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HomeMy WebLinkAboutINVESTMENT MANAGEMENT ADVISORY GROUP INC SWAP ADVISORY SERVICES I:...' \ ! I I I ~ ~ ~ ~ ~ IL_ ~'-fii;=....,.,...,_..-.-,-.~_.~=~~,t;'>i~:;rft;i'l;~_-~"... ,t-~.."" .. II In i I ,~ I ~ ~ I m 11 III 1'.1 ., . " ........~==v,;;>~ Investment Management Advisory Group, Inc. June10,2005 Commissioner Betty Beard City of Augusta, Georgia One Seventh Street, Suite 1703 Augusta, Georgia 30901 RE: Proposal to Serve as Independent Swap Advisor Dear Commissioner Beard: Investment Management Advisory Group, Inc. ("IMAGE") is pleased to present to the City of Augusta, Georgia (the "City") our Proposal for Independent Swap Advisory Services. Our area of expertise is acting as a broker, structuring specialist and pricing agent for various types of swaps (Interest Rate Exchange Agreements) and related derivative products, as well as the investment of bond proceeds from tax-exempt bond transactions. Over the last several years, IMAGE has stood out as one of the preeminent firms in the Country who specialize in this field. Measured by volume ($90 Billion since January, 2000), we rank second to none in this market. Size, however, is not how we should be measured, but rather by the quality of service we provide. We at IMAGE understand the significance of this transaction for the City and how important it is that all elements be structured properly and priced in the most fmancially advantageous manner. IMAGE's in-depth knowledge of a multitude of swap and derivative products, coupled with our prowess in the market as a leading firm in this field, will ensure the best possible results for your transaction. Additionally, a strong relationship with the swap counterparties is essential to the timely and cost effective completion of your swap transaction. IMAGE's key strengths as an Independent Swap Advisor are its unique combination of professionals, the breadth of our experience, the size of our staff, our macro perspective on swaps and derivatives and our proactive approach to the advisory process. The use of a Swap Advisor such as IMAGE, devoted solely to these instruments, will add enormous value to the process. IMAGE has assembled its professional staff with one thing in mind, proficiency in swap and related derivative transactions. Weare not a general financial advisory firm or municipal broker- dealer who also advise on swaps "part time". The unique talents of the individuals who comprise our firm are unmatched in the industry, and our proactive approach to utilize our talents consistently have demonstrated significant value added to our clients. We do not simply sit back and wait for questions or proposals to be posed to us. Weare pro actively looking for opportunities in the marketplace and searching for enhancements on each and every transaction in which we participate, Importantly, we maintain a macro perspective for the City's swap and derivative exposure, while we are engaged in the micro-analytical work on any individual swap. 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 ..,.r;JlI~""""''''TE''''''''''......'''''' ~.""'~.....- ~_...,.,..".,.''''''._.." - <--.- "........".H...'''_,;:;~ ~ I I I The following summarizes the terms of IMAGE's proposed engagement. We are confident that you will find our expertise and service to be superior. A description of the advisory services IMAGE will provide are included below, although some of the services will not necessarily apply for each transaction: Evaluation and Review of Proposals . Provide financial analysis in connection with swap products presented to the City. . Prepare Requests for Proposals and evaluation of responses of swap providers. . Advise and assist in determining and implementing appropriate methods for securing swap providers. . Advise and assist in the development and implementation of competitive processes for the procurement of swaps and/or swap providers and in evaluating competitively solicited swap proposals. . Advise and assist in evaluating and negotiating the terms of negotiated swap proposals. Structuring Advice . Advise the City about the long-term implications associated with entering into a swap, including costs of borrowing, historical interest rate trends, variable rate exposure, opportunities to refund related debt obligations and other similar considerations. . Provide an assessment of the various risks associated with swap proposals, including counterparty risk, termination risk, rollover risk, basis risk, tax event risk and amortization risk. . Assist. the City in diversifying its exposure to counterparties, if applicable. Prior to a transaction, determine its exposure to the relevant counterparty or counterparties and determine how the proposed transaction would affect such exposure. The exposure should not be measured solely in terms of notional amount, but rather how changes in interest rates would affect the City's exposure, including an aggregate view of the cumulative exposure of the City. Discuss risk measures and risk measurement models that are available for use by the City including mark-to-market, expected loss, peak loss and value at risk. Document Negotiation and Preparation · Advise and assist the City and their counsel in connection with the negotiation of schedules and credit support annexes to the standard International Swap Dealer Association, Inc. ("ISDA") Master Agreement for specific swap products. . Advise the City in connection with the preparation or modification of swap policies and an interest rate management plan. . V erify swap pricing at execution and provide a market price certificate to the City that the terms and conditions of a swap reflect a fair market value of a negotiated swap. Pricing · Advise, assist and manage, as required, the implementation of competitive processes for the procurement of swaps. I' ~ [j ~ , i 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 k-;'!).i:"''''''~!'';.'''''''\?;;::.'.l;~'~'''~~\:W1i'1~~~~~~'f,U'..R"'~~~~~~;~~:m:'B}~j)fuW~<;'i.!$!~~~.e"f;."'!!:l:t"~':"--''''';:!l,~;}.~'ih'r.hl;,~~!;i~~~:t'?l;i~&f-M:iI...'i.r'&~'ff!*,:'S~:J,-:'ll'~':I;~~~~mlWUf-'t:W~}IC~~.lei>J.t;~;il.""~P!f-H,.W"-"'f3.\.l&:~~m"q;{* · Assist in the evaluation, selection, fee negotiation and price negotiation with swap providers in connection with negotiated swaps. Other . Provide advice and assistance in the development of swap policies and guidelines for individual transactions, and as part of an overall debt management program. . Provide quantitative training to the City staff members in connection with the analysis of swap proposals. · Prepare for and participate in meetings with outside parties, including government officials, swap counterparties, underwriters, counsel, and rating agencies. IMAGE proposes a fee of $80,000, plus any transaction related expenses. However, IMAGE will only be paid upon the successful completion of the transaction. Typically the fee. is incorporated into the transaction as a cost and would be paid by the provider (counterparty) and therefore amortized over the life of the transaction. Please feel free to contact us at (610) 326-4900 should you have any questions or wish to discuss the proposed engagement. We at IMAGE look forward to the opportunity and privilege to serve the City. Very truly yours, & ,/y~ MP.:!Jil1-1. Stallone Managing Director Investment Management Advisory Group, Inc. }llJ Accepted by: ~C8mm.i88i~n'l.er Betty Deard City of gusta, Georgia 1-~ .... .~p u m~~:) It t".p...s : .. Cl-~('tc ~f (vtAJ......-A'u~ 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 , . " ".r---' ~~L PROPOSAL TO: ., CITY OF AUGUSTA, GEORGIA J REGARDING: SWAP ADVISORY SERVICES INVESTMENT MANAGEMENT ADVISORY GROUP, INC. June 10, 2005 ' ~ I ~ I ~ ~ I b I H ~ __ ..-.., , .'~~'n~-,~~I 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 .-"._-~""...,,~~'. ,..''''....~"''F.~.!-tS1?r.'''''"''='''.;;::r,.;.,-,.'1'~.~''":_..., '",,",_,_.~,< _,....,~. -.:.~ _ ".%~$~~..\i1J-lH~i'l;~"'f~'f~_~~~t~~M1:tlii."~~~~~~R>~~b~~~~jIl~.V4~J::.~~i:~~~~~~~'li'$~>W;' ii <I 1i 1. Overview of the Firm IMAGE was incorporated in November, 1992 and has since grown to include eight professional employees and additional support personnel located in our Philadelphia area headquarters and branch offices in New York City and Savannah, Georgia. IMAGE's area of expertise is acting as an independent bidding agent, struchrring specialist and pricing agent for various types of swaps and related derivative products as well as structured investments relating to bond proceeds from tax-exempt bond transactions. Over the last several years, IMAGE has emerged as one of the preeminent derivative fIrms in the Country who specialize in this fIeld. Since the beginning of 2002, IMAGE has been involved in excess of 500 total transactions ($18 Billion in 2002, $23 Billion in 2003 and over $12 Billion in 2004); we rank second to none in this market. IMAGE is an S-Corporation whose fInancial condition is considered to be excellent. IMAGE, as a fIrm, is solely a derivative special practice group with every professional dedicated to derivative instruments such as swaps, caps, floors, collars, options and struchrred investments products. David J. Eckhart, President and Managing Director, IS responsible for the organization and operation of IMAGE. INVESTMENT MANAGEMENT ADVISORY GROUP, INC. David J. Eckhart President Martin J. Stallone Managing Director Robert W. Jones Managing Director E. Gilbert Carpenter Managing Director Kevin E. Finley Managing Director Peter S. Loughead Senior Vice President Liam McGuigan Senior Vice President Christopher S, Monaghan Senior Vice President Michael W, Gamer Vice President Robert R. Kintner Vice President 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 i lf~ .