RESPONSE TO REQUEST FOR PROPOSALS #22019913

STAT TE OF ILLINON IS (RAILSPLL ITTT ERE TOBACCO SETTT LEME ENT AUTHT ORITR Y)

Senior Underwriting

AUGUU STS 30, 2010

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TABLE OF CONTENTS

SECTION PAGE

Team Experience 1

Firm Qualifications 8

Marketing Plan 13

Financing Timeline 27

Capital Position 28

SECTION APPENDIX

Marketing Piece: Tobacco Average Life Estimates 1

Summary of All Tobacco Issuances to Date 2

Summary Cash Flows 3

Additional Structuring Alternatives 4

Summary of S&P Stress Tests on Recommended Structure 5

Required Forms 6

References 7

State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010 counties participated in the 2000/1 pooled transactions totaling more than $440 million. Headed our efforts as a manager to the States of Alaska, Iowa and Louisiana and for several California counties in their securitizations. 2002-2003: Led the firm as financial advisor to NY State on its $4.4 billion State enhanced working capital securitization (State enhancement was necessary due to litigation closure of conventional market) and as co senior manager to the States of California, New Jersey and the City of New York . In late 2003, he led our efforts as sole manager for a third pooled NY county TSR securitization following temporary resolution of “light cigarette” litigation that reopened the conventional tobacco bond market. 2005-2006: Led our efforts as lead manager and co-senior manager for numerous “resecuritizations” of prior tobacco bond issues that maximized proceeds to issuers utilizing techniques including conversion of former residual structure to turbo structure, extensive use of subordinated CABs and forward delivery tobacco bonds. Pooled tobacco issues lead managed for NY counties totaled more than $700 million for 34 counties during this time period and also led our efforts as co senior or co manager for the States of Virginia, Michigan, Alaska and California. 2007-2008: Led our efforts as co-senior manager in working with the State of Ohio (Buckeye) in its groundbreaking new money TSR financing totaling more than $5.5 billion; also led our efforts as co-senior for the State of Michigan and Suffolk County, NY. 2010: Led Jefferies’ delivery of forward delivery tobacco pooled bonds sold in 2005 and continued work with a number of clients on strategies for dealing with declining consumption and tobacco industry and MSA litigation. Steve Wood, Managing Director. Mr. Wood has over 26 years in public finance with billions of lead-manager experience in both tax-exempt and taxable bonds for Illinois, transportation, federal grant credits, P3, and general government bond issuance. Mr. Wood has extensive experience with Illinois issuers developing large capital plans based on new legislative initiatives dating back to his position of Chief of General Government Group, in the Illinois Bureau of the Budget (now the Office of Budget and Management) and as Chief of Budget and Fiscal Management at the Illinois Department of Transportation where he oversaw a capital funding plan that included over $2 billion of bond finance. Bill Torsiglieri, Managing Director and Head of Quantitative Analysis. Mr. Torsiglieri oversees all quantitative analysis performed in-house and has developed software to meet the unique structuring, refunding and investing needs of all of Jefferies’ financing clients, including tobacco securitizations. Mr. Torsiglieri is an expert in using derivative structures such as swaps, forward delivery and floating/inverse tools in financing plans that make sense for individual clients and work within their specific goals. He provides expertise in structuring and implementing investment contracts and will work with the Authority on an ongoing basis to maximize benefits. Mr. Torsiglieri has been directly involved in the firm's structuring, quantitative and investment advisory services on every tobacco securitization in which we have participated. Mr. Torsiglieri has been responsible for the long term investment of more than $1 billion of reserve funds for tobacco securitizations. Mr. Torsiglieri is an Engineering Computer Science graduate of Harvard College. John Kearney, Vice President. Mr. Kearney joined our team in 2001, where his responsibilities include financial analysis, bond structuring and transaction execution. He has extensive tobacco bond experience working with such clients as the NYS TSFC, New York Counties Tobacco Trust II-V, New York City TSASC, Michigan TSFA, Buckeye TSFA, Golden State Tobacco (California State), Northern Tobacco (Alaska) and New Jersey TSFC. Mr. Kearney played an integral role in the structuring and execution of the only taxable/tax-exempt tobacco forward and turbo tobacco CABs in NYCTT IV and V. Mr. Kearney received a B.S. in Finance from Fairfield University. Samantha Costanzo, Vice President. Ms. Costanzo has nine years of banking experience in the public finance industry. She has worked on over $10 billion of financings in the areas of convention centers/hotels, transportation, housing, infrastructure, water & sewer, higher education and healthcare. Ms. Costanzo has provided banking coverage to clients in the Midwest since 2004, including the State of Illinois, Metropolitan Pier & Exposition Authority, Illinois Tollway, City of Chicago, Chicago Public Schools, Chicago Park District, Metropolitan Water Reclamation District of Greater Chicago, Illinois Tollway, State of Wisconsin and State of Minnesota, among others. Formerly with Citigroup, she joined Jefferies in March of 2009. Ms. Costanzo graduated cum laude from the University of Florida where she received a B.S. in Finance. Harold Bean, Managing Director. Mr. Bean has 23 years of investment banking experience. Mr. Bean’s tobacco securitization experience includes Buckeye TSFA and New York TSASC. His experience also includes creating more than a half a dozen new credits for issuers such as the New York MTA, Chicago Transit Authority and Arizona Department of Transportation and numerous workouts and restructurings for clients such as the NYU Hospitals Center,

