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National Association of State Auditors, Comptrollers and Treasurers. Presentation Materials. August 18 2009. David Rush Executive Director Morgan Stanley 1221 Avenue of the Americas, 30 th Floor New York, NY 10019 (212) 762-8277 David.Rush@morganstanley.com. Section 1. Market Update.

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National Association of State Auditors, Comptrollers and Treasurers

Presentation Materials

August 18 2009

David Rush

Executive Director

Morgan Stanley

1221 Avenue of the Americas, 30th Floor

New York, NY 10019

(212) 762-8277

David.Rush@morganstanley.com

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Section 1

Market Update

2

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30-Year U.S. Treasury, 30-Year LIBOR and 30-Year “AAA” MMD

Yield (%)

15-Sep-08

Lehman Brothers files for Chapter 11 Bankruptcy

April 2009

First BAB deal issued

16-Mar-08

JPMorgan announces acquisition of Bear Stearns

MARKET UPDATE

Market Overview

  • The tax-exempt market has recovered from the liquidity dislocation of Sep/Oct 2008

30-Year “AAA” MMD

10/22/08: 5.37%

08/09/09: 4.66%

Change: -0.71%

30-Year LIBOR

10/22/08: 4.11%

08/09/09: 4.57%

Change: +0.46%

30-Year U.S. Treasury

10/22/08: 4.09%

08/09/09: 4.60%

Change: +0.51%

  • Build America Bonds are partially responsible for the outperformance in tax-exempt bonds

14-Feb-08

Failure of auction rate market

4.66%

4.60%

4.57%

0.41%

Source Bloomberg, Thomson, Morgan Stanley

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30-Year “A” MMD to 30-Year U.S. Treasury Ratio

Ratio (%)

MARKET UPDATE

Ratio of Tax-Exempts to Treasuries is Unusually High

  • The high ratio of tax-exempts to treasuries makes the 35% long-term subsidy for BABs very attractive

118%

100%

Source MuniMon

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Section 2

Build America Bonds

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Distribution of Build America Bond Transactions

By Par Amount

BUILD AMERICA BONDS

Build America Bonds Market Strong

  • Morgan Stanley was in the market earlier this month with two sizable BAB financings for:
    • $400 millionDulles Toll Road (Book-running Senior Manager)
    • $825 million North Texas Tollway (Co-manager on BABs and Bookrunner on Tax-Exempt Bonds))
  • BAB financings have been done by almost every category of Section 103 issuers
  • While limited as to use (no refunding and no working capital financings), BABs have been instrumental in providing low cost financing for many important infrastructure projects
  • The American Recovery and Reinvestment Act of 2009 was signed into law on February 17, 2009 and allows for the issuance of a new class of municipal bonds: Build America Bonds
  • Allows governmental issuers to sell taxable debt until 2011 and receive a cash rebate from the U.S. Treasury equal to 35% of all interest paid for the term of the debt
  • Since the Treasury gave guidance in April 2009, Build America Bonds financings have proven to be heavily used by issuers
  • The BABs program has generated over $20 billion of issuance
    • 16.6% of municipal bond issuance since mid April
    • Includes issuers from 34 states
  • Taxable investors are seeking exposure to municipal credit, which has caused a substantial decline in BABs credit spreads

Source U.S. Department of the Treasury. 7/20/2009

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BUILD AMERICA BONDS

Build America Bonds – Recent Market Activity

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BUILD AMERICA BONDS

Build America Bonds Market Maturing Quickly

New Issue Spreads Narrowing and Individual Transaction Size Decreasing

Build America Bond Financings

25/30Y Spreads and Transaction Size (BABs maturities over $5mm)

  • The market for BABs is quickly maturing with pricing spreads narrowing and structures becoming more “muni-like”
    • Term bonds are saleable with long sinking fund structures
    • Serial maturities could become more common (Clark County, Nevada)

(bps)