~ i~ I~ l~ I" I~ I~ ib HJ I~ i] II~ ':~J ,i~ I~ l~ I~ i~ I~ I;~ ~ ri I~'~j ~,' f~ ,~ '~ ~ ~ ~ ~ ~ :;i W. ~ ~ "I ~ ~ I~ I~ I~ I~J ~ ~ I'~ ~ I~ .~ I~ I] Il~ ~ 'I ~ ,~ 11 /; i~ i~ 1~ il,~ I'.' !~ iqj '~ I~ !~! It] ii,~ i~ I,:': I,,,, i~ 1 ~i, i~ ,; .:.i ,;i 1:1, iq ,",,!:.{:;!'~i5i:<,f,'~:.om~;a;-t:S;:Z~:"~!ti:<:i:;;'~lW"=~~.;;:";;'~~~~!,;;.iWHE~-~:f',t}7",<:~'.ii;K:{j-~J;~'<J::-.::ro~~"~;;~~~~.2.g;,\~lmf.;w~~}.,!f;-;a;,'tr~~~::;.~~~'S'"~,,..'lt<<~:~~i~;:!t~i~1i!:-b" 3. Technical Proposal A. General Approach to Derivative ProduCts One of IMAGE's greatest strengths is in the training, instruction and education of interest rate swaps and other derivative products. We take a proactive approach to this process by engaging in open forum discussions as well as one on one meetings to give our clients a deep understanding of how the swaps function for them and an appreciation for how they are priced. In fact, IMAGE has on staff two practicing finance professors of the Pennsylvania State University whose primary vocation is the field of education in all areas of finance. We suggest you contact our references specifically on this point. +--~ ! I For example, once engaged by the New Jersey Educational Facilities Authority (EF A), we first educated the Authority staff on swaps and an interest rate management plan for the Authority and its participants. Once they were comfortable with the utilization of swaps, we then conducted a full day seminar at Princeton University where finance professionals from all the colleges and universities throughout the State attended. IMAGE was the keynote speaker at this seminar, along with the State's Treasurer, and we invited derivative specialist from several Wall Street firms to be panelist on a full array of swap topics and structuring issues. Since that seminar in the Spring of this year, the Authority and its constituents have entered into four interest rates swaps with our assistance. In addition, IMAGE led the single largest swap and hedging program ever completed by a municipal entity for the New Jersey Economic Development Authority (EDA). Neither the staff of the Authority nor the newly elected State Treasurer had ever completed a swap before. After approximately eight months of planning, education and structuring, the State and EDA in concert completed a $3 Billion hedging program that as of this date has savings in excess of $100,000,000. For the City of New York, we have spent countless hours with the various public professionals in the Comptroller's Office and the Office of Budget and Management to educate them on swaps. We regularly attend meetings of both offices to discuss and dissect in detail the myriad of swap proposals the City receives from its investment banking firms. Additionally, we spearheaded the negotiation process between the City and its various swap counterparty participants. . We trained and educated the City's staff on the intricacies of the ISDA documentation to develop a "NYC Standard form ISDA". IMAGE then led the negotiation process to complete nine (9) separate ISDAs thus far with various counterparties. This year to date, we have advised New York City on over $1.5 Billion in swaps. Approximately five years ago, the Pennsylvania Turnpike Commission embarked on an aggressive capital program combined with the refinancing of several of its outstanding bond issues. They had been inundated with proposals of all types from various underwriting firms containing different swap and borrowing programs. On their behalf, we moderated a two day interview and presentation process whereby each firm was invited to come before a select group of the finance committee, finance staff of the Turnpike and ourselves to present their ideas. It allowed us and the Commission to ask questions and evaluate each proposal in an open forum and get direct and immediate feedback from the presenting firms. Prior to this, the Pennsylvania Turnpike Commission 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 3 ~?'\'!-E,'4.-"i":}ri~f~'.'-~'!].~*Yt.'l2~",:-'~~~;::~~!;J,!.?;l!:B1P.)'im.1l~~::!.'i!.':.~;:,m;::~w.ri.i~~!~l1."i'f.1:~~"'';';',)';,'>!~"'le~-''i..,a~''~~ijlw:~5n':.\_'' had never entered into a swap or derivative of any kind. As a result of the increased understanding and comfort level achieved by this process, the Pennsylvania Turnpike Commission has completed in excess of $1.7 Billion in swaps with our assistance, of which approximately $700 Million now remain outstanding. To effectively integrate the use of swaps into the debt portfolio, we would work in concert with an Issuer, the Issuer's Financial Advisor and professional staff to evaluate the appropriate mix of fixed versus floating rate debt, and the efficiency of creating that mix conventionally (bonds) or synthetically (swaps). The valuation methodology would include "macro" issues such as (i) rating agency impact and credit enhancement capacity, (ii) overall exposure of the Issuer to a particular counterparty, (iii) credit worthiness of such counterparty, (iv) total exposure to tax and basis risk, (v) if an option is embedded, macro exposure to this option risk (i.e. "knock-ins" and "knock-outs"), and (vi) variable rate capacity of the Issuer. The valuation methodology would also include "micro" issues such as (i) pricing efficiency of cash versus swap markets, (ii) specific prior experience with the counterparty, (iii) municipal basis ratios, (iv) ability to refund related debt, (v) option model valuation and (vi) the relative value and return along the yield curve. The macro issue becomes "does the product provide a material advantage versus other alternatives"; and the micro question is "what is the market premium in the current environment you are receiving". This is the most basic and time-tested method of evaluation. We want to execute a good swap structure at a great time in the market; not let the Issuer employ a good swap structure and execute in a weak market. More specifically, as an Issuer determines their appropriate mix of fixed versus variable rate debt, we believe that mix is best allocated along the yield curve as set forth below. Variable rate bonds should be out longest on the yield curve where the risk/return premium is the highest compared to fixed rate yields. Another important evaluation process is when swapping to fixed ("synthetic fixed"), determining the appropriate allocation of the synthetic fixed via TBMA or LIBOR swaps. WAGE's approach, again, is to allocate the LIB OR based swaps along the yield curve where an Issuer gets the greatest bang for the buck. That is, in swapping to fixed via a LIBOR swap, an Issuer is accepting tax (and basis) risk, whereas in a conventional fixed rate bond or a TBMA Swap it is not. The greatest spread between theMMD Index scale or TBMA Swap Curve and a synthetic fixed LIBOR based swap is again in the . longer end of the yield curve. The ultimate decision on LIBOR versus TBMA swaps must also take into consideration an Issuer's willingness and ability to accept the tax and basis risk. For long-term debt (15 years and longer), the LIB OR-based swap will almost always be a lower cost than the TBMA alternative, Regardless of cost, the Issuer may conclude that existing basis exposure limits the ability to enter into a LIBOR Swap. 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 4 i- 6.00 5,75 5.50 5.25 5.00 ~ 4,75 ~ 3:! 4.50 Q) >= 4.25 4.00 3.75 3.50 3.25 3.00 , , ~ 0 ., ; - BMAAverage* - MMD Insured - 67% of LIB OR Swap * 1 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year 3 Year The pricing differential between. LIB OR and TBMA swap curves varies dramatically. We advise the Issuers to accept the tax and basis risk associated with LIBOR swaps when the market is providing an above average premium (based on historical data) for such transactions. TBMA Swaps are expensive in the current market when viewed on a historical basis, Where the premium is below historical norms, avoid such risk because the market is not "paying you" sufficiently to take on that risk. (See TBMA Swap curve below). i . , 85.00% 81.00% 77.00% 73.00% 10 yr lBMA Ratios 69.00% 65.00% ~ ~ ~ ~ $ ~ # # # # # # # # ~ # ~ ~ # ~ ~ ~ ~ # # # # # # # # # # # ~ ~. ~ # # # ~ ~ ~ ~ ~. ~ ~ ~ ~ ~ ~ ~ IMAGE will continually monitor these types of relationships to look for restructuring opportunities, For example, if an Issuer initially entered into a long-term TBMA swap in a market where long-dated TBMA ratios were low, and spreads increase materially, the Issuer may consider converting the TBMA swap to a LIBOR swap. IMAGE recently completed such a restructuring for a client that produced a reduction in the fixed swap rate of 0,65% for a 20-year swap! '<'--~';-'<"_.~=,:....