Municipal Market Weekly Ramirez Municipal Strategy

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1 ***INSTITUTIONAL USE ONLY*** Off to a Sputtering Start... Page 1 It was a down week for Munis as Treasuries sold-off with Munis in tow, although other factors caused Munis to underperform. Wed was the weakest day for Munis after an account sold a large block of bonds that helped send MMD 10yrs and out down between 7-10 bps and accounted for the majority of losses on the week. The Muni 2yr spot was the only part of the Muni curve to outperform, tightening 2 ratios to 77%, while all other spots underperformed between 1 ratio (5yr) and 3 ratios (30yr). Several factors were at play in the larger rates market. Stocks hit new highs (again), the dollar was weaker against major global currencies, jobless claims and wholesale inflation data were weaker than expected, and Bill Gross (remember him?) said that the Treasury bull market is over. As the dust settled, MMD was cut a net 4 bps in 5yrs, 11 bps in 10yrs, and 13 bps in 15, 20, and 30yrs. MMD 2s30s was steeper by 13 bps to 117 bps, while Treasury 2s30s was 1 bps steeper to 85 bps. The S&P Main Muni index lost -35 bps vs Treasury index at -28 bps. We remain somewhat cautious on the market (like last week) despite the vaunted January effect, still concerned about still-low absolute rates, tight Muni credit spreads, compressed ratios, and heavy dealer and trading account inventories. It is possible, however, that Munis settle in given the Jan effect, although the torrid equity market could drain some retail interest. We expect gross supply in Jan to ramp up but come in lower than the average $26 bil. monthly implied by our $317 bil. total gross issuance projection (-27% YoY) for Gross supply YTD is only $5.3 bil., or -64% vs this time 2017 ($14.8 bil.), and this week will not move the needle at only $4.6 bil. This week s negotiated space is led by $795 mil. Chicago Sales Tax Sec Corp, $212 mil. Denver SD#1, and $150 mil. Orlando Util Comm. The competitive space is led by $478 mil. NY MTA and $221 mil. Univ of KY. The Chicago transaction will be closely watched after the City s first deal was met with strong investor enthusiasm for the AAA/AA rated securitization. This week: Fed speakers, $13 bil. TIPS auction, Beige Book, TIC flows, Housing Starts, Jobless Claims, U of Mich sentiment, Gov t Shutdown on Friday? Trump v Graham, Bitcoin. Total Return Scenario We publish total potential returns on a weekly basis, but feel it s appropriate that we bring this analysis to the forefront as the year begins. Table 1 shows a +25 bps parallel shift of the MMD curve (from current levels), which results in total return across the MMD curve averaging ~80 bps. Table 2 then shows several potential strategies, including a 70/30 barbell and short-duration ladder portfolio, resulting in total returns of 1.74% and 1.40%, respectively. We assuming average portfolio credit quality of AA and spread of ~30 bps. We prefer the more defensive ladder posture due to lower risk (5yr eff dur) and despite lower total returns vs the short-bias barbell. We like also continue to like shorter call A rated credits, which we still think still have value. We also like CAL and NY names inside 10yrs, and the now endangered species PreRefundeds are of which are well bid. Scenarios TABLE 1 MMD Callable Curve (5% Cpn) - 1Y Total Return Projections* Mty 1-30y 1-5y 6-10y 11-15y 16-20y 21-25y 26-30y Eff Dur Unch 3.38% 2.00% 3.03% 3.58% 3.51% 3.44% 3.49% 1Y Fwd Rates 2.40% 1.36% 2.16% 2.43% 2.37% 2.45% 2.71% Parallel +25 bps 0.80% 1.28% 1.18% 1.06% 0.77% 0.58% 0.54% Parallel +50 bps -1.76% 0.56% -0.65% -1.42% -1.96% -2.27% -2.40% TABLE 2 Scenarios Bear Case Base Case Bull Case Strategy Ladder (Short) 70/30 Bar Ladder 30/70 Bar Ladder Crv Shft (avg bps)* Quality >/= A+ >/= A+ >/= A+ >/= A+ >/= A+ TR % Proj. 1.32% 1.73% 1.40% 3.25% 3.32% Eff Dur (yrs) WAM Cnvx *avg bps shift =FWD curve Peter L. Block Managing Director Credit Strategy (212) peter.block@ramirezco.com Spencer Feit Associate Credit Strategy (212) spencer.feit@ramirezco.com John Young Managing Director Underwriting (212) john.young@ramirezco.com Alan Greco Managing Director Sales & Trading (212) alan.greco@ramirezco.com

