Reducing Borrowing Cost through the use of Private Placement Debt. Presented by:

1. Reducing Borrowing Cost through the use of Private Placement Debt. Presented by: Mike Diehl - SunTrust Bank 850-435-1286 mike.diehl@suntrust.com Doug Dillon - SunTrust Leasing Corp. 410-307-6640 doug.dillon@suntrust.com

2. Agenda The Debt Issuance Process • The Debt Issuance Process • Overview of Professionals Involved • Phase I: Project Identification • Phase II: Analyze Available Funding Options • Phase III: Determine Financing Type and Structure • Phase IV: Post Financing Requirements

3. Overview of Professionals Involved The Debt Issuance Process • Financial Advisor A consultant who advises the issuer on matters pertinent to the bond issue, such as structure, timing, marketing, fairness of pricing, terms and bond ratings. • Bond Counsel/Disclosure Counsel Bond Counsel. An attorney retained by the issuer and is responsible for drafting the ordinance, resolution, indenture, loan agreement, other financing documents authorizing the issuance of the bonds or notes as well as the other documents necessary to issue the debt. Bond counsel’s primary responsibility is to help structure the transaction so that it can render an unqualified opinion to the issuer that the interest on the bonds or notes are exempt from federal income taxation. Disclosure Counsel. An attorney retained by the issuer to assist in drafting any necessary disclosure documents and to provide a 10b-5 opinion stating that no false or misleading statements were made in the offering documents. Also assists the issuer in complying with SEC rules regarding continuing disclosure. Small issues and bank loans may qualify for exemptions under the rules requiring continuing disclosure and disclosure counsel may not be necessary if no public offering is made. • Credit Enhancement/Letter of Credit Providers Organizations such as banks and insurance companies that lend their higher credit quality for a fee and ensure debt service payments to bondholders. 1

4. Overview of Professionals Involved (Cont’d) The Debt Issuance Process • Credit Ratings Agencies Organizations that evaluate the credit quality of a debt instrument and assign ratings. • Underwriter/ Lender Underwriter. A dealer which purchases a new issue of municipal securities for resale. The underwriter may acquire the securities by either competitive or negotiated sale. A consultant who advises the issuer on matters pertinent to the bond issue, such as structure, timing, marketing, pricing, terms and bond ratings. Lender. A bank or other financial institution which purchases municipal warrants, notes, or loans for it’s own account or loan portfolio. These transactions are usually in the form of direct “private placements” and are not registered or offered for resale. • Trustee/Paying Agent A financial institution with trust powers which acts in a fiduciary capacity to facilitate the collection, escrow, and distribution of funds for the benefit of the bondholder. The Paying Agent tracks ownership of the bonds and coordinates the process of bond payments for the debt issuer to the bondholder. 2

5. Phase 1: Project Identification The Debt Issuance Process • Capital Planning Process • Community/Political Input for project needs • Projects identified are prioritized based on input • Staff drafts initial Budget & Capital Improvement Plan • Governing Body approves Capital Improvement Plan 5

6. Phase 2: Analyze Available Funding & Security Sources The Debt Issuance Process • Pay as you go and cash reserves • Grants • Governmental sponsored funding programs • State Revolving Loan Fund • US Rural Development Grant/Loan • Security Sources • General Obligation Bonds • Can be issued for any public purpose • Secured by issuer’s full faith and credit • Usually the most desirable from creditor’s perspective and as a result; attracts the lowest interest of borrowing 7

7. Phase 2: Analyze Available Funding & Security Sources (Cont’d) The Debt Issuance Process • Revenue Backed Sources • Enterprise Fund Revenues (Water/Sewer/Electric) • Usually pledged to support capital projects associated with specific enterprise • Very desirable on essential service type enterprises (water/sewer/electric) • Requires borrower to establish a rate covenant in order to produce net revenues to achieve a target debt service coverage (typically in the range of 1.1 – 1.25) • Additional debt test usually required • Sales Taxes • Elastic revenue stream that is subject to volatility based on economic conditions • Because of potential volatility, additional bonds test typically set at a higher target that more predictable revenue streams such as enterprise revenues 9

