O i f M i i lOverview of Municipal Market Conditions

American Association of Port Authorities (AAPA)(AAPA)

N b r 18 2008November 18, 2008

JoAnne CarterManaging Director

Public Financial Management4350 North Fairfax Drive, Suite 580

Arlington, VA 22203-1636703 741-0175 www.pfm.com

Credit Crunch: Part 1

• Florida suspends withdrawals from LGIP

• Structured Investment

• Florida suspends withdrawals from LGIP

• Structured Investment

• JP Morgan and Fed bail out Bear Stearns

• MBIA and AMBAC

• JP Morgan and Fed bail out Bear Stearns

• MBIA and AMBAC• Structured Investment defaults increase

• Structured Investment defaults increase

• MBIA and AMBAC downgraded

• MBIA and AMBAC downgraded

• State of Connecticut, C d th SEC

• State of Connecticut, C d th SECS l AAAS l AAA

March ‘08March ‘07 Sept ‘07

Congress, and the SEC take action against the rating agencies

Congress, and the SEC take action against the rating agencies

• Several AAA insurers placed on negative outlook

• Several AAA insurers placed on negative outlook

March 08March 07 Sept 07

Dec ‘06 June ‘07 Dec ‘07 June ‘08

• Subprime losses top $400 billion

• Subprime losses top $400 billion

• Housing market stalls

• Subprime loan

• Housing market stalls

• Subprime loan

• Fed cuts 125 bps in 10 days

• Fed cuts 125 bps in 10 days

$400 billion$400 billion• Auction Rate

Bonds begin to fail• Auction Rate

Bonds begin to fail • July 11th – Federal Regulators seize IndyMac bank, largest ever thrift to

• July 11th – Federal Regulators seize IndyMac bank, largest ever thrift to

2

delinquency rates spikedelinquency rates spike

fail in the USfail in the US

Credit Crunch: Part 2

• September 15th –• September 15th –• Week of September

29th – Wachovia • Week of September

29th – Wachovia

September 7thSeptember 7th

Lehman Brothers files for bankruptcyLehman Brothers files for bankruptcy

announces purchase by Wells Fargo (not Citigroup)

announces purchase by Wells Fargo (not Citigroup)

S t b 17thS t b 17th• September 7th –Fannie Mae and Freddie Mac placed into conservatorship

• September 7th –Fannie Mae and Freddie Mac placed into conservatorship

• September 17th –The Reserve fund “breaks the buck,” price at 97 cents at close of business

• September 17th –The Reserve fund “breaks the buck,” price at 97 cents at close of business

September ‘08

• September 17th –• September 17th –• September 10th –• September 10th – September 17Fed forces AIG into liquidation

September 17Fed forces AIG into liquidation

• September 14th –Bank of America announced

• September 14th –Bank of America announced

September 10Lehman puts itself up for sale

September 10Lehman puts itself up for sale

• September 29th –Dow plunges 9% ; U.S. House fails to

• September 29th –Dow plunges 9% ; U.S. House fails to

3

acquisition of Merrill Lynchacquisition of Merrill Lynch

pass bail-out planpass bail-out plan

Credit Crunch: Part 2 (con’t)

• October 7th – Federal Reserves creates CP Funding Facility to

• October 7th – Federal Reserves creates CP Funding Facility to

• October 29 th –Federal Reserves cuts 50 bps

• October 29 th –Federal Reserves cuts 50 bps

O t b 3rd DO t b 3rd D

Funding Facility to buy CP from eligible companies

Funding Facility to buy CP from eligible companies

• October 13th – US • October 13th – US

50 bps50 bps

• October 3rd – Dow closes down 818 points for the week, its worst week in 7 years

• October 3rd – Dow closes down 818 points for the week, its worst week in 7 years

announces plan to invest a portion of $700 billion facility in preferred stocks of US banks

announces plan to invest a portion of $700 billion facility in preferred stocks of US banks

