MUNICIPAL MARKET DYNAMICS: POST SUB PRIME, BAB s & WHITNEY Thomas G. Doe, Founder and CEO October 20, 2011 MMA Page 1 www. mma research.com
12% MMA Total Rate of Return (TRR): 2011 v. Average 10% TRR % 8% 6% 4% 2% 0% 2 Year 5 Year 10 Year 15 Year 20 Year 25 Year 30 Year Average TRR ('83 '10) 4.14% 5.20% 6.41% 7.32% 7.82% 8.08% 8.22% 2011 0.96% 2.98% 7.19% 8.52% 9.93% 10.35% 11.19% Average TRR ('83 '10) 2011 Page 2
Yield (%) 3.75 3.65 3.55 3.45 3.35 3.25 3.15 3.05 2.95 2.85 MMA Median Municipal & Treasury 10 Yields Since the S&P Tobacco Downgrade on Veteran's Day 2011 S&P Ratings Action Whitney's default fear refuted on CNBC Investors believe $200B 2011 muni supply 2.75 12 Nov 12 Dec 12 Jan 12 Feb 12 Mar 12 Apr 12 May MMA Median Treasury Page 3
Average MMA AAA Municipal 10 Year Yield vs. Annual Total Issuance (By Era of Demand) Yield (%) 6.00 5.50 5.00 4.50 4.00 3.50 3.00 $275 $178 $206 $283 $394 $389 $401 $261 $525 $450 $375 $300 $225 $150 $75 Avg. Annual Issuance ($B's) 2.50 $0 Annual Average Average 10 Year Yield Page 4
Percent of Customer Trades by Tiers of Dealer Volume Percent 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1 5 6 10 11 20 21 40 40+ 2008 46.0 24.8 13.6 7.3 8.3 2009 50.3 21.3 10.7 8.0 9.7 2010 53.1 18.6 11.5 8.0 8.8 2008 2009 2010 Source: MSRB Page 5
Comparison of Number of Tax Exempt Municipal Transactions by Trade Size: 2007 2010 Tax Exempt Total 2007 (#) 2010 (#) 2010 vs. 2007 (% Change) 0 $25,000 12,425 17,259 38.9% $25,001 $50,000 5,725 7,025 22.7% $50,001 $75,000 1,353 1,477 9.2% $75,001 $100,000 3,291 3,038 7.7% $100,001 $500,000 5,434 4,382 19.4% $500,001 $1,000,000 1,231 788 36.0% $1,000,001 $2,000,000 785 467 40.5% $2,000,000+ 1,499 846 43.6% Comparison of Par of Tax Exempt Municipal Transactions by Trade Size: 2007 2010 Tax Exempt Total 2007 ($millions) 2010 ($millions) 2010 vs. 2007 (% Change) 0 $25,000 $203.30 $276.1 35.8% $25,001 $50,000 $250.20 $303.4 21.3% $50,001 $75,000 $91.80 $98.9 7.7% $75,001 $100,000 $324.20 $297.7 8.2% $100,001 $500,000 $1,427.30 $1,104.2 22.6% $500,001 $1,000,000 $1,001.00 $639.4 36.1% $1,000,001 $2,000,000 $1,199.00 $714.4 40.4% $2,000,000+ $14,648.00 $8,396.8 42.7% Page 6
Percent of Municipal Primary Market Insured: 2002 2011 70% 60% 50% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* % Primary Market Insured 58% 60% 62% 66% 59% 55% 21% 11% 10% 6% % Primary Market Insured * through August Page 7
Breakdown of Outstanding Municipals (%) 3% 7% Investment Grade from at Least One Agency Below Investment Grade Unrated 90% Source: Bloomberg Page 8
10yr 2010 MMA: 5% MMD LMIS: (Barclays): 10yr Wake Co., NC MMA: PAR 0.97 0.96 0.93 0.98 MMA: 5% 1.00 0.97 0.99 MMD 0.98 0.99 LMIS 0.97 30yr 2010 MMA: 5% MMD LMIS: (Barclays): Long Term Salt River, AZ MMA: PAR 0.97 0.95 0.95 0.94 MMA: 5% 0.99 0.97 0.96 MMD 0.99 0.98 LMIS: Long 0.99 10yr 2011 MMA: 5% MMD LMIS: (Barclays): 10yr Wake Co., NC MMA: PAR 0.99 0.98 0.99 0.97 MMA: 5% 1.00 1.00 0.99 MMD 1.00 1.00 LMIS 0.99 30yr 2011 MMA: 5% MMD LMIS: (Barclays): Long Term Salt River, AZ MMA: PAR 0.99 0.99 0.98 0.92 MMA: 5% 1.00 1.00 0.94 MMD 1.00 0.93 LMIS: Long 0.95 Page 9
