HomeMy WebLinkAboutINVESTMENT MANAGEMENT ADVISORY GROUP INC SWAP ADVISORY SERVICES
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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
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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.
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886 Vaughn Road, Pottstown, PA 19465
Phone 610-326-4902 Facsimile 610-326-4902
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· 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,
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MP.:!Jil1-1. Stallone
Managing Director
Investment Management Advisory Group, Inc.
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Accepted by:
~C8mm.i88i~n'l.er Betty Deard
City of gusta, Georgia
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886 Vaughn Road, Pottstown, PA 19465
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PROPOSAL TO:
., CITY OF AUGUSTA, GEORGIA
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REGARDING:
SWAP ADVISORY SERVICES
INVESTMENT MANAGEMENT
ADVISORY GROUP, INC.
June 10, 2005 '
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886 Vaughn Road, Pottstown, PA 19465
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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
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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.
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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
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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
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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
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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!
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Phone 610-326-4902 Facsimile 610-326-4902
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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
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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
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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
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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
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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
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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
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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
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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
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Competitive
Negotiated
Competitive
Competitive
Competitive
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Negotiated
Competitive
Negotiated
Negotiated
Competitive
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Negotiated
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Negotiated
Negotiated
Negotiated
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Competitive
Competitive
Competitive
Competitive
Negotiated
Negotiated
Negotiated
Negotiated
Negotiated
Competitive
Negotiated
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Competitive
Competitive
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Competitive
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Competitive
Negotiated
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Competitive
Competitive
Competitive
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Competitive
Competitive
Negotiated
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Negotiated
Negotiated
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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
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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
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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
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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
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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
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