October ‘08• October 7th – Fitch

and Moody’s defer recalibration of

• October 7th – Fitch and Moody’s defer recalibration of

• October 4th – President signs Emergency

• October 4th – President signs Emergency

recalibration of municipal ratingsrecalibration of municipal ratings

• October 8th –Federal Reserve cuts Fed Funds

• October 8th –Federal Reserve cuts Fed Funds

4

g g yEconomic Stabilization Act of 2008

g g yEconomic Stabilization Act of 2008

cuts Fed Funds target rate 50 bpscuts Fed Funds target rate 50 bps

Demise of Triple-A Bond Insurers

Moody’s S & P FitchAmbac Baa1 AA WithdrawnAmbac Baa1

Watch DevelopingAA

NegativeWithdrawn

Assured Guaranty1

AaaNegative Watch

AAAStable

AAAStable

Berkshire Hathaway

AaaStable

AAAStable

Not rated

CIFG B3 B WithdrawnWatch Developing Developing Watch

FGIC B1Negative

BBNegative Watch

CCCEvolving Watch

FSA1 AaaNegative Watch

AAANegative Watch

AAANegative Watch

MBIA Baa1 AA WithdrawnWatch Developing Negative

Syncora2 Caa1Watch Developing

BBB-Negative Watch

Withdrawn

5

Data as of 11/14/2008.1. Pending acquisition of FSA by Assured Guaranty, announced 11-14-08.2. Formerly XL Capital.

Reduction in Triple-A Insured Paper

Total Insured Volume (New Issuance)Total Insured Volume (New Issuance)

$112,589110,000

120,000

$122,589

$89,761

$101,550

$88,644

90,000

100,000

s

70,000

80,000

$ in

Mill

ion

$50,46050,000

60,000

$50,460

40,000 First Half 2006 Second Half 2006 First Half 2007 Second Half 2007 First Half 2008

6Source: The Bond Buyer.

Letter of Credit Activity

$13 2$14

Top LOC Providers $13.2

$10

$12

$14

$5.8$6

$8

$3.9 $3.9

$2.9$2.5

$1.8 $1.8 $1.8 $1.6$2.4 $2.3

$1.4$1.0 $1.2

$0 5$1.1

$2

$4

$0.4 $0.3 $0.5 $0.2$0

Th h 3 d Q 2008 F ll Y 2007

7

Through 3rd Quarter 2008 Full Year 2007Source: The Bond Buyer.(a) Firms were not ranked in Top 10 in 2007.

Change in MMD Triple-A Yield Curve

6%

MMD Triple-A Yield Curves

5%

11/14/2008

11/14/2007

4%

11/14/2006

2%

3%

Rate

1%

2%

0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Years to Maturity

8Source: TM3, data as of 11/14/2008

Years to Maturity

Change in MMD Triple-A Yield Curve

Change in Triple-A MMD Yield Curve9/12/2008 to 10/02/2008

90

100

9/12/2008 to 10/02/2008

60

70

80

oint

s

40

50

60

hang

e in

Bas

is P

20

30

Ch

0

10

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Years to Maturity

9

Years to Maturity

Source: TM3, as of 11/14/2008.

Change in MMD Triple-A Yield Curve

Change in MMD Triple-A Yields9/12/2008 to 11/14/2008

60

80

40

ts

0

20

ge in

Bas

is P

oint

-20

01 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Cha

ng

-40

10Source: TM3, data as of 11/14/2008

-60Years to Maturity

Credit Spreads Widen

Revenue Spread vs. MMD Triple-A Benchmark(10 Year Maturity)

1.92%BBB

160

180

200( y)

1.11%120

140

nts

A

80

100

Bas

is P

oi

0.42% A

0.59% BBB

0.25%AA20

40

60

0.14% AA

A

0

11

Data shown from 11/14/2007 to 11/14/2008Source: TM3, as of 11/14/2008.

