Market Overview

1
Market Overview
Current Market Conditions and Trends
4
2
Market Overview
Rates
The current yield curve is steeper than average.
Swaps may offer a lower cost of funds.
____________________ Rates as of 11/17/2004.
5
3
Market Overview
Interest Rate Forecast
Research Commentary
Forecast Rates

• Current Fed Funds 2.00
• Current 10-year Treasury Note 4.18
• The Federal Reserve raised the Fed Funds target
  rate 25 basis points to 2.00 at the November
  10th meeting.
• The Fed believes that accommodative policy
  coupled with robust growth in productivity is
  providing ongoing support to economic activity.
• The Committee perceives the upside and downside
  risks to sustainable growth and price stability
  in the near future to be roughly equal.
• The next Fed meeting is on December 14th, 2004.
• Merrill Lynch economists predict long-term rates
  falling through the end of 2004, then continuing
  a steady descent until Q2 2005.
• October non-farm payrolls showed a 337,000 jump,
  twice the 169,000-job growth that Wall Street
  economists had forecast,
• However, the unemployment rate edged up to 5.5
  from 5.4 in September.

6
4
GARVEEs (Grant Anticipation Revenue Vehicles)
Geographic Diversity
States that have issued GARVEE Bonds States that
have authorized the issuance of GARVEE Bonds
Montana
Michigan
Massachusetts
Rhode Island
Nevada
New Jersey
Ohio
Colorado
Maryland
California
Virginia
Arizona
Oklahoma
Arkansas
New Mexico
Georgia
Louisiana
Alaska
Alabama
Florida
Mississippi
Virgin Islands
11
5
GARVEEs (Grant Anticipation Revenue
Vehicles) Highway GARVEE Transactions
22
6
GARVEEs (Grant Anticipation Revenue Vehicles)

• Direct vs. Indirect Structure

• Direct GARVEEs
• Must be approved by FHWA
• Fund specific FEDERAL aid project or projects
• Proceeds only used on preapproved projects
• Principal/interest payment approved and paid on
  schedule by FHWA
• Indirect GARVEEs.
• Can be issued without any prior FHWA approval
• Funds can be used on STATE and FEDERAL projects
• Determination on what to use funds for can be
  made after reimbursement

7
GARVEEs (Grant Anticipation Revenue
Vehicles)Direct vs. Indirect Structure

• Used to finance a specific project or projects
• State submits the debt service schedule for
  approval (this is called programming)
• All proceeds need to be spent on the specific
  project or projects that were approved leaving no
  spending discretion or flexibility
• State submits for reimbursement before each
  principal/interest payment and State receives a
  reimbursement (three days) before the payment is
  actually made

8
GARVEEs (Grant Anticipation Revenue
Vehicles)Direct vs. Indirect Structure

• No restrictions on the usage of bond proceeds -
  treated as any other State funds - can spend on
  either Federal or State projects
• Issued without FHWA approval
• Backed by future federal reimbursements of future
  federally eligible expenditures
• State continues its federal aid program, seeking
  annual reimbursements for eligible expenses
• Reimbursements used to amortize the GARVEE bonds

9
GARVEEs (Grant Anticipation Revenue
Vehicles)Direct vs. Indirect Structure
10
GARVEEs (Grant Anticipation Revenue Vehicles)
Case Study
Merrill Lynch senior managed the Commonwealth of
Massachusetts 408 million Federal Highway Grant
Anticipation Note Refunding Program transaction
in June 2003.

• Crossover Structure Merrill Lynch developed the
  Refunding Notes innovative crossover feature,
  believed to be the first crossover refunding in
  the GARVEE marketplace, utilizing U.S. Agency
  securities and an innovative escrow structure
  designed to defease the prior bonds and pay
  interest on the Refunding Notes through the call
  date.
• Indirect GARVEE Structure The Massachusetts
  GANs program was not dependent on reimbursements
  from a specific project, but rather allowed for
  the use of all federal highway monies received,
  thereby decreased risks associated with specific
  project reimbursements.
• Double-Barreled Pledge Additional bondholder
  protection is provided through a double-barreled
  security structure that pledges 0.10 of the
  Commonwealths gas tax in the event of severe,
  unprecedented declines in federal highway
  funding.
• Bond Document Constraints The governing bond
  documents contain a number of constraints on GANs
  issuance, including,
• A limit on the issuance of additional notes
• New money proceeds capped at 1.5 billion (all of
  which have been issued)
• 216 million of annual debt service and 108
  million of semi-annual debt service
• Debt service funded from federal highway
  reimbursements one year in advance
• Advance construction balance covenant
• Capital Commitment During Volatile Market
  Merrill Lynch successfully priced the Refunding
  Notes during a volatile market environment
  characterized by heavy supply and growing
  indecision regarding the Feds impending
  announcement on June 25th

13
11
GARVEEs (Grant Anticipation Revenue Vehicles)
Case Studies (continued)

• TRANs are CDOTs version of GARVEE bonds
• Secured by a pledge of the Colorado
  Transportation Commissions annual allocation of
  funds to the TRANs
• Repayment sources for the TRANs include
• CDOTs FHWA monies
• Sales and use tax funds
• Highway user tax funds
• Other miscellaneous revenues
• Very strict requirements approved by the voters
  to authorize the TRANs

14
12
GARVEEs (Grant Anticipation Revenue Vehicles)
Case Studies (continued)

• The structuring work included
• Crafting the additional bonds test around the
  voter approved requirement
• Working with FHWA to develop a master project
  reimbursement agreement
• Mitigating risks associated with CDOTs Southeast
  Corridor, a jointly financed project with Denver
  RTD (the area transit district), and FTA
• The initial transaction garnered ratings of
  Aa3/AA/AA by Moodys, Standard Poors, and
  Fitch, respectively.
• Recent Credit Implications
• CDOTs revenue streams have been impacted by both
  the economic downturn as well as legislative and
  initiative-driven changes
• Despite this uncertainty and CDOTs reduced
  revenue stream, CDOT has been able to maintain
  its ratings
• Merrill Lynch was able to secure bond insurance
  at a premium 1.6 basis points lower than the
  initial Series 2000 TRANs
• This occurred despite a new voter referendum
  requiring an additional transfer of monies away
  from CDOT

15