Many BABs transactions also are being

structured with 10Y par calls estimated

to cost approximately 40-50 bps

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Midwest

San Francisco

Iowa

Seattle

New England

  • Minneapolis:
  • Riversource Investments
  • St. Paul
  • Thrivent
  • Galliard
  • FAF Advisors
  • Milwaukee:
  • Northwestern Mutual Life
  • Strong

Mid-Atlantic

  • San Francisco:
  • Wells Fargo
  • Barclays Global
  • Dodge & Cox
  • UCAL Regents
  • Wells Capital
  • Charles Schwab
  • Highmark
  • Franklin
  • Seneca
  • Sacramento:
  • Calpers
  • Calsters
  • Microsoft
  • State of Washington
  • Aegon
  • Principal Insurance
  • Aviva Insurance
  • Boston:
  • Fidelity (New Hampshire)
  • John Hancock
  • Loomis Sayles
  • Mass Financial
  • Putnam
  • Standish
  • State Street Global Research
  • Wellington
  • Income Research
  • Hartford:
  • Aetna
  • Cigna
  • Conning
  • GE Asset Mgmt. (Stamford)
  • Knights of Columbus
  • Allianz
  • New Jersey:
  • Metlife
  • Prudential
  • SEIX
  • Chubb Insurance
  • Philadelphia:
  • Delaware
  • Vanguard
  • Aberdeen
  • Logan Circle

Los Angeles

  • Newport Beach:
  • Pacific Mutual Life Insurance
  • PIMCO
  • LA:
  • WAMCO
  • Payden & Rygel
  • Bradford & Marzec
  • Capital Research
  • MetWest
  • Transamerica
  • STW

Chicago

New York

  • Allstate
  • Asset Allocation
  • Neuberger Berman
  • Northern Trust
  • PPM
  • State Farm
  • Legal & General
  • AIG
  • Alliance
  • Blackrock
  • GSAM
  • JPMIM
  • Loews
  • Moore
  • New York Life
  • Teachers
  • Deutsche Asset Mgmt

Atlanta

  • ING
  • Trusco

BUILD AMERICA BONDS

Large Taxable Fixed Income/BABs Investors

  • The overlap between taxable and tax-exempt investors is not insignificant, but small in terms of the overall pool of institutional investors
    • For purposes of individual name diversification, certain investors may take into account their tax-exempt holdings when purchasing Build America Bonds
  • Asset Managers are the largest buyers of Build America Bonds; however, Insurance Companies and Banks are also represented among the biggest active investors
  • International investors potentially receptive to municipal taxable debt include money managers (HSBC, ING) and large Asian/Middle Eastern investors (including sovereign wealth funds)

Seattle

Minneapolis

Boston

Milwaukee

Hartford

Cedar Rapids

Chicago

New York

Philadelphia

San Francisco

Denver

Charlotte

Los Angeles

Atlanta

Tallahassee

Austin

US. Investment Grade Target Investors

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slide10

The U.S. subsidy to issuers is not a “line item” appropriation in Treasury’s annual budget, but rather will be part of Treasury’s general appropriation

BUILD AMERICA BONDS

Build America Bonds Program

Terms and Conditions

10

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BUILD AMERICA BONDS

Tax-Exempt Bonds vs. BABs: Structuring Considerations

  • Non-callable (i.e. make-whole call) BABs are preferred by investors, although recently some have been issued as callable
  • 10-year call option can cost 40-50 bps currently reflecting the more limited buyer base for callable bonds vs. the traditional non-call or make whole call structures to which corporate investors are accustomed
  • BABs are not advance refundable in practice because of the treatment of the subsidy and the negative arbitrage likely to be associated therewith
  • Overall deal size of at least $100 million to attract investor interest and allow for greater liquidity is ideal but issues of smaller size are saleable

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Tax-Exempt Yields vs. Taxable Build America Bonds Yield Curve

Estimated based on market conditions as of August 3, 2009

(%)