- - I; 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 5 ~~~.~~,,$""~t~=~"""--.;r ~- ~~"""l'I!',u ...."-""'" """""'"'IF"""lijJ,l!il~iUlit!1mil9E Similarly, when evaluating synthetic variable (Issuer sells fixed bonds and swaps back to variable) the Issuer should consider this approach when the market is paying the Issuer a reasonable premium to do it. One method that IMAGE utilizes to evaluate this premium is to compare the MMD insured bonds versus the like term TBMA Swap (10 year term illustrated below). The illustration assumes that the Issuer borrows fixed at MMD and variable at the TBMA index rate. The dotted red line is drawn to estimate an Issuer's variable costs associated with a conventional VRDB. Liquidity and remarketing expenses are estimated at approximately .35%, Based on these' assumptions, if the Issuer sold conventional VRDBs, its cost would be BMA + .35%. Graph II illustrates that in the lO-year sector of the curve, so long as the fixed rate on its bonds minus the fixed rate on its swap is less the ,35%, the Issuer would save by employing synthetic variable. In fact, the most opportune time would be when, because of a particular market anomaly, the Issuer could have locked in BMA MINUS a spread for its variable debt. But as you can see, those types of opportunities are infrequent and short lived. . Assuming the Issuer had previously expressed an interest in having more variable rate exposure, and after a thorough review of the balance sheet implications, IMAGE would immediately advise the Issuer of these types of opportunities when they arise, and have the Issuer in a position to expeditiously take advantage of them. 10 Year MMD Insured Bonds Minus 10 Year BMA Swap 40 30 20 Ul c. !!!. 10 '0 ~ e 0 c. '" '0 .10 a; > .20 .30 .40 1997 Use Bonds Use Swaps 1998 1999 2000 2001 2002 Another important factor IMAGE evaluates when considering synthetic variable is where along the yield curve the Issuer is generating the greatest spread. The graph below (example only) would indicate that the most efficient spot on the curve to swap to floating at that time would be in the 5 to 7 years sector. This relationship is continually changing and requires a derivative specialist like IMAGE to advise the Issuer with the most up to date information during the decision making process. 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 ~ I I I I,m., g ~ . r :I~ c ! i ~ ; ~ 6 ~~r#~1.w~r~~tittwiZ'\;~~~' , 6,00 _Spread -MMD Insured - SMA Swap Yields 70 5.50 60 5.00 50 4.50 40 ~ ~ 4.00 30 ~ ~ 3.50 20 -< Ql >= 10 (5' 3.00 c. 0 CIl 'C 2.50 ... -10 CD III 2.00 c. -20 c;: 'C 1.50 .30 ~ 1,00 -40 1 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year As discussed herein, IMAGE would utilize its unparalleled, proprietary analytical facilities, coupled with its intimate market lmowledge, to provide the Issuer with every tool necessary in order to evaluate any and all derivative proposals. B. Competitive vs. Negotiated Swaps: IMAGE utilizes criteria with respect to both methods of procurement (competitive and negotiated) as long as an independent finding is made as to fair market value of the swap on the day of execution (which IMAGE provides). The determination to negotiate a swap should be made after (i) IMAGE has provided the Issuer an analysis that the particular swap under consideration, due to its size or complexity will produce more favorable pricing via negotiation rather then competitive bid, or (ii) the Issuer has determined that in light of the particular circumstances, a negotiated swap will promote and reward innovation of proprietary products. With respect to competitive procurement, the minimum number of bidder firms is three. In certain circumstances, with the Issuer's approval, we include a provision permitting firms not submitting the winning bid to match the best bid and losing bidders within a certain spread to be awarded a specified percentage of the notional amount. The terms of award of notional amount must occur with the Issuer's prior consent and prior to disclosure to the bidder firms. Smaller swaps ($50 million or less) that are more generic, such as LIBOR based "plain vanilla" swaps, are more apt to produce the best "all in" rate by a competitive process. For larger, more complex swaps we recommend negotiated procurement to achieve the best "all in" rate, because empirical data suggests that most large, complex swaps achieve the lowest "all in" cost. The counterparty is able to hedge the transaction more efficiently because it prohibits firms from "front running the market" during the hedging process. The negotiated process permits the Issuer to accelerate or delay a transaction due to market conditions as well as change the structure if need be during the negotiation. The public nature of a large competitive swap can unnecessarily drive the market up in advance of execution, producing higher costs even though the pricing yields a tighter spread to the market than that proposed in a negotiated scenario. Thus, very sophisticated decision- 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 ~<l'P.~ 7 ~ ~ . making must occur prior to the competitive/negotiated decision regardless of whether it's a BMA or LIBOR based swap.. This is why you need a sophisticated firm with the analytical tools and experience, such as IMAGE, to assist you through this process. Our understanding of the Wall Street derivative desks (their strengths and weaknesses), as well as their "books" and motivations for pushing particular types of swaps, will be invaluable to the Issuer. IMAGE will ensure that the Issuer gets the swap it needs and wants at the best possible pricing, and in the most responsible method of procurement for the situation at hand. C. Competitive Procurements: In the process of designing a term sheet for the formal competitive bid process it is important to be specific with all of the business, credit and legal terms to ensure the optimal results. While designing the bid document or term sheet, particularly if there is complexity, it is wise to have canvassed the market place and, in effect, pre-negotiated certain of the important criteria for the Issuer. As a result of this early attention to pre-bid or pre-negotiation issues, the number of willing counterparty firms will become limited to the most competitive of these firms for the specific swap as detailed and described in the bid document. For swaps that are particularly large and do not contain any proprietary products or options that are not easily exercised in part rather than in whole, we often suggest that the Issuer allow a second and/or third place bidder to match the winning bid for a specified portion of the swap. This serves two purposes: (i) it allows the Issuer to reward a firm that has provided excellent service and ideas to the Issuer, but unfortunately did not win the bid, and (ii) with respect to larger swaps, enables the Issuer to spread out its counterparty credit risk, so that credit exposure isn't so heavily concentrated with one institution. D. Procurement of Credit Enhancement or Liquidity Providers: Just as strongly as we believe that the Financial Advisor should not also be the Swap Advisor, we do not believe that the Swap Advisor should usurp any responsibilities for core competencies of the Financial Advisor. IMAGE has an excellent record of working well with many Financial Advisors and underwriters in all aspects of the financing process, and upon request we can provide references of such firms with which we have worked. The Swap Advisor should supplement the Financial Advisor in the credit enhancement and rating process, not replace it. IMAGE has successfully secured credit enhancement and liquidity from a broad array of providers of varying credit quality for our clients. IMAGE is well known and respected in this marketplace, We have performed this service as Swap Advisor alone and as part of a larger financial team including Financial Advisors and staff. If however, over time, Issuers determine that it is in their best interest to have the Swap Advisor assume this responsibility, then IMAGE would serve in this capacity. IMAGE has been the derivative advisor for 69 swaps in the last two years, exceeding $6 Billion (estimated to be between 8% and 10% of all municipal swaps), Additionally, IMAGE has been involved in over $5 Billion of credit/liquidity procurement where IMAGE was either directly responsible or part of a financial team for such procurement. IMAGE recently concluded, 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 8 ~'-"Oi;l.:i;'iS;<;;'~"i2-;":-~':i:';:{p.:~\~~'iff,i,tit'';~'''--*';:f'3ct;::l~,,"~~~~~--''''''''~'~~,.:.~~,,,,,,*~;t..~~,;~!..,,,,,:",-,,~'t<:~~W:!:'M.i!';:!_~'$'~1~i:'\'~1~X~$~~.:;j:,',,1.-'I::';Z,~;'.~"'~~;;!