Municipal Market Weekly Ramirez Municipal Strategy

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1 ***INSTITUTIONAL USE ONLY*** Municipal Market Weekly Munis: No Sugar Tonight In My Coffee..Supply Squeeze Ahead Munis have the potential to underperform Treasuries this week given the outsized scale adjustments last week (see below). However, beyond this week and for the next several months, we expect the Muni market to outperform given the impending significant supply shortage beginning June 1. We estimate that in June alone, about $86 bil. will be available for reinvestment, including June 1 redemptions of $32 bil. and coupon payments of $54 bil. This is against the current 30 day visible supply estimated at only $11 bil. for a total net supply shortfall of $75 bil. In terms of net market supply only over the next 30 days, the Muni market is set to shrink by $21.56 bil., driven by redemptions from issuers in New York (-$3.17 bil.), California (-$2.35 bil.), Florida (-$1.72 bil.), New Jersey (-$1.64 bil.), and Georgia (-$1.23 bil.) SEE CHART. YTD Muni issuance through the end of April was -13% and is running -11% through the first three weeks in May, which is in-line with our full-year 2017 estimate long-term new issue gross supply of -14% YoY, or $368 bil. A Few of Our Favorite Things: CAL and NY market, given a large, declining net supply of bonds; 7-9yr part of the curve for best rolldown; 15-20yrs part of the curve for best value, given reasonable ratios in the 90% range; and AMT bonds, given a possibility that the AMT will be modified or eliminated as part of Trump s tax reform plan; Barbell strategy as optimal portfolio (see pg 2) Page 1 Last Week Municipals outperformed Treasuries for the third consecutive week, propelled by domestic risk-off sentiment and robust weekly mutual fund inflows of $427 mil. The primary market new issue calendar of $8.8 bil. was well placed and trading in the secondary market was strong, particularly inside 10yrs where it has been very difficult to source bonds. Investors continue to shorten duration over concern about potential tax-reform implications, notably the Muni tax-exemption and future demand for longer duration from corporations. California and NY general market names, also inside 10yrs, continue to trade particularly well due to shrinking supply as noted above. BWICs averaged $678 mil. and 2,683 line items daily. Muni/ UST ratios 5yrs and out were better by 1-2 ratios following MMD scale bumps of between 8 bps and 12 bps and a Treasury market rally 5yrs and out of between 5 bps and 9 bps. Both MMD and Treasury curves bull flattened -- MMD 5s30s by 3 bps to 157 bps and Treasury 5s30s by 4 bps to 111 bps. Rate moves were almost entirely reflective of safe-haven demand following the latest - and in my view greatest to date - head-spinning-trump-related revelations, which add uncertainty to timely achievement of Trump s tax and healthcare reform agenda and a Fed rate hike in June. Trump apparently disclosed Israeli intelligence to the Russians, attempted to bully former FBI-director Comey to drop the investigation into former national security adviser Flynn, and the Justice Dept appointed former FBI director Mueller as special counsel of the investigation into possible Russia-Trump collusion in last Fall s election. Unsurprisingly, index returns were exceptional on the rates market rally, with the S&P Main Muni Index returning 48 bps (289 bps YTD), Corporate IG returning 56 bps (307 bps YTD), and Treasuries averaging returns of 54 bps (172 bps YTD). This Week The new issue calendar this week is only slightly above the 12-week moving average at $7.76 bil., led in the primary market by $2.1 bil. Hudson Yards Infrastructure Corp (Ramirez Joint Books), $600 mil. NYU Hospitals, $380 mil. Kankakee, IL Schools, and $285 mil. Baltimore Conv Ctr. The competitive calendar is led by $173 mil. San Francisco Trans and $111 mil. Ft. Worth Water/Sewer. This week has Fed speakers, Treasury auctions, Fed meeting minutes, PCE, GDP, and of course more Trump. 