0 CIFA Conference Presentation November 10, 2003 State of Connecticut SRF Programs.

CIFA Conference Presentation

November 10, 2003

State of Connecticut SRF Programs

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State of Connecticut SRF Programs CIFA Conference Presentation

Presentation Participants

Sharon Dixon Peay, Financial Administrator, Clean Water Fund and Drinking Water Fund

George Butcher, Managing Director, Goldman, Sachs & Co., Senior Manager

Mary Jo Kelly, Partner, Nixon Peabody, Bond Counsel

Mitchell Rappaport, Partner, Nixon Peabody, Bond Counsel

Susan Weil, Executive Vice President, Lamont Financial Services, Financial Advisor

William Hogan, Engineer for WPCS, Development of Environmental Protection

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Introduction:Connecticut SRF Programs

The State’s Revolving Funds consist of (i) the Clean Water Fund, created in 1987 and jointly managed with the State Department of Environmental Protection and (ii) the Drinking Water Fund, created in 1996 and jointly managed with the State Department of Health. Since its inception, the SRF program has received strong support from the State.

The State’s Revolving Funds make loans to borrowers to provide capital for various State and federally mandated water pollution control and drinking water projects. Loans are funded primarily from bond proceeds. Significant administrative and legislative support is evidenced by ongoing bond authorization at or above original commitment levels. Total legislative authorizations are:

$741.0 million in general obligation bonds.

$1,238.4 million in revenue bonds through FY 2003.

Prior to its June financing, the State has issued $745 million in senior revenue bonds and $127 million in subordinate revenue bonds.

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Introduction:Connecticut SRF Programs (continued)

State match of federal capitalization grants far exceeds the 20% requirement.

State funding of interest subsidy fund, which comprises $55.6 million to date, supports subsidized loan rates to municipalities.

For clean water projects a loan rate of 2%.

For drinking water projects a loan rate equal to 50% of interest rate paid on the State’s most recent general obligation bond issue.

Federal regulations limit the uses of program equity to making loans or guarantees, purchasing insurance, refinancing prior debt or covering administrative expenses associated with qualified projects. Program equity cannot be used to make grants and must be maintained by the Fund in perpetuity.

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The Fund had bonds outstanding under two bond resolutions.

Prior to June, $444.4 million Senior Bonds were outstanding under its Senior Bond Resolution adopted December 7, 1990.

$122.5 million Subordinate Refunding Bonds were outstanding under its Subordinate Bond Resolution adopted February 23, 1996.

Senior Bonds are secured by Loans, a 50% DSRF, and an Interest Subsidy Fund.

Loans are payable monthly and bear interest at below market interest rates.

DSRF is invested in collateralized AAA GICs and state GO bonds.

Interest Subsidy Fund is funded with state GO bonds.

Subordinate Bonds are secured by certain Funds released from the Senior Bond Resolution not needed to pay Senior Bonds.

Surplus of Senior Resolution Revenues over Senior Bond debt service

– Senior Resolution Revenues released to subordinate bonds include repayments of pledged loans, DSRF earnings and Interest Subsidy Fund revenues.

– Interest Subsidy Fund is sized so Senior Resolution Revenues at least equal the sum of Senior Bond and Subordinate Bond debt service.

State GO bond principal released from the DSRF.

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The new credit was implemented by redeeming $273 million of Senior Bonds and issuing $118 million of new money with General Revenue Bonds.

Prior Debt

Senior Bonds $444.4 Mn 78.4%

Subordinate Bonds 122.5 Mn 21.6%

Total $566.9 Mn 100.0%

After Restructuring

General Revenue Bonds

Refunding Bonds(a) $237.2 Mn

New Money Bonds 118.0 Mn

$355.2 Mn

Prior Resolution Bonds

Senior Bonds(b) $177.0 Mn

Subordinate Bonds(c) 122.5 Mn

$299.5 Mn

Total $654.8 Mn

(a) Refunding bonds include $121 million of Auction Rate Securities.(b) Reflects cash defeasance of $51.5 million Senior Bonds.(c) Cannot be advance refunded.

54% of the Fund’s outstanding bonds are General Revenue Bonds.

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New General Revenue Bond Resolution

Authorized uses of all program assets are limited by federal and state law.

Resolution provides maximum programmatic flexibility.

Unencumbered assets can be used (i) to make additional loans or to secure debt issued to make such loans, (ii) to provide new types of assistance such as loan guarantees or (iii) pay debt service on any obligations of the fund, including Senior Bonds and Subordinate Bonds.

Resolution provides for financing projects for clean water program and drinking water program.

New program purposes may be added to Resolution if new program is cross-collateralized with existing programs.

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The State is contractually obligated to use any Available Monies in the Revolving Fund to pay General Revenue Bond debt service.

Available Monies in the Revolving Fund will include:

Monies in any pledged fund under the Resolution – Support Fund and Debt Service Fund

Payments on unencumbered loans

Earnings on unencumbered investments

Principal of unencumbered investments

Funds released from the pledge of other resolutions from time to time

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Tax Considerations

Tax Law – Arbitrage rebate or yield restriction applies to equity that is; (1) pledged to bonds unless there is no assurance that the equity will be available to pay debt service, or (2) that is reasonably expected to be used to pay debt service.