Page 5 State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Harris County Toll Road Authority and New York MTA. While most of his career has focused on investment banking services for municipal clients, Mr. Bean specialized in capital structure issues and mergers and acquisitions for corporate clients for three years and worked one year on a municipal sales and trading desk. He is an alumnus of firms including Citi, Dillon Read and Dean Witter. Mr. Bean received an M.B.A. in finance from the State University of New York at Albany and a B.S. in cinema from Ithaca College. John Gust, Vice President. Mr. Gust joined the firm’s Chicago office in late 2008, after six years of experience in municipal finance as a financial advisor with Public Resources Advisory Group (PRAG) in Los Angeles. At Jefferies, he has provided primary quantitative support for transactions with the States of Ohio and Wisconsin, and Denver International Airport. At PRAG, he served as day-to-day financial advisor for the Los Angeles Wastewater System and the City of Los Angeles GO bond program, as well as primary analytical support for issuers including the cities of San Jose and Santa Monica, the New Mexico Department of Finance and Administration, Los Angeles World Airports, and the Metropolitan Water District of Southern California. Mr. Gust holds M.S. and B.S. degrees in industrial engineering from Stanford University. Ryan Grand, Associate. Mr. Grand has over two years of experience in the public finance industry. He recently joined Jefferies as an associate in the Chicago office. Previously, he has handled the day-to-day analysis and coordination among team members for issuers such as the Metropolitan Water District of Greater Chicago, the City of Peoria, Illinois, and the Indiana Bond Bank. At his previous position at Mesirow Financial, he was the lead banker on transactions for the Indianapolis Local Public Improvement Bond Bank and the Town of Fishers, Indiana. Mr. Grand graduated magna cum laude from Wabash College, where he received a B.A. in Psychology with minors in Religion and History. Jim McGinley, Managing Director and Head of Municipal Securities Markets. Mr. McGinley recently joined Jefferies and brings 20 years of municipal securities industry experience to the firm. In his capacity of Head of Municipal Securities Markets Mr. McGinley oversees all municipal securities sales, trading, and underwriting. In addition to his oversight responsibilities, Mr. McGinley is well-known as one of the largest BAB traders on Wall Street. Prior to Jefferies, Mr. McGinley worked at Barclays, where he was a Managing Director and ran municipal high grade, taxable and proprietary trading, as well as competitive bidding. Previously, he was a Senior Managing Director in Municipal Asset Management at Bear Stearns, a Managing Director in Portfolio Management at BlackRock (responsible for all tobacco and high yield trading) and a First Vice President in Municipal Research and Risk Management at Prudential Securities. Mr. McGinley received an M.B.A. from Rutgers University and a B.S. from Lehigh University. Roy Carlberg, Managing Director and Head of Long-Term Underwriting. Mr. Carlberg, a nationally recognized municipal underwriter, joined Jefferies in March 2009. Mr. Carlberg previously spent 18 years at Bear Stearns as Senior Managing Director overseeing the national municipal syndicate desk. At Bear Stearns, Mr. Carlberg had full responsibility for the firm’s negotiated and competitive commitments. Mr. Carlberg and his team priced over $100 billion of financings in excess of $500 million each for issuers across the country, including a number of historic complex financings. Of particular note, Mr. Carlberg led $49.7 billion of tobacco financings, including senior-managing over 60% of all tobacco securitizations by par amount. His underwriting philosophy is fair pricing for issuers and investors, with a special focus on the credit story, to achieve superior results. He believes in strong and effective pre- marketing and spending the time to communicate with all members of the management team in order to assure exceptional results for each issuer. Treating all managers with care and fairness is a doctrine that is essential for him. Mr. Carlberg believes in the benefits of reverse inquiry with investors, ultimately delivering creative pricing and responsive structuring to issuers. Mr. Carlberg is a graduate of Bucknell University, majoring in economics. McKim de Guzman, Managing Director and Tobacco Underwriting. Mr. de Guzman joined Jefferies in 1995. His responsibilities include tobacco underwriting and high yield trading. He had direct responsibility for pricing our prior tobacco secured financings including 23 Senior or Co-Senior transactions (29 issues) in the aggregate amount of $23.3 billion. This includes the placement of the only Taxable/Tax-Exempt convertible tobacco structure sold to date as well as over $100 million of non-rated tobacco CABs. He has also participated in advising the States of Wisconsin, New Jersey and New York on their pricings. Mr. de Guzman has over twenty years of municipal underwriting and trading experience. Prior to joining Jefferies, Mr. de Guzman’s experience includes trading and underwriting at First Boston Corporation and Tucker Anthony, as well as seven years at Lehman Brothers where he traded high-grade paper and revenue bonds. Mr. De Guzman attended Baruch College. Garrett Falzone, Senior Vice President. Mr. Falzone was Jefferies’ lead credit analyst for $163mm Monroe County, NY Tobacco Asset Securitization Corporation financing in August of 2000. This was the first tobacco securitization that was sold after the landmark $145 billion Engle Class Action lawsuit against the Original Participating Manufacturers. Mr.

