Summary: Mecklenburg County, North Carolina; General Obligation

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1 July 20, 2009 Summary: Mecklenburg County, North Carolina; General Obligation Primary Credit Analyst: Armen Hratchian, New York (1) ; Secondary Credit Analyst: Henry W Henderson, Boston (1) ; henry_henderson@standardandpoors.com Table Of Contents Rationale Outlook Series 2009D Variable-Rate Demand Obligation Structure Related Research 1 Standard & Poor's. All rights reserved. No reprint or dissemination without S&P's permission. See Terms of Use/Disclaimer on the last page

2 Summary: Mecklenburg County, North Carolina; General Obligation Credit Profile US$ mil var rate GO rfdg bnds ser 2009D dtd 07/09/2009 due 03/01/2026 Long Term Rating AAA/A-1+/Stable New Rationale Standard & Poor's Ratings Services has assigned its 'AAA/A-1+' rating to Mecklenburg County, N.C.'s series 2009D variable-rate general obligation (GO) refunding bonds. The long-term component of the rating is based on an affirmation of the 'AAA' long-term rating on the county's GO debt while the short-term rating reflects our belief that the county has sufficient market access and liquidity, within a 210-day period triggered by a bondholder put (180 days, if the county is unable to remarket within the first 30-day period) before the mandatory tender date, to pay the tender price of the bonds. The 2009D bonds are multimodal, but are being issued initially in a mode that exposes the county to tender risk; however, our analysis of the risk indicates that the county has sufficient time and resources to manage the tender potential. Bonds bear a variable rate and holders have an option to put the bonds and be funded from remarketing proceeds during the subsequent 30 days. Should the remarketing fail, the county is required to fully redeem the entirety of the issue and has 180 days to fund the mandatory tender through either another bond issuance or internal liquidity. The 'A-1+' short-term rating, in our opinion, further reflects: The county's frequent market presence, including a dedicated staff that monitors the debt portfolio, as well as a documented plan and timeline to refund the bonds if necessary; and Consistently strong financial performance over time, equating to a solid year-round liquidity position, providing adequate coverage in case the county were to pay the redemption price of the 2009D bonds. Should liquidity be required, the use of substantial amounts of cash could have a credit impact on the long-term rating on the county's debt. The county's full faith and credit pledge secures the bonds. Proceeds will be used, as adopted by resolution on June 16, 2009, to refund the county's outstanding 2002C and 2005B bonds, both of which have liquidity facilities expiring in If the mandatory tender window were triggered, the county has concluded that it would evaluate four specific options to paying the tender, including: Issue refunding bonds and call the 2009D bonds for optional redemption; Convert the 2009D bonds from the "windows" interest rate to another interest rate, which will result in a mandatory tender of the 2009D bonds on the conversion date if the conversion date is successful; Standard & Poor s RatingsDirect July 20,