BUILD AMERICA BONDS

Comparison of Funding Costs

Generic A rated issuer

  • Given the steeper municipal curve, Build America taxable debt is more cost effective on the long end
  • Build America Bonds may afford the issuer significant interest savings
  • Optional call provisions have been used on some recent transactions
    • A 10-year call option would currently cost 40-50 bps

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BUILD AMERICA BONDS

Build America Bonds Federal Subsidy Treatment

The BAB subsidy can be treated in one of three ways:

  • Revenue: this method may hurt debt service limits and budgeting requirements
  • Net Against Debt Service via Deposit to Debt Service Fund: this is the preferred method
  • Deposit to Capital Improvement Fund: this method would reduce capital improvement requirements and would reduce future borrowing needs
  • Most revenue bond issuers have treated the BABs subsidy as a top line revenue as opposed to a net against debt service
  • For state general obligation BAB issuers treatment of subsidy is a state by state issue
    • Budgeting
    • Debt Limits
    • Appropriation

13

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BUILD AMERICA BONDS

Build America Bond Sample Financing Timeline

Financing Timeline

Taxable Build America Bond Marketing Combined or Tax-Exempt Only Marketing

Week 1-2

Week 3

Week 4

Week 5

Begin Rating Agency Process

Begin Drafting POS

Monitor Cost-Benefit Analysis of Tax-Exempt versus Taxable Issuance

Begin Rating Agency Process

Begin Drafting Build America Bond POM

Announce Deal

Receive Confirmed Ratings

Mail POS

Investor Roadshow Presentation

  • Taxable/BABAnnounce Deal
  • Release POM and Roadshow
  • Post Confirmed Ratings
  • Open Books
  • Gather Indications
  • Price Guidance / Revised Price Guidance
  • Price Talk/Launch
  • Allotments
  • Pricing

Taxable/BAB Formal Marketing Period (1 Day)

Tax-ExemptRetail Order Period (1 Day)

Institutional Pricing (1 Day)

Final Pricing

Allotments

  • Announce Deal
  • Release POM and Roadshow
  • Post Confirmed Ratings
  • Open Books
  • Gather Indications
  • Price Guidance/Revised Price Guidance
  • Price Talk/Launch
  • Allotments
  • Pricing

Closing and Delivery of Bonds (2 Weeks)

Closing (5 days)

Closing (5 days)

14

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BUILD AMERICA BONDS

BABs Mechanical Considerations

  • Payment of Interest
    • Payment is “contemporaneously with each interest payment date under such bond"
    • Initially, an issuer needs to submit a new form 8038-CP to claim the credit for each interest payment
      • For a fixed-rate bond, the form needs to be submitted between 45 and 90 days before the interest payment date; the refund will be paid by that date
      • For variable-rate bonds, the credit is paid quarterly on a reimbursement basis, based on the actual bond rates for the quarter
    • The regulations expect a more streamlined approach for payment mechanics to be developed by 2010
  • Additional Documentation
    • The issuer must irrevocably elect to designate the bonds as BABs before the bonds are issued, and the election must be reported on IRS form 8038-G
      • The designation should be made (or delegated) in the issuer’s authorizing resolution/ordinance
    • The issuance should also be reported on the 8038-G by checking Line 18, "Other", and inserting "Build America Bond (Direct Payment)”

15

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Appendix A

Case Studies

16

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CASE STUDIES

Dulles Toll Road Revenue Bonds, Series 2009

Metropolitan Washington Airports Authority / Dulles Metrorail and Capital Improvements Projects