2 Page Strategy ~25 bps shift is likely in 2018 Ladder strategy Defensive posture (5yr eff dur; 7yr WAM) Intermediate-long bonds with shorter calls (5-8yrs vs 10y); cheaper vs longer calls, capture better spread and rolldown, faster reinvestment Best rolldown range has shifted over past 3yrs to belly of curve due to flatter curve Coupon: 5%+ (lower convexity vs 4%) Credit: A rated or better Revenue Bonds; Scenarios Bear Case Base Case Bull Case Strategy Ladder (Short) 70/30 Bar Ladder 30/70 Bar Ladder Crv Shft (avg bps)* Quality >/= A+ >/= A+ >/= A+ >/= A+ >/= A+ TR % Proj. 1.32% 1.73% 1.40% 3.25% 3.32% Eff Dur (yrs) WAM Cnvx *avg bps shift =FWD curve Best roll returns have shifted to 8-15y since 2014 due to flatter curve Scenarios MMD Callable Curve (5% Cpn) - 1Y Total Return Projections* Mty 1-30y 1-5y 6-10y 11-15y 16-20y 21-25y 26-30y Eff Dur Unch 3.38% 2.00% 3.03% 3.58% 3.51% 3.44% 3.49% 1Y Fwd Rates 2.40% 1.36% 2.16% 2.43% 2.37% 2.45% 2.71% Parallel +25 bps 0.80% 1.28% 1.18% 1.06% 0.77% 0.58% 0.54% Parallel +50 bps -1.76% 0.56% -0.65% -1.42% -1.96% -2.27% -2.40%

3 Page 3 Rates & Ratios YIELDS (%) Lo Hi Mean SD Z-Score 1/12/2018 1/5/2018 1/3/2017 1/13/ M 12M 12M 12M 12M 4Y AAA MMD / UST 2 Yr 77% 79% 100% 92% 62% 94% 75% Yr 73% 73% 91% 85% 62% 88% 74% Yr 84% 82% 94% 93% 79% 100% 88% Yr 95% 92% 99% 99% 90% 104% 98% UST 2 Yr Yr Yr Yr AAA MMD 2 Yr Yr Yr Yr Legend: Rich Fair Cheap *Rich/Cheap: +/- 1.5 Z-score Spreads are tight... SECTOR CREDIT SPREADS (10Y) Sector Rating 1/13/18 Avg Min Max SD 2Y Z-Scr Value GO AA Rich A Rich HOSP AA Rich A Fair HI ED AA Rich A Rich TRANS AA Rich A Rich POWER AA Cheap A Fair WTR / AA Rich SWR A Rich HY <BBB Rich

4 Page 4 Market Performance Indicators TOTAL RETURN (%) YIELD (%) Eff WTD YTD Lo Hi Mean Vol Z-score INDEX Dur WTD Jan'18 Dec' /12/18 Δ Δ 12M 12M 12M 12M 12M 3Y TREASURY-TERM TREASURY - ALL SHORT SHORT-INT INTRMD LONG-INT LONG MUNICIPAL-TERM SHORT SHORT-INT INTRMD LONG-INT LONG MUNICIPAL-QUALITY MUNI-EXEMPT MUNI-TAXABLE HIGH-GRADE 'A' RATED 'BBB' RATED HIGH YIELD MUNICIPAL-SECTOR PRE-RE GO DED TAX WTR-SWR PUB PWR HEALTHCARE HIGHER ED TRANSPORT HOUSING TOBACCO IDB / CORP GLOBAL / CORP GLOBAL US CORP-IG US CORP-HY Rich Fair Cheap *Rich/Cheap: +/- 1.5 Z-scr 10Y 30Y MUNI TAX-EXEMPT SPREADS 1/16/18 Avg Min Max SD Z-Scr Value AA Fair A Rich BBB Fair AA Fair A Fair BBB Cheap HY Rich

