Capital Markets Overview ACI-NA Finance Committee Meeting

Transcription

1 Capital Markets Overview ACI-NA Finance Committee Meeting Ira Smelkinson, Morgan Stanley April 7, 2014 Dallas, Texas This information was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This is not a research report and the views or information contained herein should not be viewed as independent of the interest of Morgan Stanley trading desks. Such interest may conflict with your interests and recipients should be mindful of such potential conflicts of interest when reviewing this information. The views of the trading desk may differ from those of the Research Department or others at Morgan Stanley. Morgan Stanley 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 desks may engage in a variety of trading activities (which may conflict with the position an investor may have) before or after providing this information, including accumulation of a position in the subject securities/instruments based on the information contained herein or otherwise. Morgan Stanley may also perform or seek to perform investment banking services for the issuers of the securities and instruments mentioned herein. Morgan Stanley is not a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice, including within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Please see additional important information and qualifications at the end of this material.

2 ACI-NA _v3.pptx\03 APR 2014\7:12 PM\4 Review from Last Year s ACI Finance Conference U.S. economic trends improving Low tax exempt borrowing rates Uncertainty regarding tax law changes AMT spread ~ 50 bps Rating agencies negative bias towards airports 12 months later, many of these themes continue but trends are improving 2

3 Section 1 Update on Overall Capital Market Conditions 3

4 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\4 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS Overview of Global Economic Conditions Morgan Stanley expects global GDP growth to accelerate gradually from 3.0% last year to 3.4% this year and 3.7% in 2015 The global economic cycle is intact; the economic expansion that started five years ago could be unusually long because of low inflation and accommodative economic policies across the globe Developed market economics look set to make good progress; Morgan Stanley expects GDP growth by 2.0% in 2014, after only 1.2% last year Emerging market economics are likely to continue to struggle due to sputtering transitions to new growth models and pressure from rising US real interest rates; Morgan Stanley cut its 2014 GDP growth for emerging markets to 4.7% from an already sub-par 5.0% Following severe weather distortions in 1Q 2014, expect a strong snapback in 2Q and improving conditions in the second half of the year Source Morgan Stanley Research After a strong start to 2014, Morgan Stanley revised up its full-year Euro Zone 2014 growth forecast from 0.5% to 0.9% on the back of a healthier euro and less drag from fiscal policy Morgan Stanley expects China to see its economic growth slowing from last year as a result of recent tightening of monetary and financial conditions Japan should receive significant monetary stimulus in 2014, but may be hampered by April s consumption tax hike 4

5 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\5 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS U.S. Economic Highlights Domestic spending regains vigor though overwhelmed by effects of harsh winter Morgan Stanley forecasts real GDP growth of 2.7% in 2014, followed by 2.6% in 2015 Return to wealth creation has led to higher personal consumption expenditures 5

6 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\6 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS Consensus Forecast Morgan Stanley s forecast for GDP is in line with consensus Source Bloomberg, Morgan Stanley Research 6

7 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS Trends in U.S. Economic Data Economic data in Q1 was mixed, with January/February growth negatively affected by severe winter weather but some encouraging signs starting to emerge, bolstering expectations for a pickup this spring Morgan Stanley forecasts nominal inflation for next 7 quarters with no Fed rate hike until 2016 Personal Income and Spending 4Q Q 2014 (Pts) (0.2) Personal Spending Retail Income Manufacturing Recovering from Winter 4Q Q 2014 (Pts) ISM Manufacturing Source Bloomberg 7

8 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS Trends in U.S. Economic Data Economic data in Q1 was mixed, with January/February growth negatively affected by severe winter weather but some encouraging signs starting to emerge, bolstering expectations for a pickup this spring Morgan Stanley forecasts nominal inflation for next 7 quarters with no Fed rate hike until 2016 Labor Conditions Improved Steadily 4Q Q 2014 Change in Payrolls (000s) Jobless Claims (000s) Change in Nonfarm Payrolls Initial Jobless Claims MS Forecast for March Change in Nonfarm Payrolls Consumer Confidence On the Rise 4Q Q 2014 Consumer Sentiment Index U. Michigan Consumer Confidence Conference Board Consumer Confidence Source Bloomberg 8