~~'J!i.':;'<;"..;t;.,~_:,j\,:",,(.,~'i?,fu~'t!.m' as part of a team, credit enhancement and liquidity in connection with an $800 million Swaption for the Delaware River Port Authority (DRP A). Every member of our team has extensive, prior professional experience as a Financial Advisor or underwriter (some both) - please refer to the enclosed resumes. With regard to the analysis, first a determination of the need for credit enhancement or liquidity is done by exploring costs on an un-enhanced versus enhanced basis. We then introduce the Issuer to the providers in the market place and their relative position and rating. From there, an evaluation of the prior experience of the provider with the Issuer, and the amount of exposure that exists, if any, is done. If the provider has worked with the Issuer we determine if the course of dealing was positive, sufferable or so negative that avoidance at all costs is indicated. We then discuss issues of capacity, credit worthiness and the ability to perform in the event of a default, as well as the relative trading value of the provider's facility. Maximum length of the credit facility is also a factor. How long will they provide the facility and the likelihood of renewal at favorable terms? At any time, we are prepared to discuss the various agreement terms that are required by these providers because they differ, and we are very familiar with the appetites of the various providers for the varying structures being offered to Issuers. Upon recommendation and selection of a credit enhancement/liquidity strategy, we assist in the procurement of the facility. .4 , , 1 ; E. Relations with Rating Agencies: j l. j I Wbere requested, IMAGE would assist the Issuer and its financing team with the Rating Agencies. Ultimately, the Rating Agency's criteria is dependent upon the underlying credit quality of the Issuer. The Rating Agencies all view interest rate swaps as agreements and obligations that introduce additional risks to the Issuer's credit rating. The terms and conditions of the swap documentation are also viewed as having credit implications. The analysis goes far deeper than customary reviews of counterparty, collateral and termination requirements to include rollover risk, amortization risk, basis risk and tax event risk. Despite the credit implication risk assessment, the Rating Agencies view swaps as useful tools in the management of the Issuer's debt and asset risks. Thus, an aggressive approach to asset and liability matching can be viewed as positive by the Rating Agencies. For example, increasing the variable rate exposure of the Issuer can be viewed as positive if the approach is well hedged with swaps (lower cost/less risk/significant savings). Rating Agencies balance their view of swap exposure in the context of safety, minimization of risks and positive impacts on debt service. The bottom line credit analysis runs to the materiality of the underlying economic fundamentals and their impact on the Issuer's financial strength regardless of the number and type of swaps entered into by the Issuer. i . i i 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 9 An example of IMAGE's valuable participation in the rating process is the Pennsylvania Turnpike Commission. The Turnpike Commission has the highest percentage of "swapped" debt of any toll road in the Country (all of its 'swaps were completed by IMAGE). IMAGE was integral in the recently completed rating process that produced the highest collective ratings of all three agencies of any toll road in the Country. Each Authority concluded that although the swap exposure was much higher then they are accustomed to, that the swaps were very safe, minimizing in virtually all areas the risks and exposure of the Turnpike Commission, and provided significant cost savings that warranted the swap exposure. F. Analytical Criteria: IMAGE utilizes a combination of in-house, proprietary analytical models as well as nationally recognized derivative valuation and management systems provided by Bloomberg, for evaluating all swaps, swaptions, caps and other derivative transactions. The key parameters used in the models include, but are not limited to: Effective Date, Termination Date, Fixed Rate, Variable Index, First Coupon Date, Day Count Fraction, Payment Dates, Business Day Convention, Discounting Curve, Asset Type, Trade Status (spot or forward), Trade Settle Date, Payor Receive, Notional Amount, Notional Amortization, Valuation Date, Option Structure, Exercise Parameters and Option V ols. As we have designed our methods and programs for the analysis of derivative based products, including swaps and structural investments, we have not only called on our relationships in the market place, but have also, from time to time, employed the services of highly respected specialists from academic circles, the likes of Dr. Gary Gray and Dr. Jennifer Carpenter. Dr. Gary Gray is a consultant and visiting Professor of Finance at The Pennsylvania State University. He is a nationally respected specialist in municipal derivative products and has authored several books including "Municipal Derivative Securities, Uses and Valuation", published by IRWIN Professional Publishing, and "Street Smart Guide to Valuing a Stock", published by McGraw-Hill. Dr. Jennifer Carpenter is a tenured Professor of Finance with the Stem School of Business at New York University, She is a specialist in derivative security valuation and has been published many times in business and academic periodicals. G. Pricing: The first pricing consideration the Issuer should consider is whether to negotiate or competitively bid the proposed swap, The determination to negotiate a swap should be made after (i) IMAGE has provided the Issuer with an analysis that the particular swap under consideration, due to its size or complexity will produce more favorable pricing via negotiation rather than competitive bid, or (ii) the Issuer has determined that in light of the particular circumstances that a negotiated swap will promote and reward innovation of proprietary products. If a competitive process is elected, then the competitive process itself drives the pricing of the swap. If a negotiated process is determined to be in the Issuer's best interest, IMAGE provides a two pronged approach to price verification on negotiated swaps to ensure that the value obtained is on market and more then adequate. In addition to our analytical capabilities where we utilize our proprietary models with data derived from Bloomberg, Telerate, and other market sources, IMAGE utilizes a market 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 10 based process that includes a canvassing of the market for appropriate counterparties to replicate the proposed transaction and confirm the market pricing as shown by the counterparty, Just as in the competitive procurement process, IMAGE diligently works the market "pre-pricing" such that we know exactly "what the market will bear" on every pricing aspect of the swap, It is one thing to say "conceptually" or "mathematically" what the textbook value of something is, but if the market today is much greater or less than that perceived value, we will know that well in advance of the pricing date, For example, we all know that on an after-tax basis, BMA variable rate bonds should not trade at 95% of 30-day LIB OR, but they currently are! One must temper the textbook with the actual market. GivenIMAGE's prowess in the derivative market, we are the firm best suited to monitor these factors on behalf of the Issuer. H. Optional Termination All swaps that IMAGE has participated in provide the Issuers with the right to terminate the swap at the market value, at any time, without providing reciprocal rights to the counterparty. Market termination in this manner is based on the bid side of the market (in contrast to a termination whereby the Issuers is the burdened party as defined in the ISDA), which does not impair the rights or economics of the counterparty and therefore inclusion of this option is of no cost to the Issuers. The potential benefits are tremendous. One of the reasons that swaps are the single largest marketable financial instrument in the world is the liquidity that the swap market provides. Incorporating this termination option will allow the Issuer to capitalize on the liquidity of this market. IMAGE has utilized this provision to generate in excess of $100,000,000 of additional value on various swap transactions. / Embedding or "selling" the right for the counterparty to optionally terminate a swap can generate significant cost savings, and is a provision we have utilized in a number of transactions. An option to exercise at market is generally of value for Issuers of lesser credit quality, while an option to exercise at par is of significant value in all circumstances. However, any option for the counterparty is something that should be used judiciously, and only after all potential risks of the potential exercise of such an option are thoroughly explored. An innovative type of "termination option" that IMAGE has utilized recently.on several existing swaps where the Issuer is paying floating is known as a digital, knock-out option. This employs a temporary, or "periodic", termination option to generate significant value, and is yet another example of how IMAGE is always monitoring our existing portfolio of swaps for opportunities, and we are continually capitalizing on what the market is paying a premium for. The premise ofthe options is as follows: In exchange for either a significant cash payment from the counterparty to the Issuer today, or a significant increase in the fixed to floating spread, the Issuer grants the periodic option that if and when BMA averages below 2.0% during any monthly reset period, the swap payments are suspended (or "knocked out") just for that monthly period! When BMA goes back above 2.0%, the swap resumes just as it was previously. Analyzing historical data going all the way back to January 1982 through September of 2002 (when the transaction was completed), there were 1,071 weekly resets of BMA, and only 56 weekly resets were below 2,0%, and 40 of those 56 have occurred since November of 2001 (post September 11 th), But remember, the Issuer only cares about monthly averaging, not : . 