Debt and Technology: Using the Internet to Competitively Market Bonds

2 Alternative forms of Issuing Long Term Debt Bank Loan Bond Pool Bond Issue

3 Factors in Determining which Long Term Debt Alternative to Select Size Term Interest rate exposure Flexibility in prepayment provisions

4 If a Bond Issue is the Alternative selected, a determination needs to be made whether the bonds are placed in the market using either the competitive or negotiated method of sale. The following checklist should provide some guidance on which method of sale to employ. Debt Structure Conditions Favoring A Competitive Sale Conditions Favoring a Negotiated Sale Pledged Revenues General Obligation or Strong System Revenue Project Supported Revenues Security Structure (for Revenue Bonds) Conventional Resolution and Cash Flow; Rate Covenant and Coverage Unusual or Weak Covenants Subordinated Debt Debt Instrument Traditional Serial and Term, Full Coupon Bonds Use of new structures, or Derivative Products and Structure to Attract Particular Investors Credit Quality Rating"A" or better Below Single "A" OutlookStable Weak but Improving, or Under Stress Issuer Characteristics Type of Organization Broad-Based General Purpose Borrower Special Purpose, Independent Authority Frequency of Issuance Regular Borrower in Public Market New or Infrequent Issuer Market Awareness Active Secondary Market with Broad Investor Base Little or No Institutional Awareness of Issuer, Historical Antipathy Investor ComfortWell-Known, Stable Issuer Issuer Experiencing Significant Financial, Legal or Other Problems Market Conditions Interest RatesStable, Predictable Market Volatile or Declining Market Supply and Demand Strong Investor Demand, Good Liquidity, Light Forward Calendar Oversold Market, Heavy Supply Policy Considerations Participation in Sale Bonds Broad Market Participation Desired for Sale of Bonds Desire to Direct Business to DBE or Local/Regional Firms Stimulation of Investor Interest Broad Market Participation Desired for Purchase of Goods Desire to Direct Business to Local/Regional Investors Source: "Guide to Effective Debt Management" Published By: National Government Finance Officers Association.

5 If a competitive sale is selected, a determination is made whether the bonds should be sold using the traditional approach of obtaining bids by facsimile or over the Internet. Some points for discussion regarding the decision include: Size of the Issue Term of the Issue Cost of the Internet bidding agent and an assessment as to the reasonableness of recouping the fee in the bidding.

6 If a competitive sale of bonds over the Internet is selected, these steps are followed: A Preliminary Official Statement and Invitation to Bid are prepared A Preliminary Official Statement is a prospectus that includes the economic, demographic and financial conditions of the issuer. An Invitation to Bid is a set of specifications for acceptance of a bond purchase proposal outlining the terms and conditions for proposal acceptance. Such terms and conditions include: Call features; Underwriters discount or commission; Maturity structure of the issue; Time and method of accepting the bids; Submitting a bid with or without municipal bond insurance. The Preliminary Official Statement and Invitation to Bid documents are posted on the Internet website.

7 Selling Bonds Competitively on the Internet (Continued) At the established auction bidding date and time, underwriters submit their bids on the Internet bidding website for: The entire issue of bonds, also known as an All-or-None Bid (AON). Specific maturities within the bond issue, also known as a Maturity-by- Maturity Bid (MBM). The auction typically lasts fifteen minutes.

8 Selling Bonds Competitively on the Internet (Continued) The True Interest Cost (the TIC), a method of calculating the all-in borrowing rate of a bond bid similar to the conventional annual percentage rate calculation for home mortgages, is calculated. The TIC of each AON bid and the combination TIC of the best MBM bid is calculated. Whatever bid provides the lowest TIC to the issuer is awarded the bonds, subject to the issuers action at a public meeting.

9 Selling Bonds Competitively on the Internet (Continued) During the auction period, a bidder can submit as many bids as desired on either the AON or MBM format. Once a bid is submitted, the bidder only knows whether or not their bid produces the lowest TIC. As a result, if a bidder is truly interested in purchasing the bonds, they can continue to submit bids producing a lower TIC until it is indicated their bid is the lowest, or the auction period ends.

10 Ten Steps Taken By Grant Street Group When Preparing An Internet Bond Auction Financial Advisor notifies Grant Street Group (GSG) of desired date and time of sale; GSG provides editorial assistance with draft Notice Of Sale, if necessary; Financial Advisor provides Final Notice of Sale and Preliminary Official Statement to GSG; GSG extracts pertinent data and information from Notice Of Sale and Preliminary Official Statement and creates the auction on the web site;

11 Ten Steps Taken By Grant Street Group When Preparing An Internet Bond Auction (continued) The Notice Of Sale and Preliminary Official Statement are secured in a PDF format and posted to the auction created on the web site; GSG prepares an excel spread sheet which is used to verify the True Interest Cost (TIC), the customary basis of award; Financial Advisor and GSG together review the Term Sheet, Notice Of Sale and the auction itself to ensure that all parameters of the auction have been correctly set in accordance with the provisions contained in the Notice Of Sale;

12 Ten Steps Taken By Grant Street Group When Preparing An Internet Bond Auction (continued) GSG sends blast to its national data base of some 500 broker-dealers and institutional investors announcing the Internet Bond Auction; GSG makes follow-up telephone calls and monitors indications of bidding interest from underwriters; Financial Advisor and Issuer are provided with updates regarding projected bidder participation; GSG assists the Issuer as necessary with obtaining an ID and Password so they can observe the actual auction; GSG provides post-auction support to Financial Advisor and Issuer with auction reports and bid detail data.