9 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\9 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS Consumer Wealth Net worth of nonfinancial corporate sector rose to record $20.0 trillion in 4Q 2013 (Fed Flow of Funds Data) Companies holding sizeable cash balances (>$2T in 4Q 2013) Consumers recognizing net wealth rebound Source Federal Reserve Bank, Morgan Stanley Research 9

10 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS Current Snapshot of Economic and Risk Indicators US Economic Data Indicates Winter Weather Payback The Conference Board's consumer confidence index jumped 4 points in March to a new cycle high of 82.3 Overall durable goods orders rose to 2.2% in February on upside in the civilian aircraft and capital goods categories Increased healthcare spending drove an upward revision of GDP growth to 2.6% from 2.4% Led by a record 68% collapse in the Midwest, housing starts fell 16% overall in January In March, initial jobless claims fell to 311k from 320k in the prior period Risk Indicators VIX (%) SPX (pts) LOIS (bps) Since Dec 01 10y UST (%) 2y Swap Spread (bps) 81 Nov Mar Oct Jul Oct Jan-07 1,858 1,878 Mar-14 2 Jun Jan Dec-13 Economic Indicators GDP QoQ (%) (annualized) Unemployment Rate (%) ISM Manufacturing (index) Capacity Utilization (%) Housing Starts ('000s) -8.3 Dec Oct Dec Jun Apr Jun Apr May Apr-00 2,273 Jan-06 IG CDS Index (bps) Since Oct Dec Feb-07 Conference Board Cons. Confidence (index) 25 Nov Jan-00 HY Index ($) Since Nov Mar Dec-13 Durable Goods (% MoM) Apr Jul-01 Source Bloomberg Worst since Jan 2000 (unless otherwise noted) Best since Jan 2000 (unless otherwise noted) Current 10

11 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS 2014 First Quarter Capital Markets Update Markets experienced a bumpy ride in the first quarter due to mixed economic data and global political turmoil - Equities saw a significant January dip before recovering in February and March - Concerns around Chinese growth and rising tensions between Russia and the Western allies due to the Ukraine crisis have contributed to volatility in the second half of the first quarter - The Fed scaled back its asset purchase program under new Chair Yellen, but she recently relieved market concerns by pledging to continue the U.S. central bank s extraordinary commitment to boosting the economy Equities Fell Sharply Before Rebounding Dow Jones Industrial Average % Daily Change Value 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% First Quarter Change = -0.7% -2.5% 12/31 1/14 1/28 2/11 2/25 3/11 3/25 Daily % Change Broader Markets 12/31/13 to 3/31/14 12/31 3/31 Change Dow 16,576 16, % Oil $95.44 $ % DJIA 16,800 16,600 16,400 16,200 16,000 15,800 15,600 15,400 15,200 15,000 10Y UST 3.03% 2.72% -31 bps 30Y UST 3.97% 3.56% -41 bps IG 63 bps 61 bps -3 bps Source Bloomberg 11

12 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS 2014 First Quarter Capital Markets Update Markets experienced a bumpy ride in the first quarter due to mixed economic data and global political turmoil - Equities saw a significant January dip before recovering in February and March - Concerns around Chinese growth and rising tensions between Russia and the Western allies due to the Ukraine crisis have contributed to volatility in the second half of the first quarter - The Fed scaled back its asset purchase program under new Chair Yellen, but she recently relieved market concerns by pledging to continue the U.S. central bank s extraordinary commitment to boosting the economy Treasury Yields Decreased 10Y UST Yield Daily Change (Basis Points) Yield (%) /31 1/14 1/28 2/11 2/25 3/11 3/25 Bond Index (bps) First Quarter Change = -31 bps Daily Change (bps) US Investment Grade Credit Markets 10 UST Yield 3.05% 2.95% 2.85% 2.75% 2.65% 2.55% CDS Index (bps) 110 IG 21/22 Roll IG 19/20 Roll IG 20/21 Roll Jan Feb Apr May Jul Aug Oct Nov Jan Feb 50 Cash Index IG19 CDS Index (RHS) IG20 CDS Index (RHS) IG21 CDS Index (RHS) IG22 CDS Index (RHS) Source Bloomberg 12