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 2017 Strategy: Barbell Page 2 Curve positioning and credit selection are key to outperformance in 2017, given the potential for additional Fed rate increases and tax policy reform. Accordingly, we think a barbell portfolio strategy is optimal, including extension of effective portfolio to about 10yrs (20yr avg maturity), to both hedge downside risk (short) and preserve income (long). Forward Treasury rates in one year imply a bear flattening of the curve with range-bound long-end rates. Credit sectors we like include dedicated tax, transportation, public power, and housing. Market Performance Indicators WEEK ENDING: 5/19/17 INDEX MONITOR 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 3.57% 1.64% 3.25% 3.81% 3.85% 3.66% 3.67% 1Y Fwd 1.76% 0.87% 1.68% 1.64% 1.66% 1.77% 2.20% +25 bps 0.99% 0.95% 1.36% 1.26% 1.08% 0.78% 0.70% +50 bps -1.58% 0.27% -0.49% -1.26% -1.68% -2.09% -2.25% 1-10y 11-20y 21-30y Optimal (Barbell) Strategy: 38% 0% 62% TR: 1.98% Eff Dur: 9.91 WAM*: 20.9 TOTAL RETURN (%) YIELD (%) Eff YTD 1Y WTD YTD Lo Hi Mean Z-score INDEX Dur WTD MTD QTD YTD RISK ADJ 1Y risk adj 3Y 5Y 5/19/17 Δ Δ 1Y 1Y 1Y 1Y 3Y TREASURY-TERM TREASURY - ALL SHORT SHORT-INT INTRMD LONG-INT LONG MUNICIPAL-QUALITY MUNI-EXEMPT MUNI-TAXABLE HIGH GRADE 'A' RATED 'BBB' RATED HIGH YIELD MUNICIPAL-TERM SHORT SHORT-INT INTRMD LONG-INT MUNICIPAL-SECTOR PRE-RE GO DED TAX WTR-SWR PUB PWR HEALTHCARE HIGHER ED TRANSPORT HOUSING TOBACCO CORP-MUNI GLOBAL / CORP GLOBAL AGG US CORP-IG US CORP-HY Rich Fair Cheap *Rich/Cheap: +/- 1.5 Z-scr

3 Page 3 AAA MMD / Rates & Ratios YIELDS (%) Lo Hi Mean SD Z-Score 5/19/2017 5/12/2017 1/3/2017 5/20/ M 12M 12M 12M 12M 4Y 2 Yr 71% 75% 100% 76% 66% 115% 89% Yr 72% 75% 91% 75% 70% 103% 83% Yr 89% 90% 94% 89% 82% 106% 94% Yr 99% 99% 99% 93% 86% 108% 98% UST 2 Yr Yr Yr Yr AAA MMD 2 Yr Yr Yr Yr Legend: Rich Fair Cheap *Rich/Cheap: +/- 1.5 Z-score 10Y 30Y MUNI TAX-EXEMPT SPREADS 5/19/17 Avg Min Max SD Z-Scr AA A BBB AA A BBB HY

4 Page 4 Muni Primary Market Gross Supply ($ in millions) As of 5/19/17 Last Week 9, wk Moving Avg 7,310.4 YTD 141,488.8 Weekly Visible Supply ($ in millions) Week of 5/22/17 Total 7,763.2 Comp. 1,307.0 Neg. 6,456.2 Source: IPREO 30-Day Visible Supply ($ in millions) Current 2017 High 2017 Low Total $ Date $ Date Total 12, ,007.8 (1/10) 6,494.0 (2/9) Comp. 4, ,718.3 (4/11) 1,395.8 (1/27) Neg. 8, ,684.4 (1/10) 3,937.6 (2/16) Source: Bond Buyer Top Competitive Issuances Coming to Market Underwriters will attempt to market $7.76 bil. of municipals in the week of 5/22, led in the negotiated space by $2.19 bil Hudson Yards Infra Corp, $600 mil. NYU Hosp, and $380 mil. Kankakee SD #11. The competitive calendar is highlighted by $173 mil. San Francisco Transp and $112 mil. Fort Worth Wtr & Swr Sys. Issuer State Amount ($ 000 s) San Francisco Transp CA 173,095 Fort Worth Wtr & Swr Sys TX 111,670 Milwaukee Met Sewage Dist WI 80,000 Newport News VA 60,645 Arlington TX 59,285 Top Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Hudson Yards Infra Corp NY 2,188,330 NYU Hosp NY 600,000 Kankakee SD #11 IL 380,000 Baltimore Convention Ctr MD 285,370 Tarrant Co (Buckner Sr Living) NC 238,380 Source: IPREO Ramirez Negotiated Issuances Coming to Market Issuer State Amount ($ 000 s) Senior Manager Ramirez Role Hudson Yards Infra Corp NY 2,188,330 Ramirez Senior Manager Economic Calendar Monday (5/22) Tuesday (5/23) Wednesday (5/24) Thursday (5/25) Friday (5/26) Chicago Fed Nat Activity Index Markit US Manufacturing PMI MBA Mortgage Applications Wholesale Inventories GDP Annualized Fed Speakers: Harker, Kashkari, Markit US Services PMI FHFA House Price Index Initial Jobless Claims GDP Price Index 3-Month Bill Auction Markit US Composite PMI Existing Home Sales Continuing Claims Core PCE 6-Month Bill Auction New Home Sales FOMC Meeting Minutes Bloomberg Consumer Comfort Personal Consumption Richmond Fed Manufact. Index Fed Speakers: Kaplan, Kashkari Fed Speakers: Brainard, Bullard Durable Goods Orders Fed Speakers: Kashkari, Harker 2-Year Floating Rate Note 7-Year Note Auction Cap Goods Orders 4-Week Bill Auction 5-Year Note Auction U. of Mich. Sentiment 52-Week Bill Auction 2-Year Note Auction

