t t t

ede al ese ve Bu ld

T E C d i B d M k T d

Framing Presentations on Tax-Exempt Conduit Bond Market Trends:

Credit Enhancement TrendsCredit Enhancement Trends

California Debt and Investment Advisory Commission California Private Activity Bonds Workshop

Federal Reserve Building

PRESENTATION3

g Los Angeles, California 90015

September 7, 2011

g

Speaker

Nikolai J. Sklaroff, Director Wells Fargo Securities

o Public Finance Investment Banker

o Published “California’s Credit Crisis: Financing Credit Facilities After the Financial Storm” in Debt Line in December 2009*

o Much has changed, even since 2009

* While at Loop Capital

H i it ti i t h ?

Outline of Topics

How has the credit enhancement market changed and what How has the credit enhancement market changed and what does it look like today?

How is it continuing to change?

What new options are available?

What does the future hold?

P

- - - - - - - - - - -

30 Y "A " MMD 30 Y "B " MMD- -

Impact of Credit Ratings – After the Crisis

900

Interest Rates by Credit Ratings Today

700

800

500

600

oint

s

260 bps

176 bps

300

400 Basi

s P

Credit spreads were widest in 2009 and

100

200

Credit spreads were widest in 2009 and have since narrowed but are still wider

than pre-crisis

0

Jan 07 Jun 07 Nov 07 Apr 08 Sep 08 Feb 09 Jul-09 Dec 09 May 10 Oct 10 Mar 11 Aug 11

Year

30 Year "Aaa" MMD 30 Year "Baa" MMD

Source: Municipal Market Data. As of August 25, 2011.

“i d ” 2 0% ”

Impact of Credit Ratings – Today’s Yields

Interest Rates by Credit Ratings Today

6.0%

"AAA" INSURED "AA" "A" "Baa"

4.0%

5.0%

Now 1.76% separates the top and bottom

3.0%

Rate

“investment grade bonds today

1.0%

2.0%

0.0%

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Year

Source: Municipal Market Data. As of August 25, 2011

N t R t dAssurance Corporation

Bond Insurers Lose Their Triple-A Ratings

Insurer Moody’s S&P Fitch

Aa1 AA+ Stable Negative Not Rated

Aa3 Negative Outlook

AA+ Negative Outlook Withdrawn

Aa3 AA+

Assurance Corporation

Aa3 Negative Outlook

AA+ Negative Outlook Withdrawn

Withdrawn Withdrawn Withdrawn

Baa1 Outlook Developing BBB

Outlook Developing Withdrawn

Withdrawn Withdrawn Withdrawn Withdrawn Withdrawn Withdrawn

Withdrawn Withdrawn Withdrawn

Withdrawn Withdrawn Withdrawn

Ca Outlook Developing Withdrawn Withdrawn

Source: Bloomberg. As of August 25, 2011

30%

The Rise and Fall of Municipal Bond Insurance

90%

100%

70%

80%

50%

60%

Unenhanced

Other Guarantees

40%

50% Standby Purchase Agreements

Letters of Credit

Bond Insurance

20%

30%

0%

10%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Bond Buyer. As of August 25, 2011

4

T t l M k t C it li ti

January 1, 2007 June 15, 2011

Changes in the Bank Industry

Total Market Capitalization

January 1, 2007 August 25, 2011

274 Citigroup 139 JPMorgan (AA-)

120

120

125

168

240

Wells Fargo

UBS

RBS

JPMorgan

Bank of America

53

58

78

87

131

UBS (A+)

Goldman Sachs(A)

Bank of America (A+)

Citigroup (A+)

Wells Fargo (AA)

85

90

93

115

120

Morgan Stanley

Goldman Sachs

Barclays

Wachovia

Wells Fargo

33

36

41

43

53

Credit Suisse (A+)

Deutsche Bank (A+)

RBS (A-)

US Bank (AA-)

UBS (A+)

64

67

75

82

W M

US Bank

Deutsche Bank

Credit Suisse

Merrill Lynch

14

25

31

32

S T t (BBB )

BB&T (A+)

PNC (A+)

Barclays (AA-)

Morgan Stanley (A)

24

24

30

42

43

Bear Stearns

BB&T

SunTrust

Lehman Brothers

WaMu

6

10

KeyBank (A-)

SunTrust (BBB+)

15

22

23

- 50 100 150 200 250 300

KeyBank

PNC

National City

- 50 100 150 200 250 300

Source: Bloomberg. Company websites. As of August 25, 2011

sse

Changes in the Letter of Credit Industry

Top 20 LOC Banks in 1991 Top 20 LOC Banks in 2001 Top 20 LOC Banks in 2011 YTD(1)