13 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS U.S. Treasury Rate History Since 1993 From long term perspective, rates continue to be historically low Upward movement over past year, but stabilizing 2-Year and 30-Year U.S. Treasury Rate History Since 1993 (%) Year History Yield (%) Year US Treasury 30-Year US Treasury 13

14 UPDATE ON OVERALL CAPITAL MARKET CONDITIONS Low Rates + Tight Spreads = Cheap Financing Despite Selloff, Investment Grade Credit Spreads and Treasury Yields Well Below Trend Since 2012, lower Treasury yields have correlated with higher investment grade credit spreads, and vice versa However, markets dislocated from this trend The sharp fall in Treasury yields during 2H 2011 saw only a modest widening in spreads By historical comparison, 2012 and 2013 were characterized by a compression in spreads despite a further drop in yields The combination of these factors historically low Treasury yields and relatively tight credit spreads has contributed to historically attractive financing costs for investment grade issuers Treasuries & Investment Grade Bond Spreads (1995 Present) 10Y UST (%) Current Investment Grade Cash Index (bps) Current Historical Source Morgan Stanley, Bloomberg, Solomon Analytics 14

15 Section 2 Municipal Bond Market / Airport Market 15

16 MUNICIPAL BOND MARKET / AIRPORT MARKET Municipal Market Themes Absolute Rate Levels Continue to be Attractive for Issuers Absolute New Issue Volume Lagging Last Year Investor Focus on Municipal Credit Tax Changes Continue to be Discussed 16

17 MUNICIPAL BOND MARKET / AIRPORT MARKET 2013 & 2014 Year-to-Date Interest Rate Review Increase in tax-exempt rates and treasury rates since May 2013 UST and MMD Since January 2011 (%) % % % Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 5Y MMD 10Y MMD 30Y MMD Source MuniMon 17

18 MUNICIPAL BOND MARKET / AIRPORT MARKET 2014 First Quarter Interest Rate Review Muni yield ratios no longer considered cheap relative to U.S. Treasuries Changes in Interest Rates and Ratios 3/31/13 12/31/13 03/31/14 US Treasury Rates 5Y 0.75% 1.74% 1.72% Relative Value 01/02/14 03/31/14 Ratios (%) % 103% 10Y 1.83% 3.03% 2.72% 30Y 3.08% 3.97% 3.56% % MMD Rates 5Y 0.83% 1.24% 1.31% 90 92% 10Y 1.89% 2.77% 2.49% 85 30Y 3.09% 4.19% 3.65% 80 78% MMD / UST Ratios 5Y 110.4% 71.1% 76.2% 75 76% 10Y 103.2% 91.4% 91.6% 70 30Y 100.5% 105.6% 102.6% Y Ratio 10Y Ratio 30Y Ratio Quarterly Highs Source Bloomberg; Municipal Market Data 18

19 MUNICIPAL BOND MARKET / AIRPORT MARKET Interest Rates Have Experienced Significant Volatility Rates Since January 2013 Since January 2013, taxexempt interest rates have experienced significant intraday volatility Sell off in summer 2013 with isolated volatility in 2014 YTD 30-Year MMD Rate Daily Basis Point Movement History January 1, 2013 to Present % (0.05) (0.10) (0.15) (0.20) (0.25) Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Source MMD 19

20 MUNICIPAL BOND MARKET / AIRPORT MARKET Municipal Yield-Curve Slope Rates Since July 1993 Shape of municipal yield curve remains steep, providing cost savings to earlier bond amortizations Municipal Yield-Curve Slope 500 Slope 450 Average 400 Basis Points (Bps) Jan 1990 Jan 1993 Jan 1996 Jan 1999 Feb 2002 Feb 2005 Feb 2008 Mar 2011 Mar 2014 Source Morgan Stanley Research 20

