The Basics of Municipal Bond Underwriting Presented By

The Basics of Municipal Bond Underwriting Presented By: Darci Doneff Managing Director, Municipal Trading and Underwriting Wednesday, January 10 th, 2007 Since 1895. Member SIPC and NYSE.

The Municipal Market Defined Definition of the municipal securities market • Municipal securities are debt obligations issued by states, cities, counties, and other governmental entities to raise money to build schools, highways, hospitals, and sewer systems, as well as many other projects for the public good. • Municipal Securities are the most important way the U. S. state and local governments borrow money to finance their capital investment and cash flow needs.

Characteristics of Municipal Bonds Carry Unique Characteristics • The most important distinguishing characteristic of the municipal securities market is the exemption of interest from federal income taxes • Municipal issuers can therefore borrow at significantly lower interest rates than other debt markets • There are currently in excess of $2 trillion in outstanding municipal debt • There are more than 70, 000 issuers with over 3 million CUSIPS

Municipal Market ~ Underwriting Volume 2006 Statistics q $390 Billion q Fixed Rate § q Variable Rate § q 75%, $294 Billion Competitive § A-1 16%, $61 Billion Negotiated § q 84%, $329 Billion 25%, $96 Billion

Municipal Market ~ Underwriting Participants Primary Market Issuers q Financial Advisors q Bankers q Underwriters q Sales Staff q Investors q Secondary Market Traders q Investors q A-2

Municipal Market ~ Participants continued… Issuers q q State & Local Governments Special Purpose ~ Authorities, Districts, and Non-Profits Underwriters and Bankers q Senior Manager § § § q May assist issuer and FA with financing plan. Communicates with issuer, FA, and co-managers. Manages the bond sale process. Co-Managers § § Adds marketing capability and expands investor base through local presence, middle market capabilities, or special niche investors. Supports the sale by committing capital to buy/sell bonds. Sales Staff q q A-3 Institutional Direct & Pooled Retail

Municipal Market ~ Investors Tier 1 Top 100 Accounts q Large Arbitrage & Hedge Funds, Bond Funds, Corporations, Insurance Companies, Money Managers, Mutual Funds, Large Banks q Tier 2 Middle Markets q Mid-size Banks, Corporations, Funds, Insurance Companies, Money Managers, Trusts q Tier 3 Direct Retail q Pooled Retail q A-4

Types of Municipal Underwriting Competitive @ 25% of Market q Most General Obligation, AAA Insured and other straight forward structures. q Stable market conditions. q Negotiated @ 75% of Market q Relatively complicated transactions q Transactions sensitive to small swings in interest rates. q Issuer/Transaction lacks strong investor demand. q Volatile bond market. q B-1

Competitive Underwriting Defined Competitive Underwriting • Process whereby an underwriter submits a sealed bid to the issuer via electronic, fax or hand delivery • Issuer selects the underwriter bidding the best (highest) price and the lowest interest cost • Depending on the size, credit quality and current market conditions an issuer can expect to receive on average 5 separate bids

Competitive Underwriting Process Issuer Identifies a Capital Need: Ex. City of Minneapolis Road Improvements Closing: Distribute proceeds to issuer and road construction begins Locate Buyers Determine Sale Date & Time Issuer Accepts Bids & Awards Based on Low Interest Cost Dealer Takes Issue Into Inventory

Negotiated Underwriting Defined Negotiated Underwriting • Process whereby both the purchase price and the offering price for a new issue are negotiated between the issuer and the underwriter • The underwriter pays the issuer a purchase price and the public the offering price the difference represents the spread the issuer pays • Underwriters selected to negotiate a new issue generally must first enter into a request for proposal (RFP) process

Negotiated Underwriting Process Issuer Identifies a Capital Need: Ex. Hennepin County decides to build a new Twins Stadium Closing: Distribute proceeds to issuer and begin construction Locate Buyers RFP Process Interview Bankers Marketing Pricing

Competitive vs. Negotiated Some considerations: Competitive Date & Time Set Pricing Parameters Set Call Features Set Underwriting Spread ? ? Marketing Time Frame ½ day Coupon Bifurcation No Retail Priority ? ? B-2 Negotiated Flexible Set 3 weeks Yes

Deal Economics of Municipal Underwriting Spread q Management Fee § § § q Takedown § § q Fixed costs to issue bonds (MSRB, wire fees, etc…) Out-of-Pocket Expenses § § E-3 $ per $1, 000 of bonds issued. Bond sale “commission. ” Clearance Related Expenses § q $ per $1, 000 of bonds issued. Fees to structure the bond issue. If FA structured the transaction, Management Fee is often $0. Variable costs to issue bonds (travel, copying, etc…) Underwriter’s Counsel

