Better Managing Your Financial Resources Repurposing Legacy Financial Products Damian M. Busch October 16, 2017

A Footnote Tax counsel should be part of the conversation from start to finish Some statements are based on experience, but are footnoted “AΩ” This indicates that this statement is not absolute fact and depends on individual circumstances – please discuss with your tax counsel

There are over $7B in swaps outstanding 6/3/2018 6:03 PM There are over $7B in swaps outstanding Reflects swap par outstanding as of respective issuers’ most recent financial statements.

Fully 10yr Rule Restricted Tax Plan Progression Initial Tax Plan 25% Fixed Rate Bonds 10% PAC Bond 33% Hedged VRDB Status Year 5 0% Fixed Rate Bonds 0% PAC Bond 33% Hedged VRDB Status Year 10 33% Fixed Rate Bonds 33% PAC Bond 33% Hedged VRDB Fully 10yr Rule Restricted

TOOL 1: De-Allocate SWAP DE-ALLOCATION EXISTING BONDS Swap Agreement SWAP DE-ALLOCATION “Deemed Termination” EXISTING BONDS DE-ALLOCATED SWAP 1) Leave as unhedged variable - Continue redemptions from restricted receipts Swap re-allocated to new or existing TP (or marked as investment) - Allow to recoup foregone spread AΩ If Tax-Exempt, yield adjustments may occur on both old and new tax plan AΩ 2) Remarket to fixed or refund (New TP) - Subsidy from older, higher rate mortgages

TOOL 2: Terminate SWAP TERMINATION IN ACTUALITY TERMINATION Swap Agreement SWAP TERMINATION TERMINATION IN ACTUALITY TAX-EXEMPT TERMINATION TAXABLE TERMINATION - Terminate, in actuality, all or a part of existing swap - Can be paid from existing resources, or bond financed AΩ - Current swap must be integrated AΩ - Few, if any, restrictions AΩ - Finance termination cost over several years - Numerous yield considerations… AΩ

TOOL 3: Modify SWAP MODIFICATION MODIFICATION Swap Agreement SWAP MODIFICATION MODIFICATION Terms Current Swap Modified Swap Notional: Receive: Maturity: Optional Termination: Fixed Pay Rate: - Modify existing swap terms for repurposing - Can modify notional, optional termination, maturity, index, and fixed pay rate $50 MM 5/1/2018 5.125% SIFMA + 15bps 1/1/2032 $50 MM SIFMA + 15bps 1/1/2032 5/1/2020 2.800%

TOOL 3: Modify (Alternatives) Swap Agreement SWAP MODIFICATION MODIFICATION - Swap modifications can take a wide variety of forms: COULD CHOOSE TO: IN ORDER TO: - Extend Final Maturity - Lower Fixed Pay Rate - Extend Optional Call - Receive up-front payment - Change reference index - Change amortization

TOOL 4: Novate (…and Modify) Swap Agreement SWAP NOVATION NOVATION Simultaneous cancellation of existing swap and replacement with new counterparty Can utilize existing terms or could incorporate modification AΩ If existing counterparty is eager to exit there could be an opportunity for the issuer to realize some savings in the novation

CONSEQUENCES OF SWAP ADJUSTMENTS STRATEGIC PLANNING Economic Impacts Cash Flow Impacts & Rating Agency Considerations Yield Compliance and Subsidy Creation

Scenario 1 IMPLICATIONS AΩ Tax plan has only fully hedged VRDBs remaining; optional par termination on swap is in 2 years. Tax plan is currently under full spread. The issuer elects to de-allocate the swap to try to recoup foregone spread and avoid becoming overhedged from 10yr rule redemptions… IMPLICATIONS AΩ Economic Rating Cash Flows OMYC - TP is now unhedged, can be called in series from 10yr rule restricted receipts without becoming overhedged - Depending on the conditions of the swap re-allocation, this could represent an increase in unhedged VRDBs - Tax plan should be re-evaluated post-yield adjustment from de-allocation - TP should realize more spread while rates remain low - Issuer must examine whether this will introduce significant additional stress in low prepay / high rate runs - Must be monitored closely as higher rates could nullify the effort

Scenario 2 IMPLICATIONS AΩ Tax plan has only fully hedged VRDBs remaining; optional par termination on swap is in 2 years. Tax plan is currently over full spread. Issuer elects to de-allocate the swap to achieve compliance before refunding to fixed-rate. Issues new, longer tenor VRDBs, and modifies the old hedge, extending optional call and lowering fixed-pay rate. IMPLICATIONS AΩ Economic Rating Cash Flows OMYC - TP is now unhedged, can be remarketed to fixed-rate and called in series from 10yr rule restricted receipts - Issuer maintains same level of hedge, but lowers the fixed-pay rate - Prior tax plan achieves compliance and is then closed via refunding to fixed-rate - Depending on tenor, costs after remarketing to fixed may be similar to, or even lower, than the prior synthetic fixed - Issuer must examine whether this will introduce significant additional stress in low prepay / high rate runs - The swap is adjusted and moved to a new plan, which may be an open plan for yield

Scenario 3 IMPLICATIONS AΩ Heavy cross-calling out of tax plan means fixed and variable rate bonds remain; optional par termination on swap is in 1 year. Tax plan is currently under full spread. Issuer elects to partially terminate swap from unrestricted monies and extend optional call date slightly to lower fixed pay rate on remaining hedge. The increase in unhedged VRDB and lower fixed-pay rate may help achieve full spread. IMPLICATIONS AΩ Economic Rating Cash Flows OMYC - TP is partially unhedged and has a lower fixed-pay rate, which should generate additional spread - Issuer has increased unhedged portion and must consider added stress of low prepay / high rate run - Compliance will need to be monitored closely; ideally the optional call can be exercised as the plan achieves full spread