July 29, 2013 Summer Educational Event Donald J. Persinski Managing Director PNC Capital Markets LLC...

July 29, 2013

Summer Educational Event

Donald J. PersinskiManaging DirectorPNC Capital Markets LLC

Capital and Finance Market Trends

Presented to:

MSRB G-17 Disclosure

2

PNC Capital Markets (“PNCCM”) is providing the information contained in this document for discussion purposes only in anticipation of serving as an underwriter to the issuer to whom this document is addressed. The information provided herein is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities and Exchange Act of 1934, as amended..

The following disclosures are required by Municipal Securities Rulemaking Board (“MSRB”) Rule G-17, as PNCCM proposes to serve as an underwriter, and not as a financial advisor, municipal advisor or fiduciary to any person or entity, in connection with the issuance and sale of securities for the issuer to whom this is addressed: (i) MSRB Rule G-17 requires an underwriter to deal fairly at all times with both municipal issuers and investors. (ii) An underwriter’s primary role is to purchase securities with a view to distribution in an arm’s-length commercial transaction with an issuer; and an underwriter has financial and other interests that differ from those of such an issuer. (iii) Unlike a municipal advisor, an underwriter does not have a fiduciary duty to an issuer under the federal securities laws and is, therefore, not required by federal law to act in the best interests of that issuer without regard to its own financial or other interests. (iv) An underwriter has a duty to purchase securities from an issuer at a fair and reasonable price, but must balance that duty with its duty to sell those securities to investors at prices that are fair and reasonable. (v) An underwriter will review the official statement, if any, for those securities in accordance with, and as part of, its responsibilities to investors under the federal securities laws, as applied to the facts and circumstances of the transaction.

Three PNC Plaza, 4th Floor

412-762-6227 T 412-762-5129 [email protected]

Donald J. PersinskiManaging DirectorHealth Care

225 Fifth AvenuePittsburgh, PA 15222-2707











John G. BartoliniAnalystHealth Care










3

Portfolio Management

Strategies Diversification Risks Duration Liquidity

Debt Portfolio Fixed Rate Variable Rate Short-Term (working capital line) Long-Term (PP&E) Derivatives Public Debt Bank Loans

Investment Portfolio Cash/Money Market Funds Fixed Income – Corporate Fixed Income – US Treasury Equity – US Equity – International Equity – Mutual Funds Alternative Investments

4

Sources of Capital

Operations – Cash Flow

Reserves – Balance Sheet

Philanthropy / Capital Campaign / Grants

Asset Monetization – Sale of Non Core Assets (Land, Skilled Nursing Facility, etc.) Partnerships, Joint Ventures, Mergers

Capital Markets (Tax-exempt and Taxable Rates)

Fixed Rate Bonds

Variable Rate Demand Bonds supported by a Letter of Credit

Floating Rate Notes

Direct Bank Placement Construction Loan

Line of Credit (Working Capital or Project Financing)

Leases (Capital and Operating)

Derivative Products and Strategies

5

Decade of Municipal Bond Finance ($000)2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total $359,747.60 $408,282.80 $388,838.30 $429,893.70 $389,631.80 $409,688.50 $433,268.80 $287,718.40 $379,302.80 $175,451.70

Number of Issues 13,614 13,959 12,766 12,659 10,830 11,721 13,828 10,574 13,102 6,373

Health Care 29,103.70 38,797.40 40,346.50 49,820.50 61,094.10 46,151.80 31,440.70 26,763.50 37,276.30 14,226.10

Development 7,813.40 9,410.20 4,823.30 8,604.90 8,696.00 7,242.20 10,954.00 12,040.20 8,851.20 7,207.30Education 96,607.70 124,322.80 106,241.20 107,257.40 89,941.80 91,470.30 100,801.50 74,470.00 93,450.00 55,079.60Public Facilities 9,569.70 15,228.30 14,806.90 13,203.50 15,222.40 12,913.40 11,281.70 7,245.60 10,069.50 4,741.90Transportation 32,560.60 45,246.30 42,362.00 41,946.00 47,560.40 48,775.20 66,895.00 32,931.70 55,340.20 21,098.00Utilities 32,691.30 31,158.70 33,188.50 36,012.50 37,594.50 40,037.90 44,619.10 31,738.20 45,424.90 18,594.90General Purpose 114,646.40 100,441.80 86,649.50 114,751.10 81,724.10 128,806.20 119,421.80 79,300.80 100,922.80 40,644.80Tax Exempt 312,319.50 352,131.50 323,226.10 362,481.10 341,264.40 323,442.40 275,553.10 247,670.80 333,488.50 146,507.50Taxable 24,122.00 25,751.70 30,131.30 29,381.90 24,252.30 84,666.70 151,877.80 31,926.40 32,779.20 24,232.90Minimum Tax 23,306.10 30,399.60 35,480.90 38,030.70 24,115.10 1,579.40 5,837.90 8,121.20 13,035.10 4,711.30Build America Bonds 0 0 0 0 0 64,151.50 117,347.10 432.9 0 0Other Stimulus 84.3 42.6 39 63.9 11.1 3,441.70 16,787.80 5,264.30 1,576.30 386.4New Money 228,919.00 221,207.30 258,362.70 274,285.00 208,225.00 261,331.60 279,770.80 146,220.40 146,246.20 70,605.80Refunding 88,405.30 130,916.30 79,170.30 75,874.40 108,603.60 86,455.90 98,515.80 90,392.10 157,985.30 70,411.50