Rank Bank Principal Amount

Mkt. Share

National Flag Rank Bank Principal

Amount Mkt. Share

National Flag Rank Bank Principal

Amount Mkt. Share

National Flag

1 Mitsubishi Bank 738.2 7.8 1 Bank of America NT&SA 1268.5 9.8 1 JPM Chase 1019.1 23.7

2 Sumitomo Bank 701.7 7.4 2 SunTrust Bank 906.3 7.0 2 Wells Fargo Bank 787.2 18.3

3 Societe Generale 576.2 6.1 3 US Bank National Association 525.9 4.1 3 Bank of America NT&SA 500.8 11.6

4 Industrial Bk of Japan Tr Co. 574.9 6.0 4 Allied Irish Banks 491.6 3.8 4 AGM formerly FSA Inc 396.1 9.2

5 Morgan Guaranty 542.6 5.7 5 Bank One, NA 486.1 3.8 5 US Bank National Association 298.6 6.9

6 Swiss Bank Corporation 516.4 5.4 6 Wachovia Bank 465.2 3.6 6 Citibank NA 295.0 6.9

7 AMBAC 493.2 5.2 7 Landesbank Hessen-Thuringen 436.0 3.4 7 Northern Trust Company 228.4 5.3

8 National Westminster Bank PLC 427.0 4.5 8 Bayerische Hypo Vereinsbank AG 413.0 3.2 8 Royal Bank of Canada 200.0 4.7

9 FGIC 423.0 4.5 9 The Chase Manhattan Bank, N.A. 379.0 2.9 9* National Australia Bank 112.5 2.6

10 Citibank NA 320.4 3.4 10 Fleet Bank NA 337.0 2.6 9* Australia & New Zealand Bk Gp 112.5 2.6

11 Student Loan Marketing Asoc 313.3 3.3 11 Firstar Trust Company 320.9 2.5 11 PNC Bank NA 107.2 2.5

12 Union Bank of Switzerland 305.2 3.2 12 The Bank of New York Mellon 310.9 2.4 12 Morgan Stanley Bank 100.0 2.3

13 Sumitomo Trust & Banking 299.6 3.2 13 Bayerische Landesbank 296.4 2.3 13 Union Bank NA 77.6 1.8

14 The Fuji Bank, Limited 287.4 3.0 14 First Union Natl Bk of Georgia 233.1 1.8 14 TD Bank NA 72.3 1.7

15 Bank of Tokyo 253.0 2.7 15 Barclays Bank PLC 224.6 1.7 15 The Bank of New York Mellon 64.2 1.5

16 Credit S i 187 6 2 0 16 PNC Bank NA 208 3 1 6 16 US Bank 60 3 1 416 Credit Suisse 187.6 2.0 16 PNC Bank NA 208.3 1.6 16 US Bank 60.3 1.4

17 Toronto-Dominion Bk & Tr Co. 165.9 1.7 17 US Bank 202.2 1.6 17 Union Bank of Switzerland 55.0 1.3

18 The Sanwa Bank, Limited 164.1 1.7 18 HypoVereinsbank Luxembourg SA 200.0 1.5 18 Bank of Scotland 53.3 1.2

19 Barclays Bank PLC 152.1 1.6 19 AmSouth Bank NA 199.0 1.5 19 Bank of Tokyo-Mitsubishi UFJ 45.0 1.1

Source: Thomson Financial and company websites; True Economics Rankings. As of August 25, 2011

20 The Tokai Bank, Ltd. 134.9 1.4 20 Branch Banking & Trust Co 191.1 1.5 20 Federal Home Loan Mtg Corp 32.1 .8

Industry Total 9,510.5 100.0 Industry Total 12,946.0 100.0 Industry Total 4,302.8 100.0

Select Credit Bank Ratings and Trading Relationships

Long-Term Credit Support and Counterparty Ratings and Trading Values(1)

Bank Moody's S&P Fitch

Wells Fargo Bank

J.P. Morgan

U.S. Bank

Aa2

Aa1

Aa2

AA

AA-

AA-

AA-

AA-

AA-

Northern Trust

Bank of America

Aa3

Aa3

AA

A+

AA-

A+

BB&T

Citibank

PNC Bank

Goldman Sachs

A1

A1

A2

A1

A

A+

A+

A

A+

A+

A+

A+

CompassCompass

Keybank

Morgan Stanley

Fifth Third

SunTrust

Regions

A3A3

A3

A2

Baa1

Baa1

Baa1

AA

A-

A

BBB

BBB

BBB-

A+A+

A-

A

A-

BBB+

BBB-

Source: Bloomberg as of 8/15/2011

LOC/Liquidity Support Volume

Bank Exposures LOC/Liquidity

> $30B BofA JPM

$29B - $20B Wells Fargo Citibank

$19B - $10B Dexia US Bank

$9B - $6B Barclays BB&T Helaba PNC State Street

< $5B Allied Irish BBVA BLB BMA/Harris BNP BoNY Depfa KBC LBBW Lloyds RBC Regions

Source: Bloomberg. As of August 25, 2011.