Problem – Under old structure, earnings on the equity reasonably expected to be used to pay debt service. As a result, the investment of the equity was limited to the related bond yield, costing the State money.

Solution – Minimize the portion of the equity subject to arbitrage rules by dividing the equity into a “sinking fund” dedicated to payment of debt service and a “general fund” that could be used to pay debt service but not expected to be so used and for which there is no assurance that it will be available to pay debt service.

Result – Because only the sinking fund is subject to the arbitrage rules, the State is able to increase its investment earnings on its equity, even though both the corpus and the earnings on the corpus in the sinking fund would be spent to pay debt service.

Further Refinement – Because the sinking fund is yield restricted, the impact of this can be limited by including in the sinking fund investments that are already yield restricted.

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Program Credit Overview

The following map of the State indicates the location of the Borrowers that are participating in the SRF Program:

Current loans, and additional commitments expected through June 30, 2004 total $934 million.

Loans are outstanding to 77 borrowers. Only two borrowers’ total loans and undrawn loan commitments exceed 10% of the Fund’s outstanding loans and undrawn loan commitments: Waterbury 13.5%, Stamford 10.6%

Strong loan administration in place for over 10 years.

Aggressive collection of any delinquencies. No monthly loan payment has been delinquentover 45 days.

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The current pool of loans was large enough and sufficiently diverse to ensure a pool of highly rated borrowers for each resolution.

An additional 43 borrowers have one loan outstanding with an aggregate total of $90.0 million. None of such individual loans exceed $11.1 million.

Pool Quality

Loans Outstanding Rating

25.8% Aaa61.6% A and Aa8.3% Baa4.3% Unrated

Borrowers with Multiple Loans

Borrower AmountNumber of

Loans Borrower AmountNumber of

Loans

MDC 46,312,279 14Middletown 11,260,937 14New Haven 23,320,264 12Waterbury 93,612,917 9Bridgeport 38,188,333 8West Haven 19,737,659 8Fairfield 33,077,260 5New London 7,867,917 5Greenwich 27,371,641 4Norwalk 38,286,110 4Norwich 6,332,310 4Ridgefield 6,118,834 4Sharon 2,410,962 4Stamford 23,789,237 4Branford 20,589,575 3Bristol 4,064,757 3Cheshire 7,576,991 3

Danbury 27,123,624 3Hebron 5,955,881 3Litchfield 3,122,394 3Naugatuck 1,637,394 3Seymour 7,797,383 3Stonington 3,107,051 3Stratford 3,009,336 3Vernon 20,578,145 3Bethel 5,189,710 2Burlington 1,611,674 2East Hampton 939,549 2Meriden 1,692,728 2New Britain 24,277,153 2Newtown 15,794,948 2Portland 5,828,789 2Suffield 1,316,688 2Thomaston 9,076,693 2

Each resolution will have loans from 40 to 50 different borrowers.

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Post-Restructuring Program Assets and Liabilities(a)

Assets Loans(b) $386.6 $339.0

Long-Term Investments 123.5 112.7

Reserve State Match 2.8 63.8

Interest Subsidy Funds 0.0 18.9

Federal Cap Grants 0.0 18.8

Short-Term Investments 60.0 73.5

Total Assets $572.9 $626.7

Liabilities Senior Bonds $177.0 $0.0

Subordinate Bonds 122.5 0.0

General Revenue Bonds 0.0 339.0

Total Liabilities $299.5 $339.0

Senior/Subordinate(a) General Resolution(a)

(a) Preliminary, subject to change.(b) Loan assets consist of general obligation bonds, water and wastewater revenue bonds, as well as current and

expected loan commitments.

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State of Connecticut SRF Ratings

Senior Subordinate Senior Subordinate GBR

Moody’s Aaa Aa1 Aaa Aaa Aaa

S&P AAA AA+ AAA AA+ AAA

Fitch AAA AAA AAA AAA AAA

Pre-Restructuring Post-Restructuring

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Connecticut Clean Water Fund issued $355 million General Revenue Bonds consisting of:

$118 million Series A Bonds to fund new loans

Fixed rate bonds

Maturing 2005 to 2025

$237 million Refunding Bonds

$116 million Series B Bonds

– Fixed rate bonds

– Maturing 2003 to 2015

$121 million Series C Refunding Bonds

– Auction Rate Securities: $55 million reset daily$66 million reset every 28 days

– Maturing 2016 to 2022

– Interest rate synthetically fixed using an interest rate swap

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On June 17, 2003, interest rates were at a 20-year low.$355,245,000State of Connecticut State Revolving Fund General Revenue Bonds

Historical Interest RatesJune 1983 to Present

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Jan-03 Mar-03 May-03 Jul-03

As of: 6/17/031.04%

As of: 6/17/033.26%

10-Year Treasury 7.24% 13.98% 3.10%10-Year MMD 5.62% 9.50% 2.85%BMA 3.92% 8.71% 0.70%

Average Maximum Minimum

As of: 6/17/032.96%

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0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

The Bonds were priced aggressively versus MMD (as of 6/17/2003).$233,860,000State of Connecticut State Revolving Fund General Revenue Bonds, Series A and B

AAA MMD

Connecticut SRF

Marketing Considerations:

General Revenue Bonds rated Aaa/AAA/AAA

Investor call to introduce new credit

New credit approach is simpler and easier for investors to understand

Assets versus liabilities

Investor questions

The Bonds were priced3 basis points below MMD(a) on average

(a) Based on a weighted average.