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 11 ''P0:;,i!!1't;.JiK'"-;-;:;,I::';''t'i;;;'',~:N,.:1;,f'.~,',0,'",';;;,*,,g;'\i}t;,li~.\:{"~!2~~~'i}~';1ti';!>itWii:1&.::i\i:i;~,'kK<iID:"",,*~,~i!-;:>:-i1:t..1~r$~a~~'TI,;:;.rXl,'if~r>::~T.ill\_"';"'''.,'10}:m:-'~\"~:&'1;!~~~..,T,~~8."'\';;:-jt4...,1''t.T'!,ff..iffi!:"",,,:r.~k;:r::S1!..<.Jl.,;''Jn'~~~f:tI}"_:2,'1;,r{~J!t~~!;~F~:'!t1~'&~':'~f!&H.~it;'''\',':;.Jt~1?",;~-:;$,;~t;~~; weekly resets. Prior to November of this past year, even though there have been periodic dips below 2.0%, there had never been a monthly average below 2.0%! Since recent rates have been so low, we have structured the transaction such that the option is forward starting, for say a year, to guarantee the swap will not be suspended or "knocked out" no matter how low BMA goes for the next 12 months, hopefully giving the economy and financial markets time to return to normalcy. Although it is certainly possible that rates stay low or go even lower, it is more likely that interest rates start climbing in the future. The value of this option has generated 4% to 5% of the notional amount of the swap, or a 40 to 60 basis points increase in the fixed to floating spread for the Issuer. I. Assignment The standard ISDA allows either party the right to assign the Swap with consent from the other party. This provision is particularly useful in the market termination process. If the Issuer feels it is not receiving proper treatment or pricing from the counterparty, this right would act as an alternative course of action whereby the Issuer would receive the market value of the swap from a third party, and in return assign its position to the third party. IMAGE utilized this provision to a great advantage during the termination process of one of the PennsylvaniaTumpikes swaps. The Turnpike awarded a relatively small swap to a regional bank to reward it for other services provided. When it came time for the termination, with IMAGE's pricing analysis, the regional bank was offering to pay an amount nearly half of what we calculated the market value to be. By utilizing just the "threat" of assignment, IMAGE and the Turnpike were able to force the regional bank to pay an on-market termination payment. Properly negotiated, there should be no incremental cost to the Issuer for the assignment rights. J. Standards and Procedures of Counterparty Selection: The minimum credit ratings should be those ratings that, either through collateral provisions or direct credit of the swap counterparty or guarantor, both provide the Issuer comfort with the counterparty exposure and has no effect on the Issuer's own credit ratings. IMAGE recommends that the minimum rating criteria the Issuer should impose upon potential counterparties, or their guarantors, be a rating that is at least in the highest two categories of one nationally recognized statistical rating Agency and at least in the highest three categories from any other nationally recognized statistical Rating Agency. At anytime during the term of the swap, either initially or in the event of downgrade, appropriate collateralization, termination and assignment provisions should be in place. K. Collateralization Most swaps that IMAGE has participated in require collateralization either from the outset or upon a market or rating event. These collateralization requirements are imposed on the counterparty/guarantors. In a rating downgrade event, as provided in the documents, collateral is required to be provided in the amounts and types set forth to protect the Agency and meet minimum ratings. Notwithstanding the credit rating of the swap counterparty, many Issuers have required collateral to be delivered when the swap reaches certain market value thresholds, In the event that a swap provider must collateralize the swap agreement, the swap will be collateralized pursuant to a standard Credit Support Annex (CSA), with the securities held by a Tri-Party Custodian approved 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 12 "~lti;k'Y)'d:;::t&;n.-:':-~~?~,~:;--",,",~,~~.'~'if'A~~"}~~ by the Agency, or the collateral may be held by the counterparty, but only with prior consent of the Agency (certain counterparties will "pay" (i.e., better interest rate) for this right). All costs of collateralization (including the fees and expenses of the custodian) will be borne by the downgraded party who must post the collateral. A weekly (or daily) mark-to-market value of the swap determines the level of collateral posted. The collateral is bankruptcy remote and held by a third party. Collateral is in the form of cash or government securities typically at levels listed below. A reasonable representation of where the market is with respect to collateral is set forth below: - Cash valued at 100% - U.S, Treasury Obligations (maturity <2 years) valued at 98% (i.e., 102%) - U.S. Treasury Obligations (2 years < maturity < 10 years) valued at 97% (i.e., 103%) - U.S. Treasury Obligations (maturity> 10 years) valued at 96% (i.e" 104%) - U.S, Agency Obligations (maturity < 2 years) valued at 97% (i.e., 103%) - U.S. Agency Obligations (2 years < maturity < 10 years) valued at 96% (i.e., 104%) - U.S. Agency Obligations (maturity> 10 years) valued at 95% (i.e., 105%) L. Special Practice Groups: IMAGE's key strengths as a Swap Advisor are its unique combination of professionals, the breadth of their experience, the size of its staff, our macro perspective on swaps and derivatives and our proactive approach to the advisory process. The use of a Swap Advisor such as IMAGE, devoted solely to these instruments, will add enormous value to the process. There are a variety of potential risks inherent in swap transactions. Examples of risks associated with swaps are: the balancing of BMA exposure versus the percentage of LIB OR exposure; the exposure to rising versus declining interest rates over time; the inherent risks in the underlying documentation with respect to the exit strategies, credit downgrades and termination events; and the lack of transparency on pricing, combined with a lack of market knowledge, (just to name a few), all of which can team up for problems over time if not properly managed with the services of a Swap Advisor with these core competencies. IMAGE has assembled its professional staff with one thing in mind, proficiency in swap and related derivative transactions, We are not a general financial advisory firm or municipal broker-dealer who also advise on swaps "part time", The unique talents of the individuals who comprise our firm are unmatched in the industry, and our proactive approach to utilize our talents consistently have demonstrated significant value added to our clients. We do not simply sit back and wait for questions or proposals to be posed to us. Weare pro actively looking for opportunities in the marketplace and searching for enhancements on each and every transaction in which we participate; Importantly, we maintain a macro perspective for the Issuer's swap and derivative exposure, while we are engaged in the micro-analytical work on any individual swap, The level of staffing is important as well. Market opportunities can be fleeting, especially in the recent volatile market environment. The Issuer can not afford to "wait in line" behind other clients. IMAGE has the largest staff of full time, exclusive derivative professionals of any firm in this business, ready to serve the Issuer on a moments notice, (See Appendix C - "Comments by Recent Swap Clients"). 