Presentation to Insert Company Name, NOT logo

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Wachovia Bank, National Association
Presentation to the
June 16, 2005
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Presentation Elements

• Rationale for Variable Rate Debt
• Variable Rate Structure Alternatives
• Howard County, Marylands Use of Variable Rate
  Debt
• Maryland Transportation Authoritys Use of
  Variable Rate Debt
• Implications for Debt Policies and Debt Portfolio
  Management

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Rational for Variable Rate Debt
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Advantages of Variable Rate Debt

• Long-running historic and current cost advantage
  that has averaged 200 to 250 basis points less
  than fixed rates
• Flexible prepayment terms can optionally redeem
  in whole or in part without penalty
• Lower upfront issuance costs than fixed rate
  bonds
• Provide diversity to debt portfolio
• Effective instrument to balance an institutions
  asset and liability mix
• Unlimited opportunities to refund and restructure

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Factors to Evaluate in Using Variable Rate
Financing

• Capacity for financial risk
• Operating budgets ability to sustain rate
  fluctuations --- contingency
• Composition of financial assets to hedge against
  an increase in short-term rates
• Floating rate exposure as a percentage of overall
  debt
• The availability and cost of credit and/or
  liquidity
• Issuers philosophy and attitude towards variable
  rate debt

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Tax Exempt Variable Rate Debt

• Variable rate debt is a debt obligation with
  interest cost that changes or is reset according
  to varying market conditions and/or a market
  index.
• Variable rate debt accrues interest on the short
  end of the yield curve.
• Given the steepness that typically exists in the
  tax-exempt yield curve, variable rate debt often
  presents a lower cost of funds than long-term
  fixed rate debt.

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Asset-Liability Management

• In recent years there has been increasing
  emphasis from financial advisors and underwriters
  to consider both assets and liabilities when
  evaluating an issuers debt portfolio.
• As seen in Chart 1, in times of lower interest
  rates, issuers with fixed rate debt have
  experienced significant negative arbitrage (light
  blue), as interest earnings have been
  considerably lower than interest expenses.
• As a result, many issuers are looking to use
  their core cash balances as natural hedges to
  support variable rate debt exposure to achieve a
  more balanced asset-liability portfolio, which is
  illustrated in Chart 2.
• Since municipal issuers can issue tax-exempt debt
  and invest their cash in taxable short term
  products, there is an opportunity to achieve
  positive arbitrage (dark blue).

Chart 1
Chart 2
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Increasing Use of Variable Rate Debt by
Tax-Exempt Borrowers
Doubled from 2000 to 2004
Doubled from 1996 to 2000
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Credit Rating Agencies Recognize the Value of
Variable Rate Debt
Prudent use of floating-rate debt can enhance a
municipal issuers financial flexibility and
reduce interest costs, resulting in a positive
impact on the credit quality. However, because
of liquidity and interest rate risksthe debt
must be structured appropriately and the issuer
must have sufficient financial flexibility. Stan
dard Poors, Credit Week Municipal
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Variable Rate Structure Alternatives
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Forms of Variable Rate Debt

• There are three common forms of variable rate
  debt in the tax-exempt marketplace.
• Variable Rate Demand Bonds (VRDB)
• Auction Rate Securities
• Synthetic Variable Rate Bonds
• Synthetic variable rate bonds combine the sale of
  fixed rate bonds with a fixed-to-variable
  interest rate swap agreement.

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Variable Rate Demand Bonds

• VRDBs are bonds that accrue interest at rates
  that reset periodically.
• Reset periods include
• Daily --Weekly -- Quarterly
  -- Annual
• Monthly -- Semi-Annual --
  Commercial Paper
• VRDBs have a put feature that allow investors to
  sell their position at par upon any reset period.
• VRDBs are subject to optional redemption prior to
  maturity upon any reset period at a redemption
  price of par.

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Variable Rate Demand Bonds Remarketing Agent

• After the issuance of VRDBs, the periodic reset
  of interest rates is managed by the Remarketing
  Agent.
• The Remarketing Agent sets the rate of the VRDBs
  for each interest rate period.
• The Remarketing Agent is responsible for
  maintaining a market for the VRDBs while the
  bonds are outstanding.
• The Remarketing Agent is compensated for its
  services on an ongoing basis dependent on the par
  amount of bonds outstanding (Remarketing Fee).

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Variable Rate Demand Bonds Credit and Liquidity

• The majority of buyers of tax-exempt variable
  rate demand bonds are money market funds.
• To be money market fund eligible, VRDBs must
  satisfy credit and liquidity requirements.
• Accordingly, variable rate demand bond issues are
  primarily structured with a credit enhancement
  and/or liquidity facility.
• Credit / Liquidity for Issuers is typically in
  the form of Municipal Bond Insurance with a
  Liquidity Facility
• Bond insurance premium paid upfront
• Liquidity fee paid ongoing based upon par amount
  outstanding
• All-in Ongoing Cost of Capital for traditional
  VRDB
• BMA(1) Remarketing Liquidity
• (1) Assumes high grade weekly reset tax-exempt
  rate demand bonds.