21 MUNICIPAL BOND MARKET / AIRPORT MARKET 2014 First Quarter Supply and Demand Q supply totaled $62.6 billion, down 26% from $84 billion in Q The glut in supply was due primarily to lower refunding volume, which fell 52% to $17.7 billion for the quarter (pure refunding issues only) as rising rates put pressure on savings Retail purchases have significantly increased as a result of higher rates and attractive valuations combined with the stabilization of bond fund flow in Q1, net inflows of $1.1 BN (vs. $42 BN in outflows from June through December of last year) Q1 Long-Term Municipal New Issuance Negotiated, Competitive and Private Placement Issuance ($BN) % Non-AMT AMT Taxable Variable Rate Cumulative YOY Change Weekly Municipal Bond Fund Flows Q Weekly ($BN) (0.1) (0.2) (0.3) (0.4) -32% -26% Cumulative YoY Change Quarter Ended March 31 st = +$1.1 BN -$344 MM long-term fund flows +$2.1 BN high yield fund flows 40% 20% 0% -20% -40% All Muni Bond Funds Long-Term Intermediate High Yield Source Lipper 21

22 MUNICIPAL BOND MARKET / AIRPORT MARKET 10-Yr BBB Rated Credit Spreads Rates Since July 1993 Credit spreads continue trend to historical average Basis Points (Bps) 10-Yr BBB Rated Credit Spreads BBB Rated Average Jul 1993 Jun 1996 Jun 1999 May 2002 May 2005 Apr 2008 Mar 2011 Mar 2014 Source Morgan Stanley Research 22

23 MUNICIPAL BOND MARKET / AIRPORT MARKET Short-Term Market Update Current money market fund balance is $270.1 billion Slightly lower vs. last week s balance of $270.5 billion SIFMA reset this week at 0.06% No change since March 19 th 39.47% of 1M LIBOR ( %) 26.08% of 3M LIBOR ( %) Tax-Exempt Money Market Assets Assets Under Management Tax-Exempt VRDB Rates SIFMA Index $BN Yield (%) Current: 0.06% No change vs. last 2014YTD ($BN) Yield (%) week s rate Jan-10 Mar-10 Jun-10 Aug-10 Oct-10 Dec-10 Mar-11 May-11 Jul-11 Oct-11 Dec-11 Feb-12 May-12 Oct-12 Feb-13 Jul-13 Sep-13 Dec-13 Feb Source Investment Company Institute Source SIFMA 23

24 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\23 MUNICIPAL BOND MARKET / AIRPORT MARKET Thoughts on Municipal Credit Trends Municipal Credit U.S. states managing budgets closely as economy grows U.S. local Government / Tax Backed Ongoing cost and legacy issues (e.g., pension funding) continue ratings pressure Airport Credit Improved ratings outlook to stable In general, airport sector considered stable Smaller / secondary hubs will lag Over the longer term, potential network re-alignment in response to consolidation Focus on cost and project delivery 24

25 MUNICIPAL BOND MARKET / AIRPORT MARKET Airport New Issuance Market Review 2013 airport issuance of $8.7 Bn: Non-AMT: $3.6B AMT: $4.7B Airport Issuance (2000-Current) By Year and Tax Status $Bln 15 AMT Holiday $19.0 Taxable: $360M Issuers took advantage of low interest rate environment 10 5 $9.4 $12.5 $10.9 $11.1 $7.2 $11.5 $8.3 $9.4 $11.9 $8.0 $8.9 $12.4 $ $2.1 AMT Tax-Exempt Taxable Source SDC Airport Issuance (Jan Current) By Month and Tax Status $Bln Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb AMT Tax-Exempt Taxable Source SDC 25