Date

AMT Spreads

Change in AMT Penalty 11/14/2007 - 11/14/2008

45

50

11/14/2007 11/14/2008

30

35

40

ints

20

25

30

Chan

ge in

 Basis Poi

10

15

C

0

5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

12

Years to Maturity

Source: TM3, as of 11/14/2008.

AMT Spreads

300

AMT Revenue Spread vs. Triple-A MMD Rates

250

2.67% BBB

200

oints

1.86% A

100

150

Basis Po

0.87% BBB

1.00%

50

0.42%

0.70% A

AA

0

AA

13Source: TM3, as of 11/14/2008.

Municipal Bond Rates vs. Treasury Rates

10 Year Treasury Rates vs. 25 Year Revenue Bond IndexOne Year History

6.00%

7.00%

One Year History6.48%

10/16/08

4.00%

5.00%5.09%9/11/08

2 00%

3.00%

10 Year

1.00%

2.00% 10 Year Treasury RBI

Maximum 4.230% 6.480%Minimum 3.340% 4.630%Average 3.849% 5.159%As of 11/14/08 3.860% 5.980%

0.00%

RBI 10 Y T

14

RBI 10 Year Treasury

Source: Bloomberg as of 11/14/2008.

Municipal Bond Rates vs. Treasury Rates

10 Year Treasury Rates vs. 25 Year Revenue Bond IndexSince Jan. 1, 1970

10 Year

14.0%

16.0%10 Year

Treasury RBIMaximum 15.750% 14.320%Minimum 3.180% 4.380%Average 7.428% 8.180%As of 11/14/08 3.860% 5.980%

10 0%

12.0%

8.0%

10.0%

4.0%

6.0%

2.0%

1/19

701/

1971

1/19

721/

1973

1/19

741/

1975

1/19

761/

1977

1/19

781/

1979

1/19

801/

1981

1/19

821/

1983

1/19

841/

1985

1/19

861/

1987

1/19

881/

1989

1/19

901/

1991

1/19

921/

1993

1/19

941/

1995

1/19

961/

1997

1/19

981/

1999

1/20

001/

2001

1/20

021/

2003

1/20

041/

2005

1/20

061/

2007

1/20

08

15

1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/

10 Year Treasury RBISource: Bloomberg as of 11/14/2008.

Municipal Bond Issuance

National Average Total Volume Issued by Month(1999-2008)

$50

$60

$34

$40

ons

$18$22

$28$24

$28

$24 $24$22

$28 $27 $26

$20

$30

$ in

bill

io

$0

$10

$0January February March April May June July August September October November December

16Source: The Bond Buyer,

Average Monthly Volume Actual Volume 2008

Municipal Bond Issuance Volume

7.0Weekly Municipal Bond Issuance

$6.3 B

6.0

$6.3 B$6.7 B

AMT = $226.7 M

4.0

5.0

)

$4.6 B

3.0$'s in billions

$2.4 B $2.6 B

2.0 $1.7 B

$1.3 B

AMT = $26 M

0 0

1.0 AMT = $15 M

17

0.0

9/15/2008 9/22/2008 9/29/2008 10/6/2008 10/13/2008 10/20/2008 10/27/2008Source: TM3.

Port Issuance

2007Total = $4.6 billion

2008 YTDTotal = $3.2 billion

Variable Rate Volume46%

Fixed Rate Volume

Variable Rate Fixed Rate Volume46%Volume

54%Volume50%

50%

Insured Volume26%

Uninsured Volume23%

26%

Uninsured Volume74%

Insured Volume77%

18Source: TM3, as of 11/14/2008.

Outlook for Municipal Bond Transactions

Market conditions that began in September have led to significant pent-up municipal bond supply.

19,000

20,000 10/22/08$19.092 billion

17,000

18,000

s) 11/14/08

5-year History

Max $20 5($ in billions)15,000

16,000

$ (tho

usan

ds

/ 4/08$17.517 billion

10/1/08$14.638 billion

10/30/08Max $20.5Min $1.5Avg $10.2

13,000

14,000

10/9/08$13.768 

10/30/08$15.111billion

12,000

$billion

19Source: TM3, as of 11/14/2008.