Page 6 State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Falzone was instrumental in educating the investor base on the implications of such a high headline risk event on actual credit quality. Mr. Falzone published extensively on tobacco securitizations for Jefferies’ institutional investor base. At BlackRock, Mr. Falzone was responsible for all high yield municipal credit as well as Master Settlement Agreement securitizations. Mr. Falzone was heavily involved in following general credit quality as well as following litigation including Freedom Holdings challenge that the MSA was violative of the Sherman Antitrust Act. Mr. Falzone regularly interacted with both plaintiff and defendant in this capacity. He also explored reverse inquiry opportunities in the tobacco space. Following BlackRock, Mr. Falzone traded and assessed credit quality for Lehman’s prop desk effort. Ken Gibbs, President of the Municipal Securities Group. In addition to his management responsibilities, Mr.Gibbs maintains a solid client base, providing the benefit of his 25 years of experience serving as financial advisor or underwriter to a wide variety of clients. Mr. Gibbs specializes in developing financing plans for large capital programs. Mr. Gibbs’ experience includes tobacco securitizations, derivatives and pension bond financings for premier issuers nationwide. Throughout his career, his work has encompassed such significant financings as done for the clean-up of Boston Harbor, the establishment of State Revolving Fund programs for Wisconsin and Indiana, the building of Denver International Airport, the Port Authority of New York and New Jersey’s capital program, the establishment of the Indianapolis Local Public Improvement Bond Bank, and the acquisition of the Dulles Toll Road. Mr. Gibbs holds a B.A. from Harvard College. He is a past member of the Board of Directors of the Municipal Securities Rulemaking Board. He is also Treasurer, a Trustee and a member of the Executive Committee of the City of New York's Citizens Budget Commission. Neil Flanagan, Managing Director and Head of Public Finance. Mr. Flanagan joined Jefferies as the Head of Public Finance in August 2008. He has extensive experience across all areas of public finance including structuring expertise, credit analysis, investor relations and derivative products. In particular, Mr. Flanagan has over 21 years of experience as a public finance investment banker and derivatives specialist, serving as the senior banker on over $100 billion of municipal underwritings. Mr. Flanagan’s experience includes tobacco, toll road, mass transit, water and sewer, stadium and general governmental financings; he was the senior banker on two of the most notable transactions ever completed in the municipal market. In addition, he has worked on tobacco bond issues for Buckeye TSFA, State of Wisconsin, Michigan TSFA, Virginia TSFA, Golden State TSC, New Jersey TSFC and Northern TSC (Alaska). Mr. Flanagan earned his B.S. in Financial Decisions and Management Information Systems at the State University of New York at Albany.

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State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010 bonds in the secondary market – 2,446 total trades. In the State of Illinois, we have traded over $11 billion of bonds in the same time period – our sales force understands both the tobacco market and the Illinois bond market.

Sales Team. Jefferies’ secondary trading activity is due to the skill and size Municipal Sales Force of its sales team. Jefferies’ institutional sales force of 19 individuals is the Ye ars Name Experience Select Key Accounts largest on the Street, and handles over 1,100 different institutional municipal Adrien Aery 31 Scudder, T Rowe Price portfolios with over $250 billion in municipal assets serviced. The adjacent Diego Allegretta 25 Citi Arb, MetLife table lists each member of our salesforce, their years experience and select Douglas Bennington 32 Fidelity, Van Kampen Laurent Bouley 24 Aetna, Northern Trust key accounts covered. Alexandra Cowan 15 BlackRock, Dreyfus (Short-Term) Robert French 26 Eaton Vance, PIMCO Over 35% of our total sales volume represents second and third tier accounts Robert Fuhr 32 Upstate NY Banks which are not adequately serviced by most other firms - this is a critical Gregory Gajowski 9 Credit Suisse, Mass Financial Todd Growick 10 Ayco, Wasmer segment of TSR buyers. We know and have worked with more than 150 Thomas Kern 23 BlackRock, Wells Fargo separate institutional purchasers of TSR bonds. Our sales force maintains Christopher King 15 Fidelity, Vanguard (Short-Term) strong, still having daily contact with the biggest purchasers of tobacco James Laverty 27 Putnam, Rochester Andrew Levinson 27 Loews, Vanguard bonds. We can use these relationships to provide a critical bridge enabling the Christine Carter Lynch 35 Allstate, State Farm State to communicate directly with these investors. Jason Matlow 7 Brown Brothers, First Investors Joseph Mazzarella 24 AIG, Goldman Asset Mgmt Why Jefferies. The Railsplitter issuance faces several challenges: (i) it will be Art Nicol 33 Brown Brothers, Selective Ins the first tobacco securitization in over two years; (ii) the market is volatile Eliseo Sampayo 18 A G Edwards, Edward Jones John Taylor 28 CW Henderson, Lord Abbett with high risk premiums; (iii) the significant size of over $1.3 billion; and (iv) disappointing tobacco revenue performance. Tobacco securitizations are a unique type of issuance that can best be successfully executed by a team that has experience in all of the facets of the financing: banking, underwriting, and sales and trading. While an SDC ranking of senior-managed deals will show several firms with large par issuance, there have been significant staff changes at many of these firms – Much of Citi’s historical team is no longer with the firm, and JPMorgan’s data ranking includes the Bear Stearns legacy as top tobacco underwriter. The professionals responsible for the Bear Stearns transactions have since migrated to Jefferies and Barclays. We urge the State to consider scoring the firms by recognizing the combination of three critical pieces that will be necessary in executing the best transaction: 9 Banking: A banking team comprising an experienced lead banker familiar with all aspects of tobacco bond structure/deal management and a veteran technical banker fully versed in the methodology of tobacco forecasting and credit analysis. 9 Underwriting: A highly-respected underwriter, experienced in pricing and structuring tobacco bonds and readily recognized by investors as the leading pricing veteran of the sector. 9 Sales & Trading: A veteran sales and trading team, with a successful track record of marketing tobacco bonds, to re-open distribution channels in a dormant primary market for tobacco bonds. Because the tobacco bond market is narrow – only 93 separate transactions executed over a span of 10 years – the universe of expertise is concentrated in a small group of market participants. We have included in Appendix 2 a database of all tobacco issuances to date including lead manager and Jefferies’ role. Below we summarize the major movements of experienced tobacco securitization bankers, underwriters, and traders:

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State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

and untapped investor segment. Currently, 25% of our sales volume comes from Tier 2 and Tier 3 coverage. In addition, our sales force maintains strong, daily contact with the biggest purchasers of tobacco bonds and can use these relationships to provide a critical bridge enabling the Authority to communicate directly with these investors. Jefferies professionals will provide detailed pre-marketing information and lead pre-pricing/pricing conference calls with thoughtful and thorough recommendations throughout the process.

