 2026-2030 maturities were combined. • Maintaining Serial bonds at original maturities is advocated.

36. Primary (Institutional) Orders • Most maturities were priced well. • Certain maturities (2017 and 2042) saw significant order flow and are the focus of a favorable repricing. • Maintaining the longer serial maturities (with Member support) helped to “ride the yield curve.”

37. Verbal Award

38. Pricing Bingo [To be used on pricing calls with the underwriting desk]