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Overview of the Lehman Brothers Municipal Product Group

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Overview of the Lehman Brothers Municipal Product Group Confidential Presentation to: Lehman Brothers Overview of the Lehman Brothers Municipal Product Group July 26, 2007 Table of Contents Section Header (used to create Tab Pages and Table of Contents) I. The Basics of Municipal Bonds II. New Issues & Secondary Trading III. Short Term Municipal Products Group IV. Municipal High Yield V. Municipal Structured Products and Derivatives VI. Municipal Relative Value VII. Municipal Bond Index VIII. The Lehman Advantage IV. Municipal Contacts 1 I. The Basics of Municipal Bonds Municipal Asset Class ! Asset Preservation – Municipal assets are widely considered the safest fixed- income asset class, save Treasuries, boasting a 10-year cumulative default rate of 0.1032% since 1970, versus 9.70% for corporate bonds (Moody’s). Approximately 70% of the market is AAA rated. ! Income Stream – Municipal securities range in maturity from daily floaters to bonds maturing out 40 years and longer. Portfolios can be constructed to provide specific tax-exempt cash flows. ! Tax Advantage – Investors often under appreciate the value of tax savings. During 2006, long AAA municipal securities traded between 85% - 95% of the 30-year U.S. Treasury. Consequently, investors in the highest tax bracket could have earned as much as 145% of Treasuries on a tax adjusted basis. ! Lower Volatility – Tax-exempt yield movements lag the Treasury market. Muted municipal yield movements result in stability of investment capital. ! Correlation – Municipal risk is typically less correlated to the core risk in taxable investment portfolios. 2 Tax Status of Fixed Income Assets ! The interest received on all municipal securities is exempt from the Federal income tax. Investors who purchases municipal securities indigenous to their state of residence are often exempt from state and local taxes as well (although a few states do tax in-state municipal bonds). There are a few states which have no personal income tax whatsoever. ! The interest received from US Treasury securities and agencies is exempt from state & local taxes, but not Federal taxes. ! The interest received on corporates, mortgage backed, as well as asset backed securities is fully taxable. 3 Municipal Tax Benefit Taxable Equivalent Yield = Yield of Tax-Exempt Asset 1- (Effective Tax Rate/100) ! A New York City resident in the highest federal tax bracket (taxable income over $349,700) has an effective tax rate of 41.823% (state and city tax included). For this investor, the taxable equivalent yield for a 10 year municipal bond yielding 4.15% would be 7.13%. This means a corporate, asset-backed, or mortgage backed security would need to yield at least 7.13%, and a U.S. Treasury or agency would need to yield at least 6.38% to better the taxable equivalent yield of a municipal bond. CURRENT YIELDS ON THE FOLLOWING SECURITIES: *As of 6/25/2007* 4 Fixed Income Asset Class Total Returns July 1, 2004 – June 30, 2007 (Individual Tax Rate 38.45%) Fixed Income Total Returns (3 Years) 10.00% 9.03% 7.56% 7.50% 5.00% 4.27% 3.97% 3.98% 4.16% 3.63% 3.71% 3.80% Annualized Returns 3.52% 2.50% 0% ABS MBS Muni U.S Tsy Corporate High Yield High Aggregate Eurodollar Global Tsy U.S Agency U.S • Over the past three years, the taxable-equivalent total returns for the Municipal Index have outperformed all other investment grade fixed income asset classes. 5 Fixed Income Asset Class Risk vs. Reward Tax Adjusted Total Returns vs. Volatility Fixed Income and Equity Asset Classes Last 10 Years Ending 12% Russell 2000 STD = 19.72 ! Annualized Return DJIA STD = 15.34 ! S&P 500 STD = 15.03 5% ! 2.00 10.90! Annualized Standard Deviation (%) NASDAQ STD = 28.36 ABS Source: Lehman Brothers Municipal Index & Strategies • On a comparative basis over the past 10 years, the Municipal Asset Class has offered the highest returns coupled with the least amount of risk of all Fixed Income instruments. *US Treasury income returns are exempt from State income taxes and adjusted (3.25% in 2002 – 2006, 3.23% in 2001, and 3.18% prior) using a national state average (top bracket), net of Federal income tax.. ** Based on an equally weighted national average Federal and State (top bracket) income tax rate (38.45% for 2003 – 2006, 41.85% for 2002, 42.33% for 2001, and 42.78% prior – local taxes have not been considered in this analysis 6 II. New Issues and Secondary Trading Municipals and Public Finance Lehman Brothers’ Experience Lehman Brothers is a top underwriter of financings for public sector clients ! Sole Book-Running Manager for the single largest long-term fixed rate bond issue in history – State of California’s $7.9 Billion Economic Recovery Bonds (2004) ! Ten-time “Deal of the Year” winner since 1990 (Institutional