26 MUNICIPAL BOND MARKET / AIRPORT MARKET Recent Pricing Trends Airport New Issues Recent Fixed-Rate Airport Transactions Issue Date Issuer Par ($mm) Ratings Yields (%) Spread to MMD (bps) AMT Penalty Moody s S&P Fitch 10Y* 20Y* 30Y* 10Y* 20Y* 30Y* 10Y* 20Y* 30Y* 03/25/2014 City of Atlanta (AMT) Aa3 A+ A+ 3.32% /25/2014 City of Atlanta (Non-AMT) Aa3 A+ A+ 3.03% /25/2014 City of Atlanta (Non-AMT) A1 A+ A 3.12% 4.06% /12/2014 Miami-Dade County (AMT) A2 A A 3.80% 4.63% /13/2014 Dallas/Fort Worth International Airport (AMT) A+ A 3.87% 4.70% /11/2013 State of Hawaii (AMT) A3 A- A- 4.41% /03/2013 Port of Seattle (AMT) A1 A+ A+ 3.81% /21/2013 Chicago Midway Airport (AMT) A3 A- A % /21/2013 Chicago Midway Airport (Non-AMT) A3 A- A- 3.63% 5.10% /05/2013 Los Angeles International Airport (AMT) Aa3 AA AA 3.49% 4.71% 4.98% /05/2013 Los Angeles International Airport (Non-AMT) 71.2 A1 AA- AA- 2.93% 4.42% /08/2013 Broward County, Florida (AMT) A1 A+ A 3.74% 5.04% 5.36% /08/2013 Broward County, Florida (Non-AMT) A1 A+ A 3.36% 4.69% 5.15% /03/2013 Chicago O Hare International Airport (AMT) A2 A- A- 3.90% 5.20% 5.55% /03/2013 Chicago O Hare International Airport (Non-AMT) A2 A- A- 3.46% 4.95% 5.22% /17/2013 Dallas/Fort Worth International Airport (Non-AMT) A2 A+ A 3.67% 4.91% /20/2013 Charleston County Airport District (AMT) A1 A % 5.47% 5.71% /20/2013 Charleston County Airport District (Non-AMT) 29.5 A1 A % /14/2013 Dallas/Fort Worth International Airport (AMT) A2 A+ A 4.14% 5.37% /07/2013 Chicago O Hare International Airport (Non-AMT) Baa1 BBB BBB 4.18% 5.37% 5.85% * Or closest maturity 26

27 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\24 MUNICIPAL BOND MARKET / AIRPORT MARKET Credit Considerations Insurance continues to be available for airport new issues Evaluate value proposition near pricing Municipal Bond Insurance Since the beginning of the credit crisis in mid-2007, there has been a significant shift in the municipal markets The municipal market transitioned from more of a commodity market with over 50 percent of all tax-exempt issuance insured to a credit market where investor credit analysis is critical to a successful financing Currently there are two bond insurers actively seeking bond insurance business Assured Guaranty, rated Aa3/AA+/NR (M/S/F) Build American Mutual, rated NR/AA/NR (M/S/F) Since May 2013, Assured Guaranty has participated in 7 airport transactions Since May 2013, Build American Mutual has participated in 4 airport transactions 27

28 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\29 MUNICIPAL BOND MARKET / AIRPORT MARKET Basel III Basel III What Happened? Basel III requires banks to maintain high quality liquid assets (HQLAs) at least equal to the amount of net cash outflows expected to be paid by the banks over the next 30 calendar days What Does it Mean for the Municipal Market? The proposed rule would not permit... securities issued by public sector entities, such as a state, local authority, or other government subdivision below the level of a sovereign (including U.S. states and municipalities) to qualify as high-quality liquid assets (HQLA) Regulators proposed that municipal securities are given only 85% credit to HQLAs, asserting that municipal securities are not liquid and readily marketable because of low average trading volumes If this proposed rule is not amended, then the failure to give banks credit for their municipal bond holdings could disincentivize banks to invest in municipal securities and could affect fees charged by banks as liquidity provides on VRDOs 28