PART 3. PLAN OF FINANCE DETAIL Jefferies Plan for Implementing the Railsplitter Financing. The State of Illinois has created Railsplitter to assist in providing working capital financing for the State in a time of relative financial difficulty for the State. In our view, deficit financing mechanisms are best implemented so that they provide financing at a low cost and with a view to eventual return to financial stability. The Jefferies team has worked with a number of state and local governments who have used MSA-based financing for working capital purposes, and has developed highly tailored plans for MSA financing for other states including New York, California, Rhode Island, and New Jersey. We strongly believe that the State’s decision on a choice for bookrunning senior manager should consider the ability of the firm to implement the financing at the lowest possible cost, and in a way that best meets the specific objectives of the State. Our plan for Illinois/Railsplitter is highly tailored with a number of objectives specific to Illinois, that will also pose stark (and highly favorable) distinctions to virtually all other large MSA financings that have been carried out by other states. Four basic principles guide Jefferies’ plan for Railsplitter: I. Finance at the Lowest Possible Cost. The enabling legislation for Railsplitter has a number of important distinctions that provide guiding principles for the financing. These include the overall maturity limitation of 19 years and the limitation of the amount of bonds to be issued to $1.75 billion. The message of the enabling legislation is clear - the financing is to be short-dated versus other tobacco financings and the limitation of bonds to be issued does not seek to maximize proceeds. Both qualities send the message that the financing is to be carried out at the lowest possible cost. The Jefferies team worked very closely with the State of New York in accomplishing financing goals primarily predicated on achieving the lowest cost for NY’s $4.4 billion deficit financing in 2002. We are confident this experience will serve Railsplitter well. II. Accommodate the State’s Active Ongoing Use of Payments from the Residual Account. The Railsplitter legislation also establishes the residual account and appropriations are made in the current budget from this account. Thus, we see as an important distinction that the residual account is to be safeguarded in the bond structuring process for the States’ future use. The Jefferies team has structured as senior manager five MSA financings that have used a residual structure and we know important distinctions that can be used to the States’ benefit in the bond structuring process. III. Maximize Investor Participation in the Railsplitter Financing. Railsplitter will be approaching the market at a time when there have been a number of negative developments in the tobacco bond market, primarily lower than expected cigarette shipments (and the resultant reduced payments under the MSA), NPM market share and questions raised by PM’s about State enforcement of the MSA. Against this backdrop, it is critical to maximize investor participation in the Railsplitter financing. A critical step for the Authority will be selecting a lead manager with the market and MSA-specific knowledge to implement a wide ranging marketing plan to re-educate investors on tobacco and introduce them to Railsplitter. We are confident that our wealth of experience in senior managing tobacco financings and our strong commitment to tobacco bonds in the secondary market, makes Jefferies the right firm to lead the process for Railsplitter. (see Part 2 of this question for a detailed marketing discussion) IV. Seek Higher Ratings than Conventional Tobacco Bond Ratings. Our view is that the strong potential exists for higher ratings for Railsplitter bonds versus other MSA financings. Jefferies and its professionals have been working with the rating agencies for years and are very familiar with the rating approaches used by each agency’s stress tests for tobacco analysis. We are highly confident that our experience will benefit the State as there are important factors that should be considered in choosing rating agencies for this financing. (see Part 4 of this question for a detailed discussion of rating agency approach) Below we discuss details of how our financing plan achieves the lowest possible costs for the Authority, basic assumptions we have incorporated in our models, and additional considerations relating to legislative and tax constraints.

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State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010 disclosure and marketing document. For the structures presented here we have made assumptions about future tobacco shipments based upon our ongoing discussions with Global Insight and public information made available by NAAG concerning recent tobacco shipments and market shares of tobacco manufacturers. Investment of the Liquidity Reserve. We have assumed the liquidity reserve will be invested at a rate of 0.5% and the earnings will be a source of revenues used to pay debt service on the bonds. Since there is a very limited universe of investment providers for the Authority’s Liquidity Reserve fund investment and liquidity is a core requirement we recommend that the Liquidity Reserve potentially be invested in the State pool (Illinois Funds) until a higher yielding permanent investment vehicle can be identified. We are prepared to provide advice regarding the investment of the Liquidity Reserve since our team has aided issuers in investing more than $1 billion, specifically related to Liquidity Reserves for tobacco securitization bonds.

ADDITIONAL CONSTRAINTS AND CONSIDERATIONS Legislative Constraints. The following is a list of the key features of the Railsplitter legislation that will impact the financing plan. ƒ Sale of Asset: Under the legislation the State may sell the tobacco settlement revenues in exchange for the net proceeds of bonds and a right to the residual interest in the tobacco settlement revenues. The legislation appears to limit the sale, transfer, or conveyance of “the tobacco settlement revenues” and therefore does not seem to permit a partial sale of the tobacco asset to the Authority. ƒ Single vs. Multiple Series of Bonds: While we interpret the legislation to permit the Authority to issue multiple series of bonds over time whose net proceeds will be paid to the State for the tobacco asset, our plan of finance assumes a single issuance. In the future, if additional tobacco bonds are sold, the State will be receiving additional proceeds in exchange for a reduction in the residual. ƒ Deadlines: The legislation limits the timing of the sale or transfer of the tobacco asset from the State to the Authority to State fiscal years (ending June 30th) 2010 and 2011. ƒ Par Amount Limit: The legislation imposes a par limit on the bonds of $1.75 billion. The proposed structure requires $1.3 billion par amount to generate a payment to the State of $1.2 billion, which we believe is the State’s immediate proceeds target. The State may consider increasing the par amount of the upcoming issue up to the $1.75 billion which would generate $370 million of additional proceeds assuming a maximum maturity of no more than 19 years (June 1, 2029).