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Auction Rate Securities

• Auction Rate Securities (ARS) are variable rate
  debt instruments that are sold periodically via a
  Dutch Auction process.
• The Dutch Auction process ensures liquidity for
  the securities without the need for a liquidity
  facility.
• The market for ARS requires the highest quality
  credit ratings.
• ARS are primarily issued with municipal bond
  insurance from a AAA-rated provider.

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The Dutch Auction Process

• In the Dutch Auction process, the rate on the
  securities is the rate at which all securities
  will be sold.
• Example
• 100 million auction rate securities
• Rate Orders
• 2.00 10 million
• 2.25 25 million
• 2.50 35 million
• 2.75 50 million
• In this example, the ARS will have a rate of
  2.75 during the interest rate period determined
  by this auction.

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Synthetic Variable Rate Bonds

• Synthetic variable rate bonds combine the sale of
  fixed rate bonds with a fixed-to-variable
  interest rate swap agreement.
• The fixed rate bonds provide committed funding
  for the projects financed
• The fixed-to-variable interest rate swap
  agreement effectively converts the fixed rate
  bonds into a variable rate obligation

(-) FRswap
Issuers Net Interest Cost Pay () Bond
Fixed Rate Receive (-) Swap Fixed Rate Pay ()
BMA Index
Issuer
Wachovia
() BMA
() FRbond
As illustrated in the diagram, the issuers net
interest cost of synthetic variable rate debt is
the BMA Index plus the spread between the fixed
rate it pays on its bonds and the fixed rate it
receives under the swap agreement.
Bondholders
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Comparison of Variable Rate Debt Structures
(1) Except for issuers with AAA-rated underlying
credit ratings.
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Howard County, Marylands Use of Variable Rate
Debt
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Howard County, Maryland Commercial Paper Program

• 90,000,000 Commercial Paper Bond Anticipation
  Notes
• Provides cost-effective short-term tax-exempt
  financing for capital improvement program
• General Obligation of the County
• Additional security provided through liquidity
  facility
• Short-term ratings P-1/A-1/F-1
• Long-term ratings -- Aaa/AAA/AAA

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What is Commercial Paper (CP)?

• Short-term paper that is issued for varying terms
  (from 1 to 270 days) at interest rates that
  correspond to the individual terms placed
• Traditional commercial paper matures at the end
  of each term and may be subsequently reissued
  instead of maturing, CP-mode paper has mandatory
  tender at the end of each term
• Tax-exempt CP is sold at par and pays interest at
  maturity
• Authorized size of program is pre-determined but
  issue size may be increased or decreased to suit
  issuer needs
• Minimum denomination of 100,000 and maximum
  maturity provides the City exemption from Rule
  15c2-12 continuing disclosure requirements
• Programs are typically issued with a line or
  letter of credit to provide liquidity to
  investors if paper cannot be rolled over to
  subsequent investors

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Advantages to City of Issuing CP

• Interest cost incurred only for outstanding CP
  bank facilities often charge a reduced fee for
  unutilized portion
• Ideally suited for
• Construction projects, particularly with slow
  start-up phase
• Seasonal working capital needs/budget shortfalls
• Access market with less than 24 hours notice
• Redemptions are not permanent and can occur on
  any maturity date

Ability to Easily Increase or Decrease Amount

• Align maturity dates with cash inflows
• Target specific refinancing dates for issuance of
  permanent financing
• Match market demand in order to obtain lowest
  financing cost
• Time issuances/maturities to correspond to low
  interest rate environments

Ability to EstablishVarying Terms
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Maryland Transportation Authoritys Use of
Variable Rate Debt
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Maryland Transportation Authority Variable Rate
Revenue Bonds

• 64,100,000 Maryland Transportation Authority
  Variable Rate Passenger Facility Charge Revenue
  Bonds, Baltimore/Washington International
  Airport, Facilities Projects, Series 2003A
  (Governmental Purpose Bonds)
• 5,600,000 Maryland Transportation Authority
  Variable Rate Passenger Facility Charge Revenue
  Bonds, Baltimore/Washington International
  Airport, Facilities Projects, Series 2003B
  (Qualified Airport Bonds AMT)
• Issued to finance the costs of construction of
  certain airport facilities projects located at
  Baltimore/Washington Airport.
• Currently in weekly reset mode
• Secured by Passenger Facility Charge revenues
• Additional security provided through direct pay
  letter of credit

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Implications for Debt Policies and Debt Portfolio
Management
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Dynamic Portfolio Management

• The desired fixed / variable rate allocation
  should be reviewed periodically, considering both
  long and short-term objectives.
• Interest expense savings can be reserved to
  minimize future budgetary shocks.
• Portfolio can be managed and rebalanced over
  time, including the potential use of derivatives.
• Debt portfolio and performance should be
  periodically reported to governing body in
  context of debt management policy.

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Institutions with Floating-Rate Debt Policies
2003
2004
100 and 94 institutions responded for the 2003
and 2004 survey, respectively. Source Cambridge
Associates LLC