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 13 M. Counterparty fees: The myriad of swap products available to the Issuer all have different pricing and fee dynamics. The range of such fees depends on the structure of the swap, the market environment at the time, and other issues specific to the Issuer which may impact the pricing. IMAGE can add value in all areas of the fee process. There are certain fee characteristics that are inherent in virtually all swaps which we summarized in herein, In addition to these pricing components, other significant fees may include forward premiums on forward starting swaps, option premiums on swaptions and knock-out options, and funding charges associated with cash paid to the Issuer on any of these structures. The forward premium charges are a product of the forward starting date of the swap, the amortization of the swap after the start date and the shape of the yield curve at the time of the transaction, and should not include any additional fee or profit component of the swap counterparty. With IMAGE's unparalleled technical and analytical capabilities (as previously detailed herein) we can independently calculate the exact cost of the forward premium to make sure the final swap pricing reflects only the structural cost of the forward start date, and not any additional premium added by the swap counterparty. Option premiums can also be a significant fee component of many swaps. This premium can be calculated in several ways. For each transaction containing an option, IMAGE utilizes a combination of proprietary option models structured specially for IMAGE; option valuation capabilities utilizing Bloomberg Financial Services, and our market based pricing procedures summarized in herein. However, IMAGE's value to the Issuer is not just what "the option" generically is worth, but how the option should be structured. In a recent transaction with a major issuer of municipal bonds, the financial advisor and swap counterparty had proposed a swap with an embedded termination option to the issuer. The option was worth approximately $6,000,000 as proposed by the financial advisor and swap counterparty. Rather then just confirm that $6,000,000 was the right number for that option, we first asked was this the right option to employ and, if so, is it being structured properly? After a diligent analysis of the swap and the financing structure, we concurred with the financial advisor and swap counterparty that yes the option was appropriate, but we made a material amendment to the structure of the swap. With our amendment, the option was then worth $9,700,000 with no adverse effect whatsoever for the issuer. This value added analytical and structuring capability is what separates IMAGE from any other firm in this industry. N. Ongoing Surveillance: IMAGE maintains an active database of all swap and derivative transactions in which it has participated. As the Swap Advisor, IMAGE will provide periodic mark to market valuations of the swap so that the Issuer and the financial advisor can fulfill their fiduciary responsibility to manage its debt and risk profile and comply with GASB/F ASB guidelines, IMAGE will also provide timely updates of the ever changing swap market; including BMA/LIBOR trading relationships, option valuations, tax and regulatory changes, as well as, cutting edge developments in various swap structures and products. IMAGE'S clients have taken tremendous advantage of this service; having reaped several 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 14 :f.~;~.:::.;:;~".;(;<~;:....:G._lc...~.-;;:;.~~"9-.;1 hundred million (collectively) in termination and/or option premiums from swap opportunities IMAGE has actively monitored. As evidenced by the "report" names on our swap experience list, approximately 20% of our transactions are as a direct result of restructurings derived from this process. After the closing of the agreement, and for the life of the swap, IMAGE provides any guidance necessary for the continued compliance with the terms and conditions of the agreement. Most importantly for the Issuer, IMAGE vigilantly monitors the ongoing short- term and long-term ratings of the agreement provider to insure their ratings are in conformity with the minimum credit rating stipulated in the agreement. If the downgrade mechanisms have been triggered, the agreement provider must take remedial action (i.e., collateralization) within the specified time period to insure the ongoing safety to the Issuer. If the remedies afforded the counterparty have not been exercised, then the Issuer has the right to terminate the agreement by following the default sections of the agreement. If a termination payment is due and owing, IMAGE is there to insure the payment is calculated in accordance with the provisions in the agreement, and that the payment is made on a timely basis. IMAGE is also then immediately available to restart the process, if appropriate, to provide a substitute product. IMAGE strives to be responsive at all times to the Issuer's needs and act as an intermediary between the Issuer, its financial advisor and the provider of the swap agreement product. 3. References 1) Rita 1. Sallis Deputy Comptroller of Public Finance New York Agency Office of the Comptroller One Centre Street Room 517 New York, New York 10007 Telephone: (212) 669-8318 E-mail: rsallis@comptroller.nyc.gov 2) Roger Anderson Executive Director New Jersey Educational Facilities Authority 101 College Road East Princeton, New Jersey 08540 Telephone: (609) 987-0880 E-mail: Anderson@njefa.com 3) J. Blair Fishburn Deputy Executive Director Pennsylvania Turnpike Commission Route 283 & Eisenhower Blvd, Highspire, Pennsylvania 17034 Telephone: (717) 986-8703 E-mail: jfishbur@paturnpike.com 4) Daniel P. Jantzen Vice President of Fiscal Services Dartmouth-Hitchcock One Medical Center Drive Lebanon, New Hampshire 03756 Telephone: (603) 653-1102 E-mail: danieL p.j antzen@hitchcock.org 886 Vaughn Road, Pottstown, PA19465 Phone 610-326-4902 Facsimile 610-326-4902 15 Issuer North Carolina Medical Care Commission Delaware River Port Authority North Carolina Medical Care Commission Pennsylvania Turnpike Commission Pennsylvania Turnpike Commission Pennsylvania Turnpike Commission Pennsylvania Turnpike Commission Louisville & Jefferson Metropolitan Sewer and Drainage System UPMC Health System County of Bucks, Pennsylvania North Carolina Capital Facilities Finance Agency Louisville & Jefferson County Metropolitan Sewer District Lancaster County Hospital Authority Delaware River Port Authority York County Cerebral Palsy Home, Inc. d/b/a Margaret E. Moul Home County of Berks Langston, Oklahoma Pennsylvania Turnpike Commission Pennsylvania Turnpike Commission Pennsylvania Turnpike Commission Florida Institute ofTechnology Rural Enterprises of Oklahoma, Inc. Metropolitan Washington Airport Authority Development Authority of laGrange (Georgia) Dartmouth-Hitchcock (Mary Hitchcock Memorial Hospital) Lancaster County Hospital Authority New Hampshire Health and Education Facilities Authority Development Authority of laGrange (Georgia) Lancaster Industrial Development Authority Mission SI. Joseph's Health System, Inc, Mission SI. Joseph's Health System, Inc, Lancaster Industrial Development Authority Palm Beach County Health Facilities Authority (BRCH Corp) Delaware River Port Authority County of Lancaster, Pennsylvania North Wales Water Authority (Montgomery County, PAl Pennsylvania Intergovernmental Cooperation Authority Palm Beach County Health Facilities Authority (BRCH Corporation) City of A~anta City of Atlanta South Carolina Jobs - Economic Development Authority Mission SI. Joseph's Health System Pennsylvania Turnpike Commission City of Reading, Pennsylvania Pennsylvania Intergovernmental Cooperation Authority Rural Enterprises of Oklahoma, Inc. County of Berks Martha Jefferson Health Services Corporation Allegheny County Airport Authority Palm Beach County Health Facilities Authority (BRCH Corp) County of Chester Milan Area Schools WCN Properties, L.P. Mission SI. Joseph's Health System Saline Area Schools Holt Public Schools County of Lancsster, Pennsylvania Louisville & Jefferson County Metropolitan Sewer District Louisville & Jefferson County Metropolitan Sewer District South Carolina Jobs - Economic Development Authority County of Berks Savannah College of Art & Design Lakeview School District Illinois Development Financing Authority (Bradley University) Beaver County Bethlehem Authority City of New York City of New York City of New York City of New York City of New York City of New York City of New York Notional Amount $20,000,000.00 $50,000,000.00 $7,000,000.00 $171,716,250.00 $57,238,750.00 $66,675,000.00 $193,615,000.00 $100,000,000.00 $211,795,000.00 $22,000,000.00 $5,000,000.00 $282,165,000.00 $17,825,000.00 $869,720,000.00 $5,000,000.00 $20,000,000.00 $22,430,000.00 $169,925,000.00 $288,140,000,00 $160,790,000.00 $3,110,000.00 $15,795,000.00 $241,780,000.00 $23,000,000,00 $129,700,000,00 $79,275,000.00 $129,520,000.00 $23,000,000,00 $3,500,000.00 $12,000,000.00 $12,000,000,00 $3,500,000.00 $33,000,000.00 $66,065,000,00 $24,900,000.00 $23,100,000.00 $253,145,000.00 $33,000,000.00 $334,880,000.00 $105,370,000,00 $40,000,000.00 $20,000,000.00 $288,202,500.00 $23,255,000.00 $326,865,000.00 $9,475,000.00 $20,000,000.00 $25,370,000.00 $114,500,000.00 $33,335,000.00 $22,850,000.00 $44,845,000.00 $6,125,000.00 $18,530,000.00 $105,755,000.00 $84,925,000.00 $13,945,000.00 $84,868,600.00 $125,921,400.00 $55,000,000.00 $2,521,000.00 $48,540,000.00 $32,785,000.00 $39,850,000,00 $59,855,000.00 $6,000,000.00 $135,050,000.00 $80,000,000.00 $33,850,000.00 $93,085,000.00 $200,000,000.00 $150,000,000.00 $100,000,000.00 Swap Structure Swap RestructuringfTermination Option Forward Starting Reverse Interest Rate Swap UBOR - Floating to Fixed Swap RestructuringfTermination Option Swap RestructuringfTermination Option Swap RestructuringfTermination Option Swap RestructuringfTermination Option Swap RestructuringfTermination Option Swap RestructuringfTermination Option Reverse Interest Rate Swap Agreement - Spread over BM), BMA - Floating to Fixed Forward Starting Interest Rate Swap UBOR - Floating to Fixed Forward Starting Fixed to Floating Inl. Rate Swap UBOR - Floating to Fixed Forward Starting Interest Rate Swap BMA - Floating to Fixed Forward Starting Interest Rate Swap Forward Starting interest Rate Swap Forward Starting Interest Rate Swap Shadow Pricing