Monthly TOB Creation ($B's) vs. % of Primary Issuance TOB Creation Par ($B's) $9.0 $7.5 $6.0 $4.5 $3.0 $1.5 $0.0 Jan Feb Mar Apr May Jun Jul Aug Sep TOB Issuance $0.81 $1.50 $1.57 $0.49 $1.35 $1.72 $1.75 $2.61 $8.00 % of Primary Issuance 6% 9% 8% 3% 7% 5% 8% 12% 29% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% TOB % Primary Issuance TOB Issuance % of Primary Issuance Source: Bloomberg Page 10
What we re going to ask our examiners to ask our banks do you know what you re holding? What do you have? How do you break it down? OCC s Director for Market Risk Policy Page 11
Par (and #) of Outstanding Muni Bonds With an Uncured Default, Reserve Draw, or Other Impairment ($MM) Sector SEP All Notices DEFAULT Support Other ALL $5,797 (80) $36,266 (650) $8,795 (321) $19,204 (211) $8,266 (118) Land Secured $438 (24) $4,641 (260) $2,767 (149) $1,616 (101) $258 (10) Tribal none $940 (4) $940 (4) none none IDB $128 (6) $1,233 (35) $919 (16) $301 (16) $13 (3) Toll Road/Transit $541 (2) $4,650 (7) $889 (4) $1,403 (1) $2,358 (2) Retirement $402 (8) $2,221 (67) $737 (28) $285 (10) $1,199 (29) Housing $200 (12) $837 (70) $685 (53) $85 (9) $67 (8) Hotel $125 (3) $715 (13) $422 (8) $194 (4) $98 (1) Other Risky Sectors $337 (14) $13,494 (141) $1,410 (54) $10,373 (51) $1,712 (36) Safe Sectors (GO,Wtr/Swr,SalesTx) $3,626 (11) $7,534 (52) $26 (4) $4,947 (19) $2,561 (29) Initially Non Rated Bonds $1,216 (55) $10,768 (462) $6,031 (268) $2,919 (136) $1,819 (58) Initially Insured/LOC Bonds $4,011 (8) $14,434 (88) $541 (5) $9,191 (47) $4,702 (36) Initially Rated, Uninsured Bonds $522 (15) $10,182 (57) $1,699 (21) $6,880 (22) $1,602 (14) Page 12
GASB Initiative Expected to provide additional information on pension funding and some standardization in calculations. Discount Rate While there are plan assets: an expected rate of return on plan investments as recommended by actuary based on actual returns of the plan. After plan assets depleted: based on a high quality municipal bond index rate. Attribution Method Single method to be utilized. Based on entry age normal principles; Level percentage of payroll. Beginning in first period employee s services lead to benefits and ending in last period of service. Increased Transparency Net Pension Liability to be in financial statements. More disclosures in notes, including actuarial assumptions. 10 years of information in requirement supplementary section. Page 13
$50.0 $45.0 $40.0 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $0.0 Estimates of the Cost of the Municipal Tax Exemption ($B's) $47.6 $43.7 $37.0 $37.1 $35.2 $32.1 $30.4 $30.4$31.3 $26.8 2010 2011 2012 2013 2014 JCT ($B's) Treasury/OMB ($B's) Page 14
Four Critical Themes for the Balance of 2011 & 2012: Credit Risks Garnering Increased State and Federal Regulatory Interest Amid Ratings Ambiguity. Illiquidity and Poor Price Discovery Prompting Scrutiny of Evaluation Primary Pricing Processes. Issuers Ability to Sustain Fiscal Discipline and.defend the Value of the Tax Exemption. Page 15