Oakland University

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• Oakland University
• Interest Rate Swap Restructuring Opportunity
• Constant Maturity Swap (CMS)
• CDR Financial Products, Inc.
• April 20, 2007

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Constant Maturity Swap (CMS) - Overview
Take advantage of the current interest rate
environment and historically sloped yield curve
by converting the variable rate index received on
the swap from the short-term BMA index to the
longer tenor 10-year BMA swap rate index.
Description
Experience significant cost savings in the event
the BMA swap curve reverts to its historical
steepness, and the spread between BMA and the
10-year BMA swap rate widens.
Objective
Convert at a minimal cost while the BMA swap
curve remains relatively flat. An overlay basis
swap to the existing deal will complete the
transaction with minimal complication.
Execution
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Background

• Based on historical averages, the BMA swap curve
  typically displays a steep and positive slope,
  whereby longer-term yields are higher than
  short-term yields.
• Converting short-term BMA for long-term BMA
  (yield curve risk only) can be an appropriate
  alternative due to the infrequency of inversion
  between these indices.
• Current market conditions have resulted in a
  significant flattening of the BMA swap curve
  such that the current spread (differential)
  between the weekly BMA index and the 10-year BMA
  swap rate is minimal

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Structure

• The CMS structure overlays the current swap with
  a 10yr BMA Swap which is similar to the
  Universitys current BMA arrangement.
• As the existing swap is based on the actual bond
  rate with alternative index conditions, CDR
  recommends an overlay basis swap instead of an
  amendment to the existing confirmation. This
  simplifies the process and provides transparency
  to the new transaction.

Actual Bond Rate1
BMA Index
Swap Counterparty
Swap Counterparty
Oakland University
Fixed Rate
10 yr BMA
Actual Bond Rate
Proposed CMS Basis Swap
Bond Holders
________________________________ (1) Index
converts to the BMA Index upon certain conditions
including a rating downgrade of the bonds or
default. Furthermore, the index converts to 65
of 1-Month LIBOR upon certain conditions
including an event of taxability as described in
the confirmation, including if the actual bond
rate average exceeds 77 of the 1-Month LIBOR
average for a period of more than 180 days
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Benefits / Why would the University do this?

• Potential Cost Savings
• Borrowing costs can be significantly reduced if
  the yield curve returns to its historically
  positive sloping shape.
• The University would pay based on a short-term
  index, historically the lower interest rate
  structure
• The University would receive based on a long-term
  index, which is historically higher.
• Flexibility
• Relatively easy to implement and the structure is
  flexible, allowing the swap to be executed in a
  number of different ways.

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Potential benefit/(loss) based on yield curve
spreads

• ________________________________
• Based on an analysis of data over the past 10
  years, the spread between 89.36 of 10 yr-BMA
  swap rates and the weekly BMA index has averaged
  107 basis points, with a low of (108) bps and a
  high of 294 bps
• Based on 2 standard deviations (a 95 confidence
  interval), the worst/best case spread income
  falls within a range of (70) bps and 285 bps.
  These ranges serve as the endpoints to the
  scenarios shown above. Current spread is (27) bps

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Executed Transactions

• Many issuers throughout the country have
  similarly taken advantage of this market
  opportunity and have entered into CMS
  transactions -
• Large Municipalities
• Specialized Authorities (e.g., water sewer,
  transportation issuers)
• School Districts
• Hospitals and Healthcare Facilities
• Universities
• CMS Transactions executed by Universities include
  the following
• University Approx. Notional Amount
• University of Texas 500,000,000
• Louisiana State University 22,940,000
• University of New Mexico 125,000,000
• American University 21,000,000
• Boston University (in process) 29,000,000 -
  56,000,000

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Risks

• Prolonged Yield Curve Flatness/Inversion
• The market value will move against the University
  if long-term BMA swap rates fall below short-term
  BMA resets. This is the primary risk of the
  transaction.
• Historically, the longest periods of inversion
  occurred over 20 years ago before the Fed applied
  rigorous monitoring and management of interest
  rates.
• BUT Currently, with a 95 confidence level based
  on historical analysis, the opportunity to enter
  into this trade provides the University with a
  strong position to benefit.
• Higher Execution/Termination Costs
• Using a 10-year BMA swap rate provides for a less
  efficient market than executing a traditional
  fixed payer swap based on the short-term BMA
  index higher counterparty hedging costs may
  result in increased termination costs for the
  University.
• Higher Risk/Reward for CMS
• Historically, the current index shows a higher
  correlation to the underlying bonds versus an
  equivalent of the 10-year BMA swap rate.
  Converting the variable rate swap index to a of
  the 10-year BMA swap rate results in increased
  volatility versus the underlying bonds, reducing
  cash flows in some periods.
• However, historical averages show a significantly
  higher spread over BMA (greater upside) for
  10-Year BMA swaps, thereby mitigating this risk
  in the long run.

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Summary

• Market Opportunity to produce additional
  cash-flow/debt service savings on the 2001 Deal
• Risk/Reward Analysis provides a basis inside the
  Universitys Profile and shows a high percentage
  of benefit within todays current market
  conditions.
• Forward Start eliminates initial cash-flow
  deficits associated with an immediate-starting
  swap with current existing flat yield curve.
• Proposed opportunity is already an existing model
  that the University currently manages
• Stand-alone/overlay transaction creates
  transparent tracking and performance analysis
  without affecting initial trade

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Standard Poors Credit FAQ
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Standard Poors Credit FAQ (cont.)