Investor) ! Top 3 municipal research team (Institutional Investor, 2000 to 2006) ! Leading derivatives & investment products group Largest 2006 Transactions July 2006 August 2006 December 2006 December 2006 Regents of the Florida Hurricane State of Texas State of Michigan Catastrophe Fund University of California $4,600,000,000 $1,365,540,000 $1,300,000,000 $1,350,025,000 Tax and Revenue General Revenue Bonds Full Faith & Credit Revenue Bonds Anticipation Notes GO Notes Senior Manager Senior Manager Senior Manager Senior Manager 7 • This slide talks to the strength of our Municipals and Public Finance business • The key message of this page is that we specialize on large and complex financings where we can add value • This is reflected in the fact that Lehman has the largest average deal size of the industry and a top 3 market share position • Of further interest: " Honored the Institutional Investor “Deal of the Year” ten times since 1990 for innovations in public finance " Top three municipal research team in Institutional Investor survey in five of the last six years " Boast the most widely used measure of municipal market performance - the Lehman Brothers Municipal Bond Index " Top three trader of municipal securities in Institutional Investor survey of the top 300 U.S. money managers Commonwealth of Massachusetts General Obligation Bonds Lehman Brothers’ Experience Lehman Brothers senior managed the Commonwealth of Massachusetts $1.2 billion General Obligation bond issue in May 2007, incorporating $845 million of LIBOR-indexed Floating Rate Notes. May 9, 2007 Transaction Highlights ! The bond issue was the 1st major issuance of LIBOR- $1,271,140,000 indexed Floating Rate Notes (FRNs) in New England. ! Lehman Brothers marketed $845.8 million of FRNs consisting of: – $400 million of callable LIBOR-indexed FRNs and – $445.8 million of non-callable LIBOR-indexed FRNs ! The transaction represents the first Commonwealth General Obligation bond issue to utilize a 30-year final Commonwealth of Massachusetts maturity. General Obligation Bonds ! Our financing structure will provide nearly $37 million in present value savings to the taxpayers of $498,565,000 Series A New Money Massachusetts. $219,440,000 Series B New Money ! Following this issue, Lehman Brothers was again $553,135,000 Series A GO Refunding selected to senior manage a $219 million follow-on new money issue that would release existing PAYGO funds Senior Book-Running Manager to defease outstanding high coupon bonds. 8 Port of Miami Tunnel Lehman Brothers’ Experience On May 2, 2007, Lehman Brothers, together with the Miami Access Tunnel consortium, was selected to design, build, finance, operate and maintain the Port of Miami Tunnel. ! The Port of Miami Tunnel is a project that will be developed as a public/private partnership (PPP) under a Concession Agreement, under the direction of the Florida Department of Transportation and the County of Miami-Dade. ! The tunnel will: – Provide direct access between the Seaport, I-395 and I-95 – Create an alternative to the Port Bridge, now the only connection to the mainland – Keep the Port of Miami competitive, at the same time maintaining its importance as Miami- Dade County’s second largest economic generator – Improve traffic safety in downtown Miami by removing cargo trucks and cruise line buses from already-congested streets – Facilitate ongoing and future development plans in and around downtown Miami. ! Lehman Brothers was engaged by Miami Access Tunnel, a consortium lead by Babcock & Brown and Bouygues, to provide firm financing commitments and advice regarding financial structuring to support their bid for a 35-year development and concession for the Port of Miami Tunnel Project. ! During the engagement, Lehman Brothers advised the consortium on financing structure, ratings, and credit enhancement. Lehman Brothers also provided debt product recommendations, capital market pricing indications, and funding commitments for the concession bid. ! Lehman Brothers financing package included the application for Private Activity Bonds authorized under the SAFETEA-LU program, likely making the Tunnel the first to incorporate PABs. In addition, Lehman Brothers’ financing package also included an interest rate hedge and credit spread lock that firmly secured the consortium’s bid. The financing package received investment grade ratings and was structured with monoline bond insurance. 9 New Issue Excellence ! Over the past ten years, when acting as the Senior or Co-Senior manager, Lehman Brothers has ranked number one in terms of total par amount and number of issues brought to market for negotiated long-term higher education debt. January 2006 – January 2007 January 1997 – January 2007 (In $ Millions) ! From 2002 through 2007, Lehman Brothers has Senior or Co-Senior managed more than 232 tax-exempt
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