Securities Industry and Financial Markets Association (SIFMA) Index vs 1 Month LIBOR(SIFMA) Index vs. 1-Month LIBOR9.00%

7.96%(9/26/08)

7.00%

8.00%

LIBOR: 4.59%5.00%

6.00%

10/10/08

3.00%

4.00%

1.00%

2.00% 1.48%11/14/08

1.14%(11/14/08)

0.00%

20Source: Bloomberg as of 11/14/2008.

Variable Rate History

SIFMA vs. 1-Month LIBOR(July, 1989 to Present)

8.00%

9.00%

10.00%

6.00%

7.00%

3.00%

4.00%

5.00%

1.00%

2.00%

0.00%

SIFMA 1 MONTH LIBOR

21

SIFMA 1‐MONTH LIBOR

Source: Bloomberg as of 11/14/2008.

Changes at Credit Agencies

• Municipal bonds default less often than corporate bonds

• Moody’s & Fitch proposing single rating scale for corporate & municipal bonds

• New approach would drive most public finance ratings upward, on average

O O t b 7 2008 M d ’ & Fit h l d lib ti f ti• On October 7, 2008, Moody’s & Fitch placed recalibration of ratings on hold due to market turmoil

22

Moody’s Global Scale Ratings

• Proposed single ratings scale (Global Scale Rating or “GSR”)

September 2008 Timeline*

(Global Scale Rating, or GSR ) across all sectors including municipal bonds

October 2008

• State GO & Related Ratings• 50 Largest Local Government Issuers

• Sector specific methodology to be published prior to each

i ti

November 2008

• Higher Education• Health Care

migration

• Representative credits will be recalibrated to set benchmarksDecember

• Housing• Airports• Ports• Toll Roads• Public Power recalibrated to set benchmarks

for transition processDecember

2008• Public Power• Mass Transit

• Local Government GO RatingsL l G t W t & S

January 2009

• Local Government Water & Sewer• State & Local Government Sales/Special Tax• All remaining credits

23* On October 7, 2008 Moody’s announced the GSR schedule will be postponed based on municipal market disruptions.

Fitch Exposure Draft

• Proposed recalibrating U.S. public finance ratings to be consistent with Fitch’s international rating scale

– On October 7, 2008, Fitch announced that they are postponing their recalibration efforts based on current market conditions and will re-revaluate in the first quarter of 2009

• Expect upward revisions of one to two notches on tax-supported bonds– Typically 2 notch increase if rated between BBB and A

– Typically 1 notch increase if rate between A+ and AATypically 1 notch increase if rate between A+ and AA

Expected General Obligation Ratings Shift

A+ and below

A+ and below14%

below42%AA and

AAA58%

AA and AAA86%

24Source: Fitch Ratings “Exposure Draft: Reassessment of Municipal Ratings Framework.” July 31, 2008.

Standard & Poor’s Ratings

• S&P has, in the past, and will continue to use, the same rating scale across the structured finance corporate and government sectorsacross the structured finance, corporate, and government sectors

• S&P reaffirmed their methodology in May 2008

R i d th U S P bli Fi it i i li ht f hi t i l d f lt• Reviewed the U.S. Public Finance criteria in light of historical default experiences

• In part due to these efforts the distribution of U S Public Finance• In part, due to these efforts, the distribution of U.S. Public Finance ratings have moved up the rating scale

• Placing a larger emphasis on management factors during rating g g p g g gprocess

25

Source: Standard & Poor’s “Standard & Poor’s Reaffirms Its Commitment to the Goal of Comparable Ratings Across Sectors and Outlines Related Actions.” May 6, 2008.

Additional Market Impact

• Equipment Financing

• Swaps

• Investment Contracts

• Public Private Partnerships

26

Questions?