How Are Prices Set In The New Issue Market? Municipal new issues are bought and sold on the basis of: • Credit quality • Maturity • Liquidity • Yield is the most important element for an issuer and an investor in evaluating the merits of the transaction F-1

New Issue Pricing Factors A lot of factors must be taken into consideration for each new issue that is priced. Factors include: • What is the prevailing level of interest rates? • What is the supply and demand for the issue? • Creditworthiness of the issuer? • Is the issuer well known? • What is the maturity? • Will it be difficult to find investors for the issue?

Negotiated New Issue Pricing ~ Scheduling How do we link the schedule with investor interest? q Monitor Volume § § q Size Makes a Difference § § q Forward Supply Time of Year Large issues get attention of all investors. Small issues somewhat limited to middle market investors, small money managers, and retail. Name/Rating/Credit § § Easy to sell – G. O. ’s and bonds related to an essential purpose. More difficult – health care, hospitality, housing, “dirt deals. ” q q C-1 Monitor Economic Data Monitor Current Events

Negotiated New Issue Pricing ~ Marketing How do we match the issue to the right investors? q q q Structure Size – some investors have restrictions as to minimize size and population Underlying Ratings – split ratings can hurt marketability q q Issuer Name q C-2 Credit Enhancement/Insurance Call Features

Pricing ~ Marketing continued… How do we tailor marketing to a specific issue? q q q C-3 Unique marketing plan for each issue. Wherever possible, underwriting and sales staff are made aware of the issue at least one month before pricing. Internal Sales Bulletins Informational conference calls including Bankers, Underwriters, and Sales Staff to discuss financing plan. Issue placed on national calendar for maximum exposure.

Pricing ~ Final Preparations Two Weeks Prior to Pricing q q Distribute Preliminary Official Statement (POS) to potential investors. Respond to questions from potential investors and other market participants as to market timing, structure, etc. One Week Prior to Pricing q q Due Diligence Call with issuer, FA, banker, and attorneys. q Call with underwriting team to outline marketing plan q C-4 Confirm pricing date with banker and issuer. Monitor competing issues in the market.

Pricing ~ Final Preparations continued…. Day Prior to Pricing q q q C-5 Gather price thoughts from co-managers (when syndicated) Confirm structure with issuer and banker based on market conditions Pre-Pricing Call with issuer and banker Communicate price ideas with investors through sales force Continue receiving feedback from investors Underwriting and sales staff finalize plan for the next day’s pricing

Pricing ~ Day of Pricing Finalize structure for the price release. Pricing Call – The Issuer gives the green light to proceed with the pricing Send out pricing wire to market participants with details of pricing Run an order period q Generally, minimum 1 hour/maximum 2 hours q Monitor order flow. q Continuously communicate with Sales Staff. q Conference call with Issuer, FA, and Banker. q Consider changes to price/structure if needed. C-6

Pricing ~ Day of Pricing continued… Re-price, if necessary. Conference call with Issuer and Banker Negotiate the final price. q Provide commitment to underwrite. q Receive verbal award from Issuer. q After Pricing Banker forwards Final Pricing Summary to Underwriting Staff for review. q Issuer and Senior Managing Underwriter sign the Bond Purchase Agreement. q Senior Managing Underwriter allocates bonds to investors. q Issue is “booked” and trades are processed. q Secondary trading may begin, usually the day after pricing. q C-7

Pricing ~ Summary Closing BPA Pricing 1 Week Prior to Pricing Pre-Pricing Re pr ici ng 2 Weeks Prior to Pricing C-9 Marketing Scheduling

Piper Jaffray Municipal Underwriting Overview Piper Jaffray is a leader in New Issue Underwriting 2006 Rankings: • Ranked 12 th in competitive and negotiated long term issues combined with a par amount $6. 6 Billion • Ranked 4 th in number of senior managed long term issues with 452 • Ranked 13 th in negotiated long term issues with a par amount of $5. 2 Billion and 4 th in number of issues with 311 • Ranked 11 th in competitive long term issues with a par amount of $1. 4 Billion and 6 th in number of issues with 141 Including short term issues Piper Jaffray senior managed a par amount of $7. 7 billion new issues in 2006. We also completed a substantial volume of co-managed underwritings, financial advisory and loan placements

Municipal Underwriting Q&A