5 Page 5 Muni Primary Market Gross Supply ($ in millions) As of 1/12/18 Last Week 4, wk Moving Avg 10,041.1 YTD 5,293.6 Weekly Visible Supply ($ in millions) Week of 1/16/18 Total 4,578.5 Comp. 2,102.7 Neg. 2, Day Visible Supply Current 2017 High 2017 Low Total $ Date $ Date Total 6, ,975.9 (1/9) 4,175.5 (1/2) Comp. 2, ,332.5 (1/9) 1,556.9 (1/2) Neg. 4, ,271.3 (1/16) (1/2) Source: Bond Buyer Top Competitive Issuances Coming to Market Underwriters will attempt to market $4.58 bil. of municipals in the week of 1/16, led in the negotiated space by $795 mil. Sales Tax Securitization Corp, $212 mil. Denver City & Co SD #1, and $150 mil. Orlando Util Commn. The competitive calendar is highlighted by $500 mil. Met Trans Auth BANs, $478 mil. Met Trans Auth TRBs, and $221 mil. Univ of Kentucky. Issuer State Amount ($ 000 s) Met Trans Auth BANs NY 500,000 Met Trans Auth TRBs NY 478,180 Univ of Kentucky KY 220,685 Florida St Edu Brd FL 170,000 Sheldon ISD TX 100,710 Top Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Sales Tax Securitization Corp IL 795,200 Denver City & Co SD #1 CO 211,995 Orlando Util Commn FL 150,175 Pasadena ISD TX 122,205 Cook Cnty IL 100,000 Ramirez Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Senior Manager Ramirez Role Los Angeles Muni Improv Corp (Series 2018-C) CA 25,805 Ramirez Senior Manager Cook Co IL 103,145 Loop Co-Manager Austin Comm Coll Dist TX 50,980 Citigroup Co-Manager Economic Calendar Monday (1/15) Tuesday (1/16) Wednesday (1/17) Thursday (1/18) Friday (1/19) Markets Closed Empire Manufacturing MBA Mortgage Applications Housing Starts U. of Mich. Sentiment U.S. Holiday: Martin Luther King Jr. Day 4-Week Bill Auction Industrial Production Building Permits Fed Speaker: Quarles 3-Month Bill Auction Capacity Utilization Philadelphia Fed Business Outlook 6-Month Bill Auction TIC Flows Initial Jobless Claims Fed Beige Book Continuing Claims Fed Speakers: Evans, Kaplan, Mester Bloomberg Consumer Comfort 10-Year TIPS Auction

6 Page 6 Muni Market Demand Tax-exempt mutual funds recorded inflows of $1.065 billion in the week ending January 10. This was 632% above the 12-week moving average of $145 million. Source: Lipper Fund Flows US Lipper Fund Flows Sector Flow Change ($B) YTD ($B) Tax-Exempt Inflow: Inflow: Money Market Outflow: Outflow: Taxable Inflow: Inflow: Equities Inflow: Inflow: Source: Lipper Fund Flows Muni Market Supply Over the next 30 days we see net muni market supply at $9.72 bil., comprised of $6.46 bil. new issues, $9.12 bil. maturing, and $6.99 bil. announced calls. The states that stand to experience the largest change in outstanding debt include New York (-$2.14 bil.), California (-$1.39 bil.), Georgia (-$1.26 bil.), Minnesota (-$1.03 bil.), and Indiana (-$850 mil.)., Ramirez, Ramirez