Tax Regulations: Working Capital Requirements. Although the State is selling the tobacco asset to the Railsplitter Authority, we expect that Railsplitter bonds will be considered for tax purposes as bonds used to finance working capital of the State. As a result, to protect the tax-exemption of the Railsplitter bonds, the State will be subject to ongoing tax and deficit analysis compliance. Any working capital financing is subject to a “proceeds spent last” (PSL) metric – that is, the State cannot treat proceeds as spent on working capital expenditures if there are any other “available amounts”, which are any amounts held by the State or a related party that may be used “without specific legislative or judicial action and without a legislative, judicial, or contractual requirement that those amounts be reimbursed.” When determining amounts available to fund working capital expenditures, the State is allowed to set aside a “reasonable working capital reserve,” equal to 5% of actual working capital expenditures of the previous fiscal year. Any available funds in excess of the reasonable working capital reserve are referred to as “replacement proceeds.” In the event that replacement proceeds exist, the State must expend such proceeds to reduce the amount of tax-exempt bonds outstanding and so as not to impact the tax-exempt status of the outstanding Railsplitter working capital bonds. Examples of permissible expenditures include: (i) reducing potential cash flow borrowings for the subsequent fiscal year by the amount of the replacement proceeds; (ii) demonstrating that such amount is expected to be spent for working capital purposes during the subsequent fiscal year (i.e., a structural deficit remains); (iii) funding capital project expenditures which reduce other borrowings or pay-as-you-go capital expenditures; (iv) repaying the working capital borrowing (not likely for Railsplitter); or (v) investing in tax-exempt bonds. The State will be required, with the help of bond and tax counsel, to monitor and manage its use of revenues, particularly as it relates to any replacement proceeds through final maturity of the related bonds.

Page 23 State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Proposed Indenture Provisions. We recommend the following key provisions for the Railsplitter indenture. 9 Residual structure: Consistent with the Railsplitter legislation, TSRs in excess of the Authority’s annual expenses, bond debt service and revenues not required to replenish the Liquidity Reserve will be released to the State. Residual tobacco revenues will be released to the State on or before June 1st each year, after the Trustee has received the tobacco revenues in early May and set aside sufficient funds to pay expenses, reserve replenishment, and the June 1st principal and interest and December 1st interest due on the tobacco bonds. 9 Liquidity reserve: Sized similarly to conventional muni financing, in an amount equal to the lesser of: 10% of proceeds, 125% of average annual debt service, and 100% of maximum annual debt service. 9 Annual principal maturity dates: The bonds will mature annually on June 1st beginning June 1, 2011 with a final maturity of June 1, 2027 (17 years of annual principal payments) 9 Optional redemption: The bonds will include a traditional muni call feature; 10 year par call. Bonds maturing after June 1, 2020 will be subject to optional redemption on June 1, 2020. Non-call bonds could be structured as well, to reduce borrowing costs, at the cost of future flexibility. 9 Pro-rata treatment upon default: An important consideration for the rating agencies is the treatment of the bonds upon default. Our recommendation is that if the bonds are in default, then all outstanding bonds will have an equal claim on the tobacco assets. This results in a consistent rating for all of the bonds, so that it is possible for the longer maturities to have the same rating as the shorter maturities. Jefferies was first to incorporate this key feature into tobacco issues to achieve rating “convergence”, an important improvement over the original tobacco deals. 9 Additional bonds test: To permit the most aggressive marketing of the Railsplitter bonds we recommend that no additional bonds be permitted under the current resolution. Although, subordinate bonds would be permitted that have no claim on any tobacco revenues until all of the Bonds have been repaid. If the State anticipates using the tobacco asset for additional financing in the future, we recommend that the upcoming bonds be offered using a partial pledge of TSRs, so that the unpledged portion can be pledged to future bonds. 9 Annual Authority operating expenses: As an independent entity, the Authority will have ongoing annual expenses including rating fees, O&M insurance for board members and officers, and other expenses. We have estimated these annual expenses at $1 million and have assumed these expenses are paid in advance of bond debt service in the flow of funds. Other Strategies—See Appendix 4. Jefferies considered a variety of additional strategies in developing the optimal marketable structure for the Railsplitter bonds. During the initial phase of the Railsplitter transaction, the State may wish to explore these potential strategies to finalize the most appropriate structure. Jefferies and our team have been at the forefront of developing nuanced structural enhancements in the tobacco sector since its inception, and can further tailor our structuring strategy in coordination with the Authority. Please refer to Appendix 4 for a discussion of some identified alternatives.

PART 4. DETAILED DISCUSSION OF THE RATING AGENCY APPROACH Ratings Strategy. While the prevailing view is that ratings for tobacco bonds are capped, Jefferies believes that an aggressive ratings strategy will be important to the Authority in framing the investors’ own valuations and can positively impact the pricing. We also believe that the Super Senior structure will merit a higher rating than the current “cap” standard. We believe that Railsplitter bonds should be aggressively rated due to the following distinct structuring characteristics: A. Serial maturity structure on the transaction provides payment certainty; B. High coverage of the bonds provides levels of excess cashflow which is very uncommon in tobacco securitizations; C. Short final maturity limits the risk to bondholders of shipment declines and other risks to the tobacco revenues. While most tobacco securitizations have risk exposure to 30 years of decline, the proposed Railsplitter bonds are limited to 17 years of potential declines. Rebooting the Rating Process. The rating agencies have not evaluated a new tobacco issuance since 2008 and have, in particular the asset-backed groups responsible for rating tobacco bonds, experienced substantial disruptions in personnel and process. Jefferies recommends that extra time and care be devoted to the ratings process and a reintroduction strategy

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State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Appendix 1 Marketing Piece: Tobacco Average Life Estimates

State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Appendix 2 Summary of All Tobacco Issuances To Date

All Tobacco Bond Transactions Detailed Underwriting Information

Amount Jefferies Jefferies Unique Jefferies Jefferies Co- SDC Sale of Role of Leading Co- Deal Lead Managers Issuer State Leading Manager Index Date Issue Jefferies Role Manager Index Role Par Count ($ mils) Count Par