29 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\29 MUNICIPAL BOND MARKET / AIRPORT MARKET The Volcker Rule Volcker Rule What Happened? The two basic objectives of the Volcker Rule are to prevent banks from engaging in proprietary trading in certain classes of securities, and to prevent banks from investing in hedge funds and private equity, with the rule scheduled to go into effect on July 21, 2015 What Does it Mean for the Municipal Market? Banks are allowed to buy and sell for their own account securities issued by the U.S. government and its agencies, and those issued by state and local governments The latest version of the Volcker Rule permits proprietary trading in direct obligations of state and local governments including general obligation and revenue bonds, bonds issued through 501(c)(3) organizations such as colleges and hospitals, and bonds issued for private activities like housing and environmental control 29

30 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\31 MUNICIPAL BOND MARKET / AIRPORT MARKET SEC Municipal Advisor Rule Effective July 1, 2014 Independent Registered Municipal Advisor Exemption The historical use of a financial advisor ( FA ) could provide an issuer with the ability to provide underwriters an exemption to the Muni Advisor rule FA can be engaged in a general capacity, not necessarily financing-specific Issuer could provide underwriters with a written representation that the issuer is represented by, and will rely on the advice of, the independent registered municipal advisor (e.g. FA) Could be fulfilled by a single written disclosure to multiple market participants Could be posted on the issuer s website Underwriters must provide written disclosures with a copy to the FA that the underwriter is not a municipal advisor and is not subject to the fiduciary duty imposed by the Exchange Act Enables underwriters to discuss ideas when FA is not present Other Exemptions The issuer could issue deal-specific mini-rfps to solicit ideas and engage an underwriter on each financing within its underwriting pool period The issuer can engage an underwriter for a contemplated financing through a written contract that is specific to a contemplated financing The issuer may wish to engage an underwriter earlier than it is accustomed to, permitting an underwriter exemption for broker-dealers and ability to discuss deal-specific ideas The engagement letter/contract can be canceled at any time by the issuer 30

31 ACI-NA _v4.pptx\04 APR 2014\3:45 PM\30 MUNICIPAL BOND MARKET / AIRPORT MARKET Proposed Tax Reform Act of 2014 Overview and Analysis On Wednesday, February 26, House Ways and Means Committee Chairman Dave Camp released his proposed Tax Reform Act of 2014 which included provisions that would potentially curb the muni taxexemption In Morgan Stanley s view, the plan is unlikely to pass because: i. Senate Democrats have signaled they d like to restart their own tax reform process; ii. It is unclear if most Republicans even support the legislation; and iii. Politicians are unlikely to support major, controversial changes to laws in an election year Proposed Tax Reform Act of 2014 Reduces the number of tax brackets and cuts the top individual rate to 25% 10% surtax on joint income more than $450,000 that would apply to muni interest Prohibits future issuance of tax-exempt private activity bonds Prohibits advance refunding Requires market discount on municipal and other bonds to be accreted and recognized as income annually What You Need to Know Factors to Watch (1) Lower Tax Value Biases Yields Higher Most individual investors, which account for about 70% of the market directly or by proxy, would be subject to lower tax rates under the proposal and the highest bracket would now pay an additional tax on their muni interest The loss of tax-exempt private activity bonds could mitigate lower tax value with scarcity value Credit Impact from Higher Borrowing Costs is Likely Manageable Should borrowing costs rise substantially this means more interest paid to bond holders and less money going towards public purposes. However, Morgan Stanley anticipates that, in aggregate, issuers could sustain the higher costs without widespread credit deterioration, based on previous rates stress testing Relative Winners & Losers in State & Local Credit Could Emerge Disallowing the deduction for state and local taxes paid likely means an effectively higher tax burden for residents in localities with above-average income and/or property taxes which would reduce revenue flexibility in those areas More De Minimis Downside The proposal calls for muni bonds market discount to be accreted and recognized as income annually, creating an annual tax liability instead of the end-of-holding period tax bill currently. This could hurt bonds that fall into de minimis by weakening investor demand Notes 1. Morgan Stanley Research 31

32 MUNICIPAL BOND MARKET / AIRPORT MARKET Conclusion Capital Markets Continue to Provide Attractive Funding Volatility Issuers Must Stay Nimble Focus on Credit Issuers Must Reach Out Continue to Monitor Tax and Regulatory Changes 32