Fixed-Rate 260,781.50 306,200.20 288,946.90 320,515.80 262,634.30 362,120.20 392,149.10 256,082.50 345,298.90 160,639.50Variable-Rate (Short Put) 47,018.50 61,799.90 55,899.00 50,391.50 116,345.90 32,333.90 24,969.80 14,384.00 15,005.50 3,235.60Variable-Rate (Long/No Put) 5,864.30 2,772.80 6,115.90 13,177.10 6,440.10 8,565.80 3,593.70 2,572.00 2,530.10 1,395.00

Linked-Rate 227.4 0 0 0 328.4 1,982.10 9,062.20 12,093.40 14,216.20 9,263.20Auction-Rate 42,228.50 33,053.20 32,131.20 38,769.20 0 0 0 0 0 0Bank Qualified 16,644.60 18,511.50 17,392.80 16,312.70 15,302.60 33,147.90 36,876.50 18,821.20 25,093.60 11,785.10Bond Insurance 194,895.30 232,976.10 191,326.20 201,017.80 72,181.10 35,401.20 26,857.40 15,256.50 13,272.70 5,626.40Letters of Credit 23,623.50 27,050.90 21,520.20 20,732.30 71,520.60 20,434.40 11,817.10 9,891.60 6,076.60 805.2Standby Purchase Agreements 3,429.00 12,980.50 14,057.10 17,722.20 28,061.60 4,071.70 3,469.30 1,688.20 1,974.70 566.4

6

Municipal Bond Issuance – Year-to Date Comparison (June 30)

Volume in millions Number of issues Volume in millions Number of issuesChange from previous period

TOTAL 175,451.7 6,373 195,348.5 6,991 -10.20%

January 26,807.5 887 17,438.6 723 53.7February 24,426.3 1,016 27,027.8 1,053 -9.6March 32,248.0 985 34,746.0 1,257 -7.2April 37,144.3 1,184 34,833.2 1,229 6.6May 29,467.7 1,311 37,876.6 1,496 -22.2June 25,357.9 990 43,426.3 1,233 -41.6

First Quarter 83,481.8 2,888 79,212.4 3,033 5.4Second Quarter 91,969.9 3,485 116,136.1 3,958 -20.8

Health Care 14,226.1 248 18,017.2 277 -21.0

Tax-Exempt 146,507.5 5,602 178,091.1 6,382 -17.7Taxable 24,232.9 714 12,768.4 551 89.8

New-Money 70,605.8 2,893 70,154.1 2,881 0.6Refunding 70,411.5 2,875 87,110.7 3,506 -19.2

Fixed-Rate 160,639.5 6,034 183,105.7 6,776 -12.3Variable-Rate (Short Put) 3,235.6 75 5,543.9 101 -41.6Linked-Rate 9,263.2 58 4,374.7 60 111.7

Bond Insurance 5,626.4 561 7,697.4 700 -26.9Letters of Credit 805.2 23 3,654.8 63 -78.0Standby Purch Agreements 566.4 7 833.4 11 -32.0

2013 2012

7

Municipal Bond Issuance – State Rankings

Volume in Volume in Change fromState Rank millions Rank millions previous period

California 1 26,971.80 2 22,430.90 20.2Texas 2 16,178.70 3 16,072.50 0.7New York 3 15,382.40 1 25,295.10 -39.2New Jersey 4 9,334.70 12 5,280.20 76.8Illinois 5 7,360.10 4 8,863.30 -17Florida 6 7,129.40 5 7,924.90 -10Ohio 7 7,104.70 8 6,822.30 4.1Massachusetts 8 5,138.10 13 5,165.60 -0.5North Carolina 9 5,136.00 16 4,029.80 27.5Pennsylvania 10 5,040.50 10 6,477.10 -22.2

2013 2012

8

Healthcare Bond Issuance

The volume of Health Care bond issuance has declined in recent years. Factors contributing to this decline include: uncertainty due to healthcare reform; a tightened credit market; fewer refunding opportunities; and significant growth in bank direct placements.

Note: 2013 data is through June 30.