1 1 11/5/1999 709.28 SALOMON-SBH TSASC, Inc. NY SENIOR CO-MGR 1 709.28 2 2 11/11/1999 294.50 SALOMON-SBH Nassau Co Tobacco Settlement Corp NY 3 3 12/15/1999 103.50 SALOMON-SBH Westchester Co-New York NY 4 4 8/2/2000 163.40 JEFFERIES Monroe Tobacco Asset Sec Corp NY LEAD 1 163.40 5 5 9/4/2000 50.00 MERCH-CAP-CORP Alabama 21st Century Authority AL 6 6 9/14/2000 30.12 MS-DW-DISCOVER Chautauqua Tobacco Asset Sec Corp NY 7 7 9/22/2000 246.33 BEAR Erie Tobacco Asset Sec Corp NY CO-MGR 1 246.33 8 8 10/13/2000 116.05 BEAR Northern Tobacco Sec Corp AK 9 9 10/20/2000 47.92 SALOMON-SBH Niagara Tobacco Asset Sec Corp NY 10 10/26/2000 198.50 BEAR Puerto Rico Childrens Trust Fund PR 10 11 10/26/2000 198.50 SALOMON-SBH Puerto Rico Childrens Trust Fund PR 12 11/10/2000 113.57 PAINE-W New York Counties AC Tobacco NY CO-SENIOR 113.57 11 1 13 11/10/2000 113.57 JEFFERIES New York Counties AC Tobacco NY LEAD 113.57 14 12 1/26/2001 28.35 SALOMON-SBH Ulster Tobacco Asset Sec Corp NY 15 13 3/5/2001 521.11 SALOMON-SBH DC Tobacco Settlement Fin Corp DC 16 3/9/2001 734.53 BEAR SC Tobacco Settlement Mgmt Auth SC 14 17 3/9/2001 200.00 BEAR SC Tobacco Settlement Mgmt Auth SC 18 5/24/2001 11.98 SALOMON-SBH Guam Economic Dev Auth GU 15 19 6/8/2001 13.49 SALOMON-SBH Guam Economic Dev Auth GU 20 16 7/20/2001 215.22 JEFFERIES New York Counties AC Tobacco NY LEAD 1 215.22 21 17 8/2/2001 126.79 BEAR Northern Tobacco Sec Corp AK CO-MGR 1 126.79 22 18 8/16/2001 199.62 SALOMON-SBH N California Tobacco Sec Auth CA CO-MGR 1 199.62 23 19 9/7/2001 60.00 MORGAN-ST Arkansas Development Fin Auth AR 24 10/12/2001 604.25 SALOMON-SBH Iowa Tobacco Settlement Auth IA CO-MGR 604.25 20 1 25 10/12/2001 40.00 SALOMON-SBH Iowa Tobacco Settlement Auth IA CO-MGR 40.00 26 11/1/2001 282.98 BEAR LA Tobacco Settlement Fin Corp LA CO-MGR 282.98 21 1 27 11/1/2001 919.80 BEAR LA Tobacco Settlement Fin Corp LA CO-MGR 919.80 28 22 11/8/2001 21.71 SALOMON-SBH Virgin Islands Tobacco Settle Cp VI 29 23 12/6/2001 103.76 MLCM Alabama 21st Century Authority AL 30 24 12/14/2001 466.84 MLCM So California Tobacco Sec Auth CA 31 12/14/2001 17.28 PAINE-W Rensselaer Tobacco Asset Sec Corp NY CO-SENIOR 17.28 25 1 32 12/14/2001 17.28 JEFFERIES Rensselaer Tobacco Asset Sec Corp NY LEAD 17.28 33 26 12/14/2001 47.75 PAINE-W Rockland Tobacco Asset Sec Corp NY CO-SENIOR 1 47.75 34 3/21/2002 26.78 PAINE-W California Co Tobacco Sec Agency CA 35 3/21/2002 59.22 PAINE-W California Co Tobacco Sec Agency CA 27 36 3/21/2002 8.09 PAINE-W California Co Tobacco Sec Agency CA 37 3/21/2002 3.74 PAINE-W California Co Tobacco Sec Agency CA 38 28 4/9/2002 37.41 PAINE-W California Co Tobacco Sec Agency CA 39 29 4/10/2002 30.01 PAINE-W California Co Tobacco Sec Agency CA 40 30 5/2/2002 1,591.10 BEAR Badger Tobacco Asset Sec Corp WI FA 1 1,591.10 41 5/10/2002 40.96 PAINE-W California Co Tobacco Sec Agency CA 4231 5/10/2002 56.89 PAINE-W California Co Tobacco Sec Agency CA 43 5/10/2002 7.40 PAINE-W California Co Tobacco Sec Agency CA 44 32 6/14/2002 41.59 MORGAN-ST California Co Tobacco Sec Agency CA 45 6/20/2002 649.73 PAINE-W RI Tobacco Settlement Fin Corp RI CO-MGR 649.73 33 1 46 6/20/2002 35.66 PAINE-W RI Tobacco Settlement Fin Corp RI CO-MGR 35.66 47 6/25/2002 31.25 MORGAN-ST California Co Tobacco Sec Agency CA 34 48 6/25/2002 3.10 MORGAN-ST California Co Tobacco Sec Agency CA 49 35 7/11/2002 92.96 PAINE-W California Co Tobacco Sec Agency CA 50 7/17/2002 97.78 SALOMON-SBH California Statewide Fin Auth CA 36 51 7/17/2002 98.77 SALOMON-SBH California Statewide Fin Auth CA 52 37 7/23/2002 49.84 PAINE-W MO Tobacco Settlement Fin Corp MO 53 38 8/1/2002 500.00 BEAR TSASC, Inc. NY SENIOR CO-MGR 1 500.00 54 39 8/15/2002 1,801.46 SALOMON-SBH NJ Tobacco Settlement Fin Corp NJ FA 1 1,801.46 55 8/26/2002 129.54 BEAR South Dakota Ed Enhance Fund Corp SD 5640 8/26/2002 148.51 BEAR South Dakota Ed Enhance Fund Corp SD 57 10/3/2002 1,171.20 SALOMON-SBH Puerto Rico Childrens Trust Fund PR 58 41 10/16/2002 220.53 M-R-BEAL California Co Tobacco Sec Agency CA CO-SENIOR 1 220.53 59 42 10/25/2002 517.91 BEAR Washington Tobacco Settlement Aut WA 60 1/16/2003 2,625.00 BEAR Golden State Tobacco Sec Corp CA CO-SENIOR 2,625.00 43 1 61 1/16/2003 375.00 BEAR Golden State Tobacco Sec Corp CA CO-SENIOR 375.00 62 44 2/27/2003 1,659.17 BEAR NJ Tobacco Settlement Fin Corp NJ CO-SENIOR 1 1,659.17 63 45 4/10/2003 431.56 BEAR Oregon Dept of Admin Services OR 64 6/12/2003 296.27 CITIGROUP NY Tobacco Settlement Fin Corp NY FA 296.27 65 6/12/2003 81.25 CITIGROUP NY Tobacco Settlement Fin Corp NY FA 81.25 6646 6/12/2003 81.25 J-P-MORGAN NY Tobacco Settlement Fin Corp NY FA 1 81.25 67 6/12/2003 55.00 PAINE-W NY Tobacco Settlement Fin Corp NY FA 55.00 68 6/12/2003 1,796.94 CITIGROUP NY Tobacco Settlement Fin Corp NY FA 1,796.94 69 47 9/25/2003 2,572.29 CITIGROUP Golden State Tobacco