8. Phase 2: Analyze Available Funding & Security Sources (Cont’d) The Debt Issuance Process • Special Revenue Pledges • Special Assessments • Designed to fund project to benefit affected property owners • Breadth and diversity of affected property owners extremely important • Assessments and ad valorem taxes relative to assessed value considered • Revenue is more predictable if collected on tax rolls • Appropriation Only • Leases • Normally will give Lessor the right to retrieve asset financed in the event of non appropriation 10

9. Phase 2: Determine Financing Type and Structure The Debt Issuance Process • Fixed Rate vs Variable Rate • The interest cost of fixed rate debt is set at closing and does not fluctuate with changing market conditions. • The interest cost of variable rate debt will fluctuate periodically as market conditions change (daily, weekly, monthly, etc.). • Having a portion of your debt portfolio as variable rate can provide a natural hedge with invested assets (i.e. in a rising interest rate environment the debt service costs would increase, but interest income on invested assets would also increase). • Interest Rate Hedge Agreement (Swap) • Commonly used to effectively fix variable rate debt. • May result in a lower all in cost that traditional fixed rate debt. • Used to lock an interest rate on a forward basis • May be subject to basis and/or tax risk. • Economically non advance refundable. 12

10. Phase 3: Determine Financing Type and Structure (Cont’d) The Debt Issuance Process • Debt Service Structure • Level: Most conservative structure with debt service payments being level throughout the term of the financing. • Wrap: Debt service payments are wrapped around existing obligations to create a level structure of all parity obligations. • Bullet: Often used for short to intermediate term financing in anticipation of a permanent funding source (i.e., proceeds from sale of assets; new or increased revenue sources; contributions or grant funding; long term financing). 13

11. Phase 3: Determine Financing Type and Structure (Cont’d) The Debt Issuance Process • Type of Debt - Bonds Market or Bank Loan? • Warrants/Bonds • Very efficient for longer term non bank qualified transactions • Can accommodate innovative and creative financial solutions beneficial to the issuer • High cost of issuance vs. private placement • Debt rating and/or credit enhancement (bond insurance or bank letter of credit) required • Risk of future changes in tax laws passed in investors (i.e., no “gross up” language) • Sold either competitively or negotiated • Continuing disclosure required after bonds are sold • Flexible call features 14

12. Phase 3: Determine Financing Type and Structure (Cont’d) The Debt Issuance Process • Bank Loan • Does not require that transaction be rated or insured • No offering documents or registration required • No underwriter involvement required • Banks usually do not require a reserve fund or surety bond • Disclosure usually limited to receipt of CAFR and budget • Lower cost of issuance (typically limited to bond counsel) • Very efficient if under 20 years in maturity • The purchase of tax-exempt loans by non-bank subsidiaries and affiliates of commercial banks debt has resulted in more efficient “non-bank qualified” pricing • Because you are dealing directly wit the sole purchaser of the entire obligation, the transaction can be highly customized. • Interest rate is known and set prior to closing • Longer term transactions (20 years+) are typically less desirable • Level of municipal finance expertise varies. Larger banks have dedicated professionals; smaller institutions may not. 15

13. Phase 5: Transaction Management The Debt Issuance Process • Develop Financing Timetable • Procure other finance team members (trustee, paying agent, verification agent, escrow agent, printer, etc.)* • Draft and Review Financing Documents (Bond Resolution and POS/OS)* • Develop Rating Agency Presentation and Receive Bond Ratings* • Procure Bond Insurance* • Finalize Financing/Borrowing Documents • Obtain Final Board/Commission Approval for Financing • Select Sale Date* • Distribute Financing Documents to Capital Markets* • Price/Market Bond Offering* • Close Financing/Receive Project Funds * bond market only 16

14. Phase 6: Post Financing Requirements The Debt Issuance Process • Investment of Bond Proceeds (Investment Portfolio, Investment Agreement) • Conduct Post-Sale Review • IRS Spend Down Provisions • Arbitrage Rebate • Continuing Disclosure Requirements • Monitor Legislative and Regulatory Changes • Monitor Refunding Opportunities 17