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The ARS have been priced below BMA.$121,375,000State of Connecticut State Revolving Fund General Revenue (Auction Rate Securities) Series C

$55,000,000 Daily 0.89% 0.83% (6)

66,375,000 28-Day 0.89% 0.81% (8)

Initial Auction Period

PARSAverage

Spread to BMA(bp)

BMAAverageAmount

Performance for Period7/11/2003 to 11/3/2003

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1.1%

1.2%

7/11/03 7/23/03 8/4/03 8/16/03 8/28/03 9/9/03 9/21/03 10/3/03 10/15/03 10/27/03

BMA versus Connecticut ARS Performance

28-DayDailyBMA

Marketing Considerations:

Diversifies CWF investor base

Goldman Sachs markets ARS to retail buyers

Reduces supply of fixed rate bonds

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The ARS were synthetically fixed with an interest rate swap.

VariableRate Bonds

(ARS)

Fixed Rate3.18%(b)

67% of LIBOR

Assumedat BMA

(a) Enhanced LIBOR Swap assumed to price equal to 67% LIBOR. Also assumes BMA = 67% of LIBOR.(b) Rate including enhancement, after 10/1/2013 rate changes to 3.03%.

Calculation of Synthetic Fixed Rate(a)

Pay:

Swap Rate 3.18%(b)

ARS Remarketing Fees 0.26%

Takedown (annualized) 0.05%

Floating Rate on Bonds BMA

Receive:

Floating Rate on Swap 67% of LIBOR(a)

All-In Refunding Rate: 3.49%

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2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

3.7%

3.9%

4.1%

4.3%

4.5%

2016 2017 2018 2019 2020 2021 2022

Relative Costs of Borrowing:Fixed Rate Bonds vs. Synthetic Fixed Using LIBOR Swaps(a)

Connecticut SRF Yields

Enhanced LIBOR Swap Curve

(a) Pricing as of 6/17/2003.

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Based on historical averages, 67% of LIBOR is a good long-term hedge ratio for tax-exempt variable rate debt.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

10/13/93 10/13/94 10/13/95 10/13/96 10/13/97 10/13/98 10/13/99 10/13/00 10/13/01 10/13/02 10/13/03

10 Years 67.3%5 Years 70.7%3 Years 75.7%2003 YTD 83.0%

Averages

67.0%

BM

A/1

-Mo

nth

LIB

OR

67% LIBOR

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Enhanced LIBOR swap receipts are higher when LIBOR rates are low.

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10

1-MonthLIBOR

1.00% 100.00% 2.00 79.16 3.00 71.17 4.00 67.284.20 68.005.00 68.00 6.00 68.00 7.00 68.00 8.00 68.00 9.00 68.00

10.00 68.00

% of LIBOR Received

1-Month LIBOR

% o

f L

IBO

R R

ecei

ved

AdditionalBenefit

Enhanced LIBOR Swap Receipts

68% of LIBOR

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Connecticut Enhanced LIBOR versus the Average Connecticut Auction Rate Security

0.60%

0.70%

0.80%

0.90%

1.00%

1.10%

7/11/03 7/23/03 8/4/03 8/16/03 8/28/03 9/9/03 9/21/03 10/3/03 10/15/03 10/27/03

Weighted Average PARS Rate

Enhanced LIBOR

The spread of Enhanced LIBOR has averaged 26 bp above BMA.

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To date, the all-in synthetically fixed rate on the ARS utilizing an Enhanced LIBOR interest rate swap, has been 30 bp lower than anticipated.

VariableRate Bonds

(ARS)

Fixed Rate3.18%

Enhanced LIBOR Rate1.12%

0.82%(Actual

ARS Rate)

(a) Indicative pricing on 20-year 67% LIBOR swap ratio as of 6/17/2003.

Calculation of Synthetic Fixed Rate(a)

Pay:

Swap Rate 3.18%

ARS Remarketing Fees 0.26%

Takedown (annualized) 0.05%

Floating Rate on Bonds 0.82%

Receive:

Floating Rate on Swap 1.12%

All-In Refunding Rate: 3.19%

From July 10 to November 3 the additional savings achieved were $110,000.

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State’s Perspective

State Committed to Environment

Innovative Municipalities

Maximize ability to respond to municipalities and create programs consistent with goals

PROS

Pitfalls with unraveling of old indenture

Increased exposure to changes in State management

Adverse Changes in State and Federal Laws

CONS

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The State Benefits from The New Program

Enhance earnings

Consider broader range of program initiatives

Maximize State resources

Innovative Solutions for Municipalities

Management Efficiencies

0 CIFA Conference Presentation November 10, 2003 State of Connecticut SRF Programs.

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