Sec Corp CA CO-SENIOR 1 2,572.29 70 11/20/2003 2,015.42 J-P-MORGAN NY Tobacco Settlement Fin Corp NY FA 2,015.42 71 11/20/2003 40.00 BEAR NY Tobacco Settlement Fin Corp NY FA 40.00 7248 11/20/2003 40.00 CITIGROUP NY Tobacco Settlement Fin Corp NY FA 1 40.00 73 11/20/2003 70.00 PAINE-W NY Tobacco Settlement Fin Corp NY FA 70.00 74 11/20/2003 75.00 J-P-MORGAN NY Tobacco Settlement Fin Corp NY FA 75.00 75 49 12/12/2003 79.68 JEFFERIES New York Counties Tobacco Trust III NY SOLE 1 79.68 76 50 5/13/2005 448.26 BEAR Virginia Tobacco Settle Fin Corp VA CO-SENIOR 1 448.26 77 51 6/10/2005 216.60 CITIGROUP Westchester Tobacco Asset Sec NY CO-MGR 1 216.60 78 52 7/14/2005 108.00 MLCM Puerto Rico Childrens Trust Fund PR 79 53 7/28/2005 3,140.56 BEAR Golden State Tobacco Sec Corp CA CO-MGR 1 3,140.56 80 8/10/2005 69.47 MLCM Erie Tobacco Asset Sec Corp NY 54 81 8/10/2005 249.37 MLCM Erie Tobacco Asset Sec Corp NY 82 8/19/2005 235.79 JEFFERIES New York Counties Tobacco Trust IV NY LEAD 235.79 55 1 83 8/19/2005 179.01 JEFFERIES New York Counties Tobacco Trust IV NY LEAD 303.41 84 56 10/20/2005 83.06 PAINE-W California Co Tobacco Sec Agency (Sonoma) CA 85 10/20/2005 37.49 PAINE-W California Co Tobacco Sec Agency (Merced) CA 57 86 10/20/2005 2.20 PAINE-W California Co Tobacco Sec Agency (Merced) CA 87 58 10/27/2005 24.99 MLCM Rockland Tobacco Asset Sec Corp NY 88 59 11/15/2005 199.38 JEFFERIES New York Cos Tobacco Trust V NY LEAD 1 199.38 89 11/18/2005 609.05 CITIGROUP Iowa Tobacco Settlement Auth IA 60 90 11/18/2005 222.91 CITIGROUP Iowa Tobacco Settlement Auth IA 91 61 12/2/2005 255.49 BEAR No California Tobacco Sec Auth CA CO-MGR 1 255.49 92 62 12/21/2005 17.70 MLCM Erie Tobacco Asset Sec Corp NY 93 63 1/31/2006 14.58 JEFFERIES Monroe Tobacco Asset Sec Corp NY SOLE 1 14.58 94 64 2/2/2006 67.86 M-R-BEAL California Co Tobacco Sec Agency- Alameda CA 95 65 2/3/2006 319.83 CITIGROUP California Co Tobacco Sec Agency -LA County CA CO-MGR 1 319.83 96 66 2/3/2006 1,353.51 BEAR TSASC Inc NY SENIOR CO-MGR 1 1,353.51 97 3/31/2006 8.53 Citigroup Nassau Co Tobacco Settlement NY 98 3/31/2006 34.12 Bear Stearns & Co Nassau Co Tobacco Settlement NY 67 99 3/31/2006 77.68 Citigroup Nassau Co Tobacco Settlement NY 100 3/31/2006 310.71 Bear Stearns & Co Nassau Co Tobacco Settlement NY 101 68 4/3/2006 7.29 Citigroup Virgin Islands Tobacco Settle Cp VI 102 69 4/6/2006 39.02 UBS Securities LLC California Co Tobacco Sec Agency - Stanislaus CA 103 70 4/13/2006 61.75 Citigroup California Statewide Fin Auth - Pool- 9 Co CA 104 71 5/12/2006 490.50 Bear Stearns & Co Michigan Tobacco Settle Fin Auth MI CO-SENIOR 1 490.50 105 72 5/19/2006 59.37 Lehman California Co Tobacco Sec Agency CA 106 73 5/26/2006 583.63 Bear Stearns & Co So California Tobacco Sec Auth - San Diego Co CA Amount Jefferies Jefferies Unique Jefferies Jefferies Co- SDC Sale of Role of Leading Co- Deal Lead Managers Issuer State Leading Manager Index Date Issue Jefferies Role Manager Index Role Par Count ($ mils) Count Par 107 74 6/13/2006 36.78 Merrill Lynch & Co Arkansas Development Fin Auth AR 108 75 6/16/2006 105.40 Citigroup San Diego Tobacco Settlement Cor CA 109 76 8/11/2006 411.99 Bear Stearns & Co Northern Tobacco Sec Corp AK CO-MGR 1 411.99 110 77 8/17/2006 248.26 Citigroup DC Tobacco Settlement Fin Corp DC 111 78 1/11/2007 102.03 Citigroup Silicone Valley Tob Asset Sec- Santa Clara Co CA 112 79 1/23/2007 3,622.21 Bear Stearns & Co NJ Tobacco Settlement Fin Corp NJ CO-MGR 1 3,622.21 113 80 3/7/2007 4,446.83 Bear Stearns & Co Golden State Tobacco Sec Corp CA CO-SENIOR 1 4,446.83 114 81 4/27/2007 1,149.27 Bear Stearns & Co Virginia Tobacco Settle Fin Corp VA CO-MGR 1 1,149.27 115 82 5/16/2007 911.14 Citigroup Tobacco Settlement Finance Authority WV CO-MGR 1 911.14 116 83 5/17/2007 49.87 Citigroup California Co Tobacco Sec Agency CA 117 84 6/15/2007 197.01 Morgan Stanley RI Tobacco Settlement Fin Corp RI CO-MGR 1 197.01 118 85 7/21/2007 294.08 Citigroup Inland Empire Tobacco Sec Auth CA 119 86 8/15/2007 522.99 Bear Stearns & Co Michigan Tobacco Settle Fin Auth MI CO-SENIOR 1 522.99 120 87 10/24/2007 5,531.59 Bear Stearns & Co/ Citigroup Buckeye Tobacco Settlement Finance Authroity OH CO-SENIOR 1 5,531.59 121 88 12/1/2007 36.98 Citigroup Guam Economic Dev Auth GU 122 89 3/19/2008 443.88 Citigroup Tobacco Settlement Finance Corporation NY FA 1 443.88 123 90 4/23/2008 195.88 Citigroup Puerto Rico Childrens Trust Fund PR 124 91 6/20/2008 275.73 Goldman SC Tobacco Settlement Mgmt Auth SC 125 6/26/2008 29.88 Citigroup Michigan Tobacco Settle Fin Auth MI CO-SENIOR 12692 6/26/2008 75.00 Lehman Michigan Tobacco Settle Fin Auth MI CO-SENIOR 1 202.41 127 6/26/2008 97.53 Citigroup Michigan Tobacco Settle Fin Auth MI CO-SENIOR 128 93 8/14/2008 233.15 Citigroup Suffolk Tobacco Asset Securitization Corp NY CO-SENIOR 1 233.15