Reverse Swap and Basis Swap Forward Starting Interest Rate Swap .UBOR - Floating to Fixed Total Return Swap (Synthetic Floating) Forward and Spot Starting Interest Rate Swap Market Pricing Letter Swap Extension BMA - Floating to Fixed BMA - Fixed to Floating BMA - Floating to Fixed BMA - Floating to Fixed BMA vs. UBOR Forward Starting Interest Rate Swap UBOR - Floating to Fixed Forward Starting Interest Rate Swap Forward Starting Interest Rate Swaption - UBOR BMA vs. UBOR Market Pricing Letter - Fixed to Floating Market Pricing Letter - UBOR and Floating to Fixed UBOR - Floating to Fixed Swa ption Swap RestructuringfTermination Option UBOR - Floating to Fixed Market Pricing Letter Reverse Swap and Basis Swap Forward Starting Interest Rate Swap Forward Starting interest Rate Swap Market Pricing Letter - BMA Floating to Fixed BMA Fixed to Floating Forward Starting Interest Rate Swaption BMA - Floating to Fixed Floating to Fixed Swap - Taxable UBOR - Floating to Fixed BMA - Floating to Fixed BMA Floating to Fixed UBOR - Floating to Fixed BMA - Floating to Fixed BMA - Floating to Fixed Market Pricing Letter - Floating to Fixed Swap Conversion from BMA to UBOR Forward Starting Swap BMA Floating to Fixed UBOR - Flating to Fixed Swaption BMA - Floating to Fixed UBOR - Floating to Fixed UBOR - Floating to Fixed Basis Swap Basis Swap Basis Swap Basis Swa p Basis Swa p 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 Competitive or Neqotiated Negotiated Competitive Competitive Competitive Competitive Competitive Competitive Competitive Negotiated Competitive Competitive Competitive Competitive Competitive Negotiated Competitive Negotiated Competitive Competitive Competitive Negotiated Negotiated Competitive Negotiated Negotiated Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Competitive Competitive Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Negotiated Negotiated Negotiated Competitive Competitive Negotiated Negotiated Competitive Negotiated Negotiated Competitive Negotiated Negotiated Competitive Competitive Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Louisville & Jefferson Metropolitan Sewer District Southeastem Pennsy1vania Transportation Authority, Series 1995B Southeastem Pennsy1vania Transportation Authority, Series 1997 Southeastem Pennsy1vania Transportation Authority, Series 1999 AS New Jersey Economic Developrrent Authority County of Cuyahoga (MetroHealth System) New Jersey Educational Facilities Authority, NJ City University Southgate Properties Pennsy1vania Intergovemmental Cooperation Authority City of New York Clear Creek Independent School District City of New York Industrial Developrrent Authority EMH Regional Medical Pennsy1vania Turnpike Commission William Beaurront Hospital, Michigan Butler County General Authority, Erie School District Bronson Methodist Hospital Butler County General Authority, Butler Schooi District UPMC Health System Dartroouth-Hitchcock (Mary Hitchcock Memorial Hospital) Pitney Road Partners (Harrisburg Comrrunity College) Pitney Road Partners (Harrisburg Comrrunity College) Pitney Road Partners (Harrisburg Comrrunity College) Bronson Methodist Hospital Bronson Methodist Hospital New Jersey Housing and Mortgage Finance Agency New Jersey Housing and Mortgage Finance Agency City of New York Marietta Area Healthcare, Inc. Harrisburg Authority Harrisburg Authority Montgomery County, Pennsy1vania Montgorrery County, Pennsy1vania City of Harrisburg City of Harrisburg City of New York St. Joseph Health System St. Joseph Health System Louisville & Jefferson County Visitors and Convention Commision State of Ohio City of New York City of New York Savannah College of Art & Design Butler County General Authority, New Castle School District Butler County General Authority, New Castle School District Butler County General Authority, New Castle School District Dauphin County, Pennsy1vania Dauphin County, Pennsy1vania Dauphin County, Pennsy1vania Lakeland Regional Health Systems Pennsy1vania I ntergovemmental Cooperation Authority Harrisburg Authority (City of Harrisburg School District) Harrisburg Authority (City of Harrisburg School District) Harrisburg Authority (Ciiy of Harrisburg School District) Summa Health System Canon-McMillan School District Iroquois School District, Erie, Pennsy1vania Montefiore Medical Center City of New York Ridley School District City of New York Pennsy1vania Turnpike Commission WCN Properties, LP. North Shore-Long Island Jewish Healthcare, Inc. North Shore-Long Island Jewish Healthcare, Inc. North Shore-Long Island Jewish Healthcare, Inc. North Shore-Long Island Jewish Healthcare, Inc. North Shore-Long Island Jewish Healthcare, Inc. Canon-McMillan School District North Broward Hospital District North Broward Hospital District Beaver County Prospects Aggregates, Inc. Metropolitan Atlanta Rapid Transit Authority Metropolitan Atlanta Rapid Transit Authority $190,790,000.00 $9,525,000.00 $131,335,000.00 $215,290,000.00 $3,000,000,000.00 $56,000,000.00 $22,000,000.00 $7,500,000.00 $163,185,000.00 $350,000,000.00 $58,855,000.00 $77,960,000.00 $24,260,000.00 $160,000,000.00 $78,475,000.00 $37,310,000.00 $87,355,555.00 $38,960,000.00 $168,090,000.00 $22,400,000.00 $17,435,000.00 $595,000.00 $24,795,000.00 $49,450,000.00 $49,450,000.00 $13,565,000.00 $24,015,000.00 $500,000,000.00 $22,600,000.00 $31,480,000.00 $65,000,000.00 $45,710,000.00 $34,085,000.00 $15,880,127.00 $14,604,000,00 $50,000,000.00 $57,402,000.00 $57,804,250.00 $7,000,000.00 $58,725,000.00 $250,000,000.00 $100,000,000.00 $32,521,600.00 $8,870,000.00 $9,695,000.00 $9,485,000.00 $12,465,000.00 $11,320,000.00 $11,150,000.00 $30,000,000.00 $326,865,000.00 $20,024,000,00 $77,000,000.00 $51,390,000,00 $40,000,000.00 $23,195,000.00 $12,575,000.00 $172,245,000.00 $50,000,000.00 $19,655,000.00 $500,000,000.00 $80,000,000.00 $4,000,000.00 $50,000,000,00 $10,000,000.00 $15,000,000.00 $15,000,000.00 $15,000,000.00 $11,755,000.00 $80,640,000.00 $100,000,000.00 $59,855,000.00 $20,575,000.00 $200,000,000.00 $518,390,000.00 B~L1BOR Basis Swap L1BOR - Floating to Fixed L1BOR - Roating to Fixed L1BOR - Floating to Fixed Forward Starting Floating to Fixed L1BOR Swap BMA Roating to Fixed Spot Staring L1BOR Interest Rate Synthetic Fixed I nterest Rate Swap Basis C!>P Swap L1BOR - Floating to Fixed Escrow Swap Total Return Swap Spot Starting Swap BMA Fixed to Floating Synthetic Fixed Swaption Swaption Basis Swap Swaption L1BOR Floating to Fixed Total Return Swap (Synthetic Floating) Spot Starting Taxable L1BOR Interest Rate Swap Spot Starting Taxable L1BOR Interest Rate Swap Spot Starting Taxable L1BOR Interest Rate Swap Spot Starting L1BOR Interest Rate Swap Spot Starting L1BOR Interest Rate Swap L1BOR - Floating to Fixed LI BOR - Floating to Fixed Total Return Swap BMA - Floating to Fixed BMA Floating to Fixed BMA Floating to Fixed L1BOR - Floating to Fixed L1BOR - Floating to Fixed Swap Extension . Swap Extension CPI Indexed Swap Market Pricing Letter - L1BOR Floating to Fixed Market Pricing Letter - L1BOR Floating to Fixed BMA - Floating to Fixed Market Pricing Letter - L1BOR - Floating to Fixed Swaption Swaption Swap Restructuring Swaption Swaption Swaption Fixed to Roating Fixed to Floating Fixed to Floating Fixed to Floating Market Pricing Letter - Basis Cap L1BOR - Floating to Fixed Chooser CAP Swaption LI BOR - Floating to Fixed L1BOR Floating to Fixed (Synthetic Fixed) Market Pricing Letter - Swaption Interest Rate Swaption Forward Starting Interest Rate Swap CPI Synthetic Fixed Rate Swap BMA Based Fixed to Floating B~L1BOR Basis Swap Forward Starting Interest Rate Swap Interest Rate Swap L1BOR - Floating to Fixed L1BOR - Floating to Fixed L1BOR - Floating to Fixed L1BOR - Floating to Fixed L1BOR - Floating to Fixed L1BOR - Floating to Fixed B~L1BOR Basis Swap B~L1BOR Basis Swap Basis CAP Floating to Fixed Interest Rate Swap Basis Swap Basis Swap 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 Competitive Competitive Competitive Competitive Competitive Negotiated Competitive Competitive Negotiated Competitive Negotiated Negotiated Competitive Competitive Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Competitive Negotiated Negotiated . Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Negotiated Negotated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negoliated Negotiated Negotiated Negotiated DAVID J. ECKHART, President and Managing Director Expe1ience: Mr. Eckhart has been involved in the derivative and reinvestment marketplace since 1988. Mr. Eckhart is one of the founding principals of IMAGE, established in November, 1992. Since then, IMAGE has grown to be one of the largest independent firms in the marketplace, managing the placement of over $100 billion of derivative products, Mr. Eckhart is an innovator in the marketplace, developing ideas that create significant value to IMAGE participants. Prior to founding IMAGE, he was Senior Vice President of a West Coast reinvestment firm from 1989 until 1992. He also served as an investment banker with Shearson Lehman Hutton, Inc. for seven years, where he was involved in structuring several innovative financings for many types of issuers including cities and counties, hospitals, airports, prisons, resource recovery and others. Education: Mr. Eckhart received his B.S. degree in Marketing and his M.B.A. in Finance from The Pennsylvania State University. MARTIN J. STALLONE, Managing Director Experience: Marty joined IMAGE in 1999 as a Managing Director. Prior to this, Marty was the founding partner and President of Hamilton Consulting, Inc., a Pennsylvania based, full service regional financial advisory firm. He also served as Vice President of the Corporate and Municipal Finance Department of Meridian Capital Markets. Marty specialized in structuring complex capital finance transactions for business corporations, nonprofit entities and municipalities, Marty's extraordinary financial and computer analytical skills, coupled with over fifteen years of experience in the public markets, provides him with the ability to undertake the structuring of complex finance transactions and the implementation of these structures to address the needs of any client. Since joining IMAGE, Mr. Stallone has pioneered the firm's efforts in interest rate swaps and embedded option transactions. IMAGE now represents several of the largest issuers of municipal bonds in the Country who, with IMAGE's assistance, are on the cutting edge of municipal derivative technology. Several transactions that Marty and IMAGE have completed include: the largest hedging program ever implemented by a public issuer, one of the largest BMA Index swaps ever completed by a public issuer, first of its kind option structures for various public issuers, and certain transactions that had been written off as "undo able" by others before them. Marty's resume of completed swap transactions ranks second to none in the public/municipal swap industry. His extensive experience in municipal and structured finance has allowed him to expand and improve the use of these types of products to better serve IMAGE's clients. Professional Activities: Marty has been the featured speaker regarding these topics for many organizationar seminars and conventions including over a half-dozen national municipal derivative conferences, the Virginia State Municipal Issuers Conference, the Government Finance Officer's Association, the Pennsylvania Municipal Authorities Association, Pennsylvania Association of School Business Officials and regional bench bar and CPA continuing education seminars. . Education: Marty is a graduate of Comell University (BA) where he was honored as a National Merit Scholar, 886 Vaughn Road; Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 "l I I~ I ~ I M ~ ~ ~ ~ ~. ~ t' h ~ 1, I" f:l ~ I,~ ~ ~ . ~ ;1 II iJ "~.~ CHRISTOPHER S. MONAGHAN, Senior Vice President Experience: Mr. Monaghan joined IMAGE in 2004, He has been involved with public finance since 1987. Prior to joining IMAGE, he was a Senior Vice President at Penn Capital Advisors performing financial advisory work for municipal issuers in Pennsylvania, New Jersey and Delaware. While at Penn Capital, Mr. Monaghan was active in the origination, documentation and structuring of a wide variety of financings including general obligation, water and sewer, schools, transportation, health care and special revenue issues. Prior to Penn Capital, he was a Vice President in the Philadelphia Public Finance office for Smith Barney Inc. While at Smith Barney, he was also a member of the Division's Technical Group specializing in innovative financing techniques involving tax analysis and derivative products and has experience in both these fields. He has personally been financial advisor or lead banker on deals ranging from $1 million to over $700 million and has relevant experience structuring deals ranging up to $1 billion. In addition, he has assisted many of these clients in the investment of bond proceeds and the implementation of derivative products. Education: Mr. Monaghan received a B.A. in Economics from Villanova University and an M,B.A. from Georgetown University, Graduate School of Business. MICHAELW. GARNER, Vice President Experience: Mr. Gamer joined IMAGE in 2002. Prior to joining IMAGE, he served as an Assistant Vice President in the Investment Banking Group of The GMS Group, L.L.C. and an Associate with Commerce Capital Markets. During that time, he completed diverse taxable and tax-exempt bond issues on both a public offering and private placement basis. These financings included school district and general obligation, water and sewer revenue, investor owned utilities and other industrial development projects, and various healthcare and housing transactions. He joined IMAGE to provide various cashflow and investment analyses, escrow structuring, and derivative structuring, pricing and analyses. Education: Mr. Gamer earned a Bachelor of Science degree in Business from The Pennsylvania State University. ROBERT R. KINTNER, Vice President, Director of Valuation, Advisory & Reporting Services Experience: Mr, Kintner joined IMAGE in 2004. Prior to joining IMAGE, he served as Assistant Vice President in the Municipal Underwriting and Trading at Tucker Anthony, Inc. and an Assistant Trader and Underwriter for Hopper Soliday & Co., Inc. During that time, he assisted in the development and management of a $200 million Tender Option Bond Program, performed underwriting and remarketing for short-term and variable rate municipal issues, and assisted with proprietary trading and hedging strategies for municipal bonds. Mr. Kintner joined IMAGE to provide Valuation, Advisory, and Reporting (V AR) Services. Education: Mr. Kintner earned a Bachelor of Science degree in Business Management from Millersville University. 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 Introduction: Blair Fishburn isthe Deputy Executive Director in charge of Finance and Administration for the Pennsylvania Turnpike Commission. Image has completed over a billion in notional amount of various swaps for the Pennsylvania Turnpike Commission in the past several years. Dave, Marty, Please accept my sincerest apologies for being delinquent with this....I want to thank you and commend you for the fantastic job on the U thru W swap bids!! I know Marty, Kathy and Nick were all not just pleased, but exhilarated, at the conclusion of the activity. The rates you/we got on the swaps have made our debt refinancing plan savings even better-beyond our expectations! I'm no seasoned investment/derivatives industry veteran, but I can't imagine any other firms in the same market segment (niche?) that could do what Image does any better!! You folks are professionals, you're sharp, smart and shrewd.... with a combination of intellect, experience and creativity who makes us, your client, extremely successful. One observation I've shared with many people about doing business with Image is that although we know we're not your only client, and you do make pretty good money along the way, but whenever there is work that you perform for us, you give the impression that we're your most important client. In all the deals we've done in my tenure, you guys are focused, proactive, responsive and achieved all our objectives with quality results. In spite of sounding over-enthusiastic, and I don't mean to be effusive with all this, but I am, and the PTC overall is, an extremely delighted Image customer!!! Many thanks, Blair 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 Introduction: Dan Jantzen is the Vice President of Fiscal Services for Dartmouth- Hitchcock Medical Center. Image has completed several swap and reinvestment derivative transactions for Dartmouth-Hitchcock Medical Center in the past several years. From: Daniel P. Jantzen [Daniel.PJantzen@Hitchcock.ORG] Sent: Tuesday, February 05, 2002 2:46 PM To: marty@imagepa.com Subject: Thanks You are a miracle worker! Not only that, I really appreciate and enjoy working with you. Thanks for all of the help. 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 M~iF..>;.".:_\.":..~;j::~m<lli-.X~~~;;..:;l.~\;;..;l.%W3l.~~~!<ti~~~~~.::>..~J;\I".;ti.~~~ffl;m~..--..W.i~~~~_<m--.J,"lt~&;t~liH;;t,lil!U;l';;:l,~'x~~~,Zi?~;]:;'~~;~~;'\~\\'-'~_*;;~~:;1t4_~t,"1j-<:-'~:!i~M..~~l:>;:;;c)}1i:':"""'\-'I:$;:';'-'J~-~'i1<;m~~!~;. Introduction: Paul Powers is the Vice President/Chief Financial Officer for the Lakeland Regional Medical Center. Image completed a restructuring of two Lakeland Swaps that netted the Medical Center in excess of $4 million. From: Paul Powers [mailto:paul.powers@lrmc.com] Sent: Friday, March 28,2003 8:55 AM To: Marty@imagepa.com Subject: Re: Memo Thanks Marty you did a great job. I appreciate all you did on this project. I have a Happy CEO and Authority thanks to you andDave. I will be out of the office for the next two weeks. I will call you when I get back about the 2002 Bonds. PAP 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 I I 1 ~~~~~ Introduction: Alan Anders is the Executive Director for the City of New York's Office of Management andBudget. Image completed the first competitive bid swap by New York City, a $350,000,000 LIBOR based swap to fixed. From: Anders, Alan [mailto:AndersA@omb.nyc.gov] Sent: Tuesday, July 01,2003 5:29 PM To: marty@imagepa.com Subject: From Alan Anders Tuesday 5:30 pm Well Marty, that was certainly easy!!! (Only kidding). Great job! Alan 886 Vaughn Road, Pottstown, PA 19465 Phone 610-326-4902 Facsimile 610-326-4902 ~ I I ~ ~ ~ ~ ~ ~ ~ !