5 Page 5 Muni Market Demand Tax-exempt mutual funds experienced inflows of $427 mil. in the week ending May 17, marking the sixth consecutive week of tax-exempt inflows. Inflows YTD are $4.37 bil. Source: Lipper Fund Flows US Lipper Fund Flows Sector Flow Change ($B) YTD ($B) Tax-Exempt Inflow: Inflow: Money Market Inflow: Outflow: Taxable Inflow: Inflow: Equities Outflow: Inflow: Source: Lipper Fund Flows Muni Market Supply Over the next 30 days, we see gross supply at $10.96 bil. and net muni market supply at -$21.56 bil. The states that stand to experience the largest change in outstanding debt include New York (-$3.17 bil.), California (-$2.35 bil.), Florida (-$1.72 bil.), New Jersey (-$1.64 bil.), and Georgia (-$1.23 bil.). We estimate long-term new issue gross supply for 2017 at $368 bil., for a decline of about $60 bil., or -14%, which incorporates $204 bil. of new money bonds and $164 bil. of refundings. We expect 2017 to end with net market supply at +$38 bil., Ramirez, Ramirez

6 Page 6 Ramirez Managed Deals $2,188,330,000 Hudson Yards Infrastructure Corporation Hudson Yards Second Indenture Revenue Bonds $2,154,970,000 Fiscal 2017 Series A (Tax-Exempt) and $33,360,000 Fiscal 2017 Series B (Taxable) Issue: Bond ratings pending. Retail pricing Friday 5/19 and Monday 5/22, institutional pricing Tuesday 5/23. Ramirez & Co. is Joint Book-Running Manager of this transaction. Purpose: Hudson Yards Infrastructure Corporation (HYIC) Second Indenture Revenue Bonds, series 2017A/B (2017 Bonds) proceeds refund al l outstanding series 2007A bonds ($2 bil.), advance refund $391 mil. first indenture series 2012A bonds, and pay issuance costs. The series 2007A and 2012A bonds primarily financed extension of the No.7 subway line to Hudson Yards Financing District (HYFD). Security: The 2017 Bonds are issued under a second indenture, subordinate to unrefunded first indenture series 2012A bonds, secured by recurring and non -recurring revenue generated within HYFD. The City of New York (City) also pledges interest support payments (ISP). Recurring revenue consists of payments in lieu of property taxes (PILOTs) paid to HYIC by office properties and tax-equivalency payments (TEPs) paid to the City and appropriated to HYIC by residential, hotel, and retail properties. Non-recurring revenue consists of development-related revenue, including payments in lieu of mortgage recording taxes, and sales of district improvement bonuses and transferable development rights. Upon closing, unrefunded series 2012A bonds ($609 mil.) convert to a fully amortizing structure ( ) and the first indenture is closed. The 2017 Bonds amortize from Except for completion bonds up to $150 mil., issuance of additional second indenture bonds requires net recurring revenue to cover first and second indenture maximum annual debt service by at least 1.25x. HYIC is permitted to transfer surplus funds to the City from the second indenture following annual set-aside (by June 30) of revenue sufficient to cover debt service in the current and subsequent fiscal year (future year debt service requirement). Project: HYIC is a local development corporation created by the City in 2005 to finance capital improvements within HYFD, a 45 square-block area in the Midtown-West area of Manhattan. HYFD s objective is to increase the Midtown core office inventory within a mixed-use environment. The City incentivized residential and commercial development through PILOTs for office properties and the 421-a tax abatement programs for residential properties. Major real estate developers active in