3 Summary: Mecklenburg County, North Carolina; General Obligation Direct that the 2009D bonds be subject to mandatory tender if they can be successfully remarketed at a revised windows spread; and Liquidate investments to provide for the payment of the purchase or redemption price of the 2009D bonds. Since it is an 'AAA' credit, with a consistently strong financial position and substantial and expanding economy, we believe there is sufficient demand for Mecklenburg County bonds, if the county were to remarket or refund the bonds. Further, since it is a frequent issuer and has managed variable-rate debt in its portfolio for several years, we also believe the county has the mechanisms in place to effectively sell debt on a timely basis, in this case, within a 180-day period. The county has provided a timeline describing events that would take place within the 180-day period, including: Month one: County staff will analyze current market conditions and availability and the relative cost of the alternatives described above and formulate a recommendation as to the preferred course of action. Month two: Recommendations will be presented for approval to the Board of County Commissioners and then to the state's Local Government Commission (LGC), and a timeline will be approved by the LGC. Month three: Legal and financing documents will be drafted and approved by county, LGC, and counsel staff. Month four: A final review of the documents will be completed, and rating agencies will be presented with the documents for review. Month five: The LGC and county board will give final approval, the ratings will be released, and the closing will take place. If refunding or conversion does not close within the fifth month, county staff will evaluate the investment portfolio to assess which investments need to be and should be liquidated. Month six: Investments will be liquidated and funds will be deposited to pay the tender price of the 2009D bonds at least two days before the mandatory tender date. The county has consistently maintained a strong liquidity level, which could be used in case market access were restricted during the 180-day window. Including approximately $80 million outstanding on its 2006A variable-rate bonds that the county is providing self-liquidity for through Nov. 4, 2009, the county would have an exposure of up to $200 million in the short term. As of June 30, 2009, the county had a strong cash and short-term investment position (available overnight short-term investments) of $452 million, providing 2.26x coverage. Not including investments, the county has averaged $296 million ($276 million if not including bond proceeds of approximately $20 million) in cash per month during the 2009 calendar year, providing approximately 1.48x coverage. During the same period, the county had an average monthly balance of $131 million in highly liquid federal agency securities that would be available within a six-month window. Since July 2006, the county reports that its lowest combined cash and short-term investments point was $299 million in October 2006 and has been no lower than $376 million (October 2008) during the past 12 months. Within any month, cash levels fluctuate only moderately, as payroll, the largest one-day reoccurring expense, is an $8 million expense. Further, the county has structured its debt portfolio so that payments are due in March and April, immediately following property tax collections early in the calendar year and, historically, the county's strongest cash period. For more information on the county's long-term rating, please see the rating report published on Feb. 6, 2009 on RatingsDirect. 3

4 Summary: Mecklenburg County, North Carolina; General Obligation Outlook The stable outlook reflects the county's consistently strong financial position and liquidity levels. The county continues to experience long-term sustainable growth of both its tax base and employment base, which has provided strong operating results and subsequent reserve build-up, positioning the county with financial flexibility during economic slowdowns like that currently being experienced nationwide. The county's strong financial management, specifically its management of its debt portfolio and reserve levels, also provides credit stability. Finally, if the county were to pay a mandatory tender using substantial levels of cash, it would likely have a negative effect on the current long-term rating. Series 2009D Variable-Rate Demand Obligation Structure Bonds bearing interest in the initial windows interest rate mode will be subject to a bondholder's right to put their bonds upon giving appropriate notice. Following bondholders putting their bonds, the remarketing agent will have 30 days to remarket the bonds in order to make payment to bondholders from remarketing proceeds, which are the only source of payment for bondholders' puts. If insufficient remarketing proceeds have been received as a result of the remarketing agent being unable to remarket all of the put bonds, a mandatory tender will occur. The mandatory tender date will be six months (180 days) from the date of the receipt of notice to tender bonds. On the mandatory tender date, the bonds will be purchased in whole from immediately available funds of Mecklenburg County, regardless of whether the failed remarketing was partial. Within the 180-day period leading up to the mandatory tender, bonds will bear interest based on Securities Industry and Financial Markets Association (SIFMA) plus the applicable windows spreads as designated by the remarketing agent. The short-term rating during this mode is based on Standard & Poor's analysis of the county's market access and liquidity position during this time, due to its obligation to honor the mandatory tender upon a failed remarketing. If another tender event occurs before the windows mandatory tender date and after the failed remarketing, the windows mandatory tender will be cancelled. Related Research USPF Criteria: "GO Debt," Oct. 12, 2006 USPF Criteria: "Short-Term Debt," June 15, 2007 USPF Criteria: "Commercial Paper, VRDO, And Self-Liquidity," July 3, 2007 Complete ratings information is available to RatingsDirect subscribers at All ratings affected by this rating action can be found on Standard & Poor's public Web site at under Ratings in the left navigation bar, select Find a Rating. Standard & Poor s RatingsDirect July 20,

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