Scotia Soc Gen Sumitomo SunTrust Union Bank

T th b k t d f 54% f l

General Trends in Credit Enhancement

Bond Insurance Option, Going, Going…

Variable rate issuance declining and current volume Variable rate issuance declining and current volume dominated by replacement facilities

Banks retaining capacity for existing clientso Banks retaining capacity for existing clients

o Pricing remains competitive

o Greater attention to documentation

(1) o Top three banks accounted for 54% of volume(1)

o Number of banks providing enhancement has declined since 2008, with little activity from foreign banks

(1) Thomson Financial; True Economics Rankings. As of August 25, 2011

Variable rate growth and dramatic changes

HiHisttoriical Vl Variiablble RRatte IIssuance

120.0

BBilli

ons

100.0

80.0

60.0

40.0

20.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

VRDO ARS

Source: Thomson Financial. As of August 25, 2011

0.0

Changes in the Letter of Credit Volume

Hi t l LOC I Historiical LOC Issuance

80.0

BBilli

ons

70.0

60.0

50.0

40.0

30.0

20 0 20.0

10.0

0.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

National California

Source: Thomson Financial. As of August 25, 2011

But the Stats are misleading…

While the decline in variable rate and LOC issuance is genuine, it is also vastly overstated

Significant movement to on-balance sheet enhancement alternatives: Direct Purchase by Banks

Different banks are doing the product differently and the generic term really describes multiple products

Volume significant

o Some banks buying as securities, some as loans

o Some show up in market data, much does not

O S d l S ll i h S

Three Basic Models

Issuer Bonds*

SIFMA +/-Spread

VRDO Structure Index Floater Structure Wells Fargo Direct Purchase Structure

SIFMA +/-Spread

SIFMA +/-Spread

LOC Provider Remarketing Agent

Fee Fee Tender Option

Issuer Bonds* Spread

Issuer Securities** Spread

Comparison of Risks

* Bonds purchased by Investors * Bonds purchased by Investors ** Bonds purchased by WFS

Remarketing remarketing agent’s capital strength and performance

Spread over index is locked in for the entire Index Floater period

Systemic Put Investors refuse to hold VRDOs or Index Notes as an asset class

Bank does not have a right to tender

the Index Floater to the borrower prior to the expiration of the Index p p

Floater Period‡

Bank Renewal Facility is not renewed or pricing increases dramatically upon renewal

If bank does not negotiate a new

Index Floater term or will not write an LOC upon expiration, issuer faces

term out

Interest Rate Variable rates may rise unexpectedly resulting in higher debt service

Rates are variable and may rise resulting in increased costs

‡ Under certain credit events, the Bank may accelerate repayment of the securities

VRDO Index Floater Wells Fargo Direct Purchase

Spread over index increases due to Bank Risk Spread over index is locked in for the investor discomfort with bank credit entire Index Floater period

Spread over index is a function of a

Variable rates are extraordinarily low

Hi t i l SIFMA

9.0%

High: 7.96% Low: 0 07%

Historical SIFMA

7.0%

8.0% Low: 0.07% Average: 2.72% Current: 0.20%

5.0%

6.0%

3.0%

4.0%

Average = 2.72%

1.0%

2.0%

0.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Period of extraordinarily low ratesPeriod of extraordinarily low rates

Source: Thomson Financial. SIFMA as of August 25, 2011.

Economist Outlook on the 30-Yr US Treasury (as of August 12, 2011)

Economist Outlook on the Federal Funds (as of August 12, 2011)

Outlook for Variable rates looks to remain low

1.50% 7.00%

Economist Outlook on the 30-Yr US Treasury (as of August 12, 2011)

Economist Outlook on the Federal Funds (as of August 12, 2011)

Citi

0.75%

1.00%

1.25% BofA Merrill

Moody's

Citi

Wells Fargo

3 00%

4.00%

5.00%

6.00%

BofA Merrill

Moody's Economy

Wells Fargo

0.00%

0.25%

0.50%

Economy

0.00%

1.00%

2.00%

3.00%

Unique clarity from the Fed’s recent outlook for rates

Current 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 Current 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012

Rates are expected to remain low through 2013

Source: Bloomberg. As of August 12, 2011.

g

Future Issues for Variable Rate Financing and Credit

Bank ratings and balance sheets

Shifting business models

Evolution of new products

o DP is continuing to evolve in response to competitive pressures and investor demand

On balance sheet alternatives

Term / Renewal Term / Renewal

Cost

Basel III

Interest rates Interest rates

- -

Questions and Follow up

Nikolai J. Sklaroff Public Finance Investment Banker

Wells Fargo Securities 550 California Street, 10th Floor MAC A0112-108 San Francisco, CA 94104 415-222-6825 Direct 415-608-5467 Cell 415-975-7537 Fax415 975 7537 Fax nikolai.j.sklaroff@wellsfargo.com

Wells Fargo Securities is the trade name for certain capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association and Wells Fargo Securities, LLC, member NYSE, FINRA and SIPC.

“

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