7 Page 7 Ramirez Managed Deals Municipal Improvement Corporation of Los Angeles $25,805,000 Lease Revenue Refunding Bonds Series 2018-C (Real Property Taxable) Issue: Series 2018-C bonds are rated A1/AA-/AA-. Pricing Wednesday, January 17, Ramirez & Co. is Senior Manager of the Series 2018-C Bonds. Proceeds of the Series 2018-C bonds will be used to prepay all outstanding taxable COPs for the Hollywood and Highland Theater Project. Security: Each series of bonds issued by Municipal Improvement Corporation of Los Angeles (MICLA) are separately secured by lease payments to be made by The City of Los Angeles (City) to the Trustee on behalf of MICLA. The lease payments are payable from the City s general fund or any other legally available source. The City has covenanted to budget and appropriate basic lease payments in an amount sufficient to cover debt service. There is no debt service reserve fund. Pursuant to the lease agreement for the Series 2018-C Bonds, the City will lease real property from MICLA. The leased assets include the Dolby Theatre and certain airspace lots located on the real property. The real property will be covered by standard insurance provisions but is not covered for seismic damage. The City has the right to substitute the leased property with similar assets, pending prior confirmation from rating agencies that a substitution would not result in a rating downgrade. Credit Overview: The City spans over 500 square-miles in Los Angeles County, California. It is located along the coast of the Pacific Ocean in the southern portion of the State. Los Angeles is the second most populous city in the nation (behind New York City), with an estimated 2017 population of 4.04 million individuals. Resident wealth levels are above average, with a median per capita income at 113% of the national median. As of November 2017 the City s unemployment rate was 4.4%, above the national rate of 4.1%. The City s tax base totals $565.4 billion (+6.6% YoY), with the twenty largest taxpayers accounting for 2.8% of assessed value. Overall net debt totals $14.4 billion ($3,565 per capita), equivalent to 2.5% of assessed value. MICLA is a nonprofit public benefit corporation that was created to finance, acquire, improve, lease, and develop certain equipment and property for the City. In FY16 the City had a general fund surplus of $318 million on total revenues of $4.89 billion (- 2.3% YoY). General fund revenues are budgeted to increase by an average of 3% annually over the next five years. The general fund balance at FYE16 was $1.03 billion, or 21% of revenues. As of 6/30/17 the City s two pension plans were funded at 71.4% and 91.5%, respectively, with a combined unfunded actuarial accrued liability (UAAL) of $3.79 billion. As of the same date, the City s OPEB UAAL totaled $2.25 billion.

8 Page 8 Samuel A. Ramirez & Co., Inc. 61 Broadway, 29th Floor New York, NY Samuel A. Ramirez & Co., Inc., member FINRA, MSRB, SIPC. This material is proprietary to Samuel A. Ramirez & Co., Inc. or ( Ramirez ) and may not be disclosed to any third party or used for any other purpose without the prior written consent of Ramirez. Unless otherwise agreed in writing between you and Ramirez & Co, we are acting solely as a principal/underwriter in an arm s length commercial transaction in which Ramirez has financial and other interests that differ from yours. Ramirez is not acting as a municipal advisor, financial advisor or fiduciary and the information provided should not be construed as advice within the meaning of Section 15B of the Securities Exchange Act of The information in this document should not be considered research1 or its content be construed as a solicitation or recommendation. This material has been prepared for informational purposes only without regard to any particular user's investment objectives, financial situation, or means, and Ramirez is not soliciting any action based upon it. The Information contained is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Ramirez does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and or counsel. The Information should not be relied upon for the maintenance of your books and records or for any tax, accounting, legal or other purposes. Subject to applicable law, you may disclose any aspects of any potential transaction or structure described herein that are necessary to support U.S. federal income tax benefits. The information in this document reflects prevailing conditions and our views as of this date which, are subject to change. In preparing this material, we have relied upon and assumed, without independent verification, the accuracy and completeness of all the information available from internal and public sources or which was provided to us by or on behalf of Ramirez or which was otherwise reviewed by Ramirez. Even when this material contains a kind of appraisal, it should be considered preliminary, suitable only for the purpose described herein and not be disclosed or otherwise used without the prior written consent of Ramirez. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. 1 For purposes of the debt Rule FINRA 2242, a debt security excludes any equity security, municipal security and security-based swap (each as define under the Exchange Act) and any US Treasury (as defined in FINRA Rule 6710 (p)).