Total 55,308.29 Total 28 31,798.94 15 13,329.23 State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Appendix 3 Summary Cash Flows

State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Appendix 4 Additional Structuring Alternatives

State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Appendix 5 Summary of S&P Stress Tests on Recommended Structure

State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Appendix 6 Required Forms

Registration No. 12230

Jefferies & Company Inc 520 Madison Avenue New York NY 10022

Information for this business last updated on: Monday, September 21, 2009

Certificate produced on Wednesday, August 25, 2010 at 2:54 PM File Number 5024-787-2

To all to whom these Presents Shall Come, Greeting:

I, Jesse White, Secretary of State of the State of Illinois, do hereby certify that JEFFERIES & COMPANY, INC., INCORPORATED IN DELAWARE AND LICENSED TO TRANSACT BUSINESS IN THIS STATE ON MAY 30, 1973, APPEARS TO HAVE COMPLIED WITH ALL THE PROVISIONS OF THE BUSINESS CORPORATION ACT OF THIS STATE RELATING TO THE PAYMENT OF FRANCHISE TAXES, AND AS OF THIS DATE, IS A FOREIGN CORPORATION IN GOOD STANDING AND AUTHORIZED TO TRANSACT BUSINESS IN THE STATE OF ILLINOIS.

In Testimony Whereof, I hereto set my hand and cause to be affixed the Great Seal of the State of Illinois, this 19TH day of AUGUST A.D. 2010 .

Authentication #: 1023101904 Authenticate at: http://www.cyberdriveillinois.com SECRETARY OF STATE

State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Appendix 7 References

State of Illinois – Railsplitter Tobacco Settlement Authority RFP for Senior Underwriter / #22019913 August 30, 2010

Issuer References

Monroe TASC New York Counties TT Jefferies’ Role: Senior Jefferies’ Role: Senior Scott Adair Ken Crannell Chief Financial Officer Deputy County Exec. For Administration Monroe County Office of the Suffolk County Executive 400 County Office Building 100 Veterans Memorial Highway Rochester, NY 14614 Hauppauge, NY 11788 (585) 753-1107 (631) 853-4014 [email protected] [email protected]

Golden State TSC Buckeye TSFA New York TSFC Jefferies’ Role: Co-Senior Jefferies’ Role: Co-Senior Jefferies’ Role: Financial Advisor Katie Carroll Kurt Kauffman Marian Zucker Assistant Director Debt Manager Executive Vice President California State Treasurer’s Office Ohio Office of Budget & Management New York TSFC Public Finance Division 30 East Broad Street, 34th Floor 641 Lexington Avenue, 4th Floor 915 Capitol Mall, Room 280 Columbus, OH 43266 New York, NY 10022 Sacramento, CA 95814 (614) 466-0691 (212) 688-4000 x314 (916) 653-2903 kurt [email protected] [email protected] [email protected]