1. Been down so long, it looks like up to me When will rates move up, and how to prepare NCSHA Annual Conference October 21, 2014 Swap Financial Group Peter Shapiro 76 South Orange Avenue, Suite 6 South Orange, New Jersey 07079 973-378-5500

2. Unprecedented last six years In prior crises, rates have quickly recovered We are still waiting for ‘mean reversion’ Swap Financial Group2

3. 3 Last 50 Years (Benchmark 10-Year US Treasury)

4. Swap Financial Group4 Last 43 Years (Fed Funds) Unprecedented

5. Inflection point: 2015 Fed has stated clear intentions US economy strengthening, esp. last two lagging legs of housing and labor Markets still suffer from PTSD – pricing in the risk of disaster, despite evidence to the contrary Swap Financial Group5

6. Fed Funds Target Rate Projections 6 FOMC member votes

7. Swap Financial Group7 Since January 2008 (Benchmark 10-Year US Treasury) Lehman Euro crisis QE taper Huh? The Enigma of Long-Term Rates

8. Enigma of long-term rates Swap Financial Group8 Will long rates wait till Fed tightening begins? Probably not Most dangerous investment right now: Long-term bonds Converse: The best time to borrow is right now Think about: Locking in today’s rates for known future needs

9. Swaps outperformed muni bonds Upper line (white): 30-yr muni bonds Lower line (orange): 67% Libor swap Spread between bonds and swaps

10. Fearless rate predictions Year-end 2015 – LIBOR (3-mo): 1.50 SIFMA: 0.85 10-yr Treasury: 3.25 30-yr MMD: 3.75 Year-end 2016 – LIBOR (3-mo): 3.00 SIFMA: 2.00 10-yr Treasury: 4.50 30-yr MMD: 5.00 Swap Financial Group10

11. Swap Financial Group11 Cost of bank facilities skyrocketed...

12. Swap Financial Group12... but prices have dropped steadily

13. Bank LOC outlook Continued low demand will keep LOC costs low Bank instability/regulatory environment will require issuers to be agile Alternative structures will continue to play a big role Swap Financial Group13

14. Alternatives are growing Direct Purchase programs Floating Rate Notes (SIFMA and LIBOR) Extendables (“windows”) Synthetic floating (via swap) Swap Financial Group14

15. Swap Financial Group 15 Example: Boston University Swap Dealer 1.265% Bond Holder Floating Index (SIFMA) 1.50% Boston Univ Ratings: A1/A Issued 5-yr bond @ 1.50% (MMD plus 32) Swap to floating (pay SIFMA, receive 1.265%) Net: SIFMA + 23.5 bps No remarketing cost or risk No bank LOC/liquidity cost No bank covenants No basis risk Key risk: counterparty risk  But reverse direction All-in cost: SIFMA + 23.5 bps