HYFD include: Related, Oxford, Brookfield, Tishman, Moinian, and Extell. HYFD is zoned for 51.1 mil. sq ft (msf) of total development, including office (25.4 msf; 49.7%), residential (19.7 msf; 38.6%), hotel (4.2 msf; 8.2%), and retail (1.8 msf; 3.5%). HYFD is currently 50.6% complete, under construction, or in contract totaling 25.9 msf (73 properties). Completed properties account for 22% of total zoned density (11.3 msf, 41 properties), including 1.9 msf office (1 property), 7.6 msf residential (21 properties), and 1.8 msf hotels (19 properties). Properties under construction or in contract (14.6 msf; 32 properties) account for 28.5% of zoned density, including 8.7 msf office (4 properties under construction; 1 in contract), 3 msf residential (10 properties), 1.9 msf hotel (16 properties), and 1 msf retail. HYIC engaged Cushman and Wakefield (C&W) for a demand and development study that projects sufficient demand for the remaining 49.4% (25.3 msf) of zoned density. C&W projects 100% buildout of zoned residential and hotel density by 2028 and 2039, respectively, and 92% build-out of zoned office density by C&W s projections incorporate various factors and assumptions, including HYFD capture rates of future City-wide development (38% midtown office; 8%-12% City-wide residential) and a 40-year City-wide economic and demographic forecast provided by Moody s Analytics. Moody s projections of City-wide office-using employment, ratio of completed housing units-tohousehold formations (1.6), and net supply of hotel rooms drive C&W s demand projections for office, residential, and hotel development, respectively. Retail development demand is a factor (~3%) of office and residential development. Financial: HYIC revenue totaled $1.48 bil. between FY06-16, including $274 mil. recurring revenue, $566 mil. non-recurring revenue, and $358 mil. of ISP. DSC from recurring revenue was 1.25x and 1.52x on unrefunded series 2012A bonds in FY Upon closing of the 2017 Bonds, HYIC will fully fund second indenture debt service due FY18. Revenue projections incorporate various assumptions, including C&W s development projections, City tax revenue methodologies, and below-average assessed value growth. Base-case cashflow assumes full build-out of HYFD and total revenue of $27.8 bil. through FY47 (7.8% CAGR), ranging from $234 mil. in FY19 to $1.93 bil. in FY47, consisting primarily (96%) of recurring revenue from office (47%), residential (34%), and hotel (14%). DSC on 2017 Bonds and completion bonds in FY19-47 under the base-case is projected 1.54x and 9.57x. Stress-case cashflows assume no further development in HYFD beyond offices under construction and in contract. In the stress-case, net recurring revenue totals $14 bil. through 2047 (7.4% CAGR), ranging from $122 mil. in FY19 to $906 mil. in FY47. DSC on 2017 Bonds and completion bonds in FY19-47 under the stress-case is projected at 1.00x and 4.50x.

7 Page 7 Samuel A. Ramirez & Co., Inc. 61 Broadway New York, NY Samuel A. Ramirez & Co., Inc., member FINRA, MSRB, SIPC. This material is proprietary to Samuel A. Ramirez & Co., Inc. and may not be disclosed to any third party or used for any other purpose without the prior written consent of Samuel A. Ramirez & Co., Inc. Samuel A. Ramirez & Co, Inc. is not acting as a municipal advisor and this message and any opinions, views or information contained herein are not intended to be, and do not constitute, advice within the meaning of Section 15B of the Exchange Act of The information in this document should not be considered research 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 Samuel A. Ramirez & Co., Inc. is not soliciting any action based upon it. 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 Samuel A. Ramirez & Co., Inc. or which was otherwise reviewed by us., 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 Samuel A. Ramirez & Co., Inc. 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.