Transaction Summary

Dulles Corridor Metrorail Project

$963.3MM Series 2009 Bonds

  • Morgan Stanley demonstrated its comprehensive capabilities in the transportation sector in serving as joint bookrunning senior manager for the inaugural financing of the Dulles Corridor Metrorail Project
    • As the market leader in Build America Bond market, Morgan Stanley priced $400mm of Series 2009D BABs at attractive spreads with strong investor demand
  • On August 5, 2009, Morgan Stanley completed the landmark $963.3 million inaugural financing for the Dulles Corridor Metrorail Project
  • The Metropolitan Washington Airports Authority (MWAA) has a 60-year concession to operate and maintain the Dulles Toll Road and develop the Metrorail Project
    • The Dulles Metrorail Project is a 23 mile extension of the existing Metrorail system that will provide service to Tyson’s Corner, the Reston/Herndon area, and provide a direct connection from Dulles International Airport to downtown Washington
  • The purpose of the Series 2009 Bond was to pay for capital improvements to the Dulles Toll Road and fund the initial costs of Phase I of the Project
  • Morgan Stanley developed a comprehensive marketing plan that included an on site in-person tour of the road along with an electronic roadshow
  • Morgan Stanley worked with MWAA and its finance team to develop a credit structure that resulted in strong investor demand across the multiple liens and funding instruments

Series 2009A

  • $198,000,000
  • First Senior Lien CIBs
  • Series 2009B
  • $207,056,689
  • Second Senior Lien CABs
  • Series 2009C
  • $158,234,960
  • Second Senior Lien Convertible CABs
  • Series 2009D
  • $400,000,000
  • Second Senior Lien BABs

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CASE STUDIES

North Texas Tollway Authority

$418.165 Million Refunding and $178.310 Million Fixed-Rate Remarketing

  • On August 3, 2009, Morgan Stanley served as Senior Manager on North Texas Tollway Authority’s $596.475 million restructuring
  • The financing plan involved the termination of four swaps, release of a FGIC insurance policy, refundings for savings, a restructuring and a commercial paper takeout
  • The bonds were issued in conjunction with $825 million Build America Bonds, which were issued to finance NTTA’s capital projects. Morgan Stanley served as co-manager on the Build America Bond transaction
  • Morgan Stanley developed the financing model NTTA’s long term capital plan and ran cashflows for all three transactions during pricing. Morgan Stanley successfully achieved NTTA’s targeted coverage for its current and anticipated transactions despite challenging tax-exempt market conditions - allowing for a significant upsizing of the Build America issue
  • To support the restructuring, Morgan Stanley underwrote $40 million of the 2009A Bonds
  • The current refunding for savings achieved $1.4 MM net pv savings and 3.28% of refunded bonds

North Texas Tollway Authority

$418,165,000

North Texas Tollway Authority First Tier Tax-Exempt Current Interest Bonds, Series 2009A

$178,310,000

Dallas North Tollway System Revenue Bonds, Series 2005C

Ratings: A2/A-

(Moody’s/S&P)

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Appendix B

Disclaimer

19

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DISCLAIMER

Disclaimer

This material was prepared by sales, trading or other non-research personnel of one of the following: Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. International Limited, Morgan Stanley Japan Limited and/or Morgan Stanley Dean Witter Asia Limited (together with their affiliates, hereinafter “Morgan Stanley”). This material was not produced by a Morgan Stanley research analyst, although it may refer to a Morgan Stanley research analyst or research report. Unless otherwise indicated, these views (if any) are the author’s and may differ from those of the Morgan Stanley fixed income or equity research department or others in the firm.

This material was prepared by or in conjunction with Morgan Stanley trading desks that may deal as principal in or own or act as market maker or liquidity provider for the securities/instruments (or related derivatives) mentioned herein. The trading desk may have accumulated a position in the subject securities/instruments based on the information contained herein. Trading desk materials are not independent of the proprietary interests of Morgan Stanley, which may conflict with your interests. Morgan Stanley may also perform or seek to perform investment banking services for the issuers of the securities and instruments mentioned herein.

This material has been prepared for information purposes only and is not a solicitation of any offer to buy or sell any security/instrument or to participate in any trading strategy. Any such offer would be made only after a prospective participant had completed its own independent investigation of the securities, instruments or transactions and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley has no obligation to continue to publish on the securities/instruments mentioned herein.

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