29.1

38.8 40.3

49.8

61.1

46.2

31.4

26.8

37.3

14.2

$0

$10

$20

$30

$40

$50

$60

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Billi

ons

9

Healthcare Bond Issuance: January 1, 2013 – June 30, 2013

The Washington Hospital

Doylestown Hospital

Catholic Health EastHanover Hospital

St. Luke’s Health System

Total Par Amount: $195,200,000

10

Recent Fixed Rate Healthcare Bond Issues

Obligor Rating1 Par ($MM)AwardDate

Call Provision

Spread to MMD (bps)

Yield % (Final Maturity)

Gross Revenue Pledge? DSRF? Mortgage?

Yavapai Community Hospital Association (AZ) Baa1/nr/BBB+ 32.995 7/18/2013 2023 at par +160 5.34 (2033) Yes No Yes

Palmetto Health (SC) Baa1/BBB+/BBB+ 140.430 7/16/2013 2023 at par +160 5.24 (2031) Pledged Assets No Yes

Cook Children's Medical Center (TX) Aa2/AA/nr 68.950 7/10/2013 2023 at par +90 4.84 (2039) Springing No No

Methodist Hospitals of Dallas Aa3/AA-/nr 189.065 7/10/2013 2023 at par +107 5.08 (2043) Yes No No

St. Joseph Health System (CA) A1/AA-/AA- 324.840 7/9/2013 2023 at par +122 5.05 (2037) No No No

New Hanover Regional Medical Center (NC) A1/A+/nr 56.745 7/3/2013 2023 at par +123 4.20 (2026) No No No

Palisades Medical Center (NJ) nr/nr/BBB 47.555 6/21/2013 2023 at par +202 5.80 (2043) Yes Yes Yes

Cape Cod Healthcare (MA) nr/A-/A- 50.000 6/19/2013 2023 at par +145 4.96 (2041) Yes No Yes

St. Luke's Hospital of Bethlehem (PA) A3/BBB+/nr 25.000 6/19/2013 2023 at par +149 4.75 (2033) Yes No Yes

Ascension Health (WI) Aa2/AA/AA+ 100.000 6/12/2013 2023 at par +113.5 4.625 (2043) Yes No No

Fairfield Medical Center (OH) Baa2/nr/nr 96.600 6/12/2013 2023 at par +169 5.18 (2043) Yes Yes Yes

Beaver Dam Community Hospitals (WI) nr/BBB-/nr 42.995 6/12/2013 2023 at par +210 5.30 (2034) Yes Yes Yes

Day Kimball Healthcare (CT) nr/nr/nr 30.330 6/6/2013 2023 at par +258.5 5.875 (2043) Yes Yes Yes

Memorial Hospital (WY) nr/BBB/nr 26.790 6/4/2013 2023 at par +150 4.59 (2037) Net Revenues Yes No

Nanticoke Memorial Hospital (DE) nr/BB+/BBB- 45.645 5/30/2013 2023 at par +203 4.85 (2032) Yes Yes Yes

St. Luke's Warren Hospital (NJ) A3/BBB+/nr 37.410 5/22/2013 2023 at par +98 4.00 (2043) Yes No Yes

Riverside Health System (IL) A2/A+/nr 32.000 5/16/2013 2022 at par +131 4.28 (2042) Unrest. Rcvbles No No

Cleveland Clinic Health System (OH) Aa2/AA-/nr 62.650 5/15/2013 2023 at par +107 4.04 (2042) Yes No No

Carolinas HealthCare System (NC) Aa3/AA-/nr 127.260 5/15/2013 2023 at par +65 3.56 (2039) Yes No No

Skagit Regional Health (MO) Baa2/nr/nr 27.360 5/15/2013 2023 at par +150 4.35 (2037) Yes Yes Yes

Beacon Health System (IN) nr/AA-/AA- 162.835 5/9/2013 2023 at par +134 4.23 (2044) Yes No Yes

Bowling Green-Warren County Community Hospital (KY) nr/A/nr 42.260 5/8/2013 2023 at par +112 3.80 (2035) Yes No Yes

MedStar Health (MD) A2/A-/A 149.760 5/7/2013 2023 at par +101 3.78 (2038) Pledged Revs No Yes

Maine Health & Higher Ed (pool) (ME) A1/nr/AA 64.030 5/2/2013 2023 at par +100 3.50 (2033) Yes Yes Yes

Genesis HealthCare System (OH) Ba1/BB+/nr 295.000 4/23/2013 2023 at par +230 5.20 (2048) Yes Yes Yes

Hanover Hospital (PA) nr/BBB-/nr 15.610 4/16/2013 2023 at par +180 3.66 (2024) Yes Yes Yes

OhioHealth Corporation (OH) Aa2/AA+/AA 226.000 3/27/2013 2023 at par +104 4.15 (2043) No No No

Doylestown Hospital (PA) Baa2/BBB/nr 26.595 3/13/2013 2023 at par +164 4.19 (2029) Yes No Yes

The Washington Hospital (PA) Baa2/nr/BBB+ 14.570 1/29/2013 2023 at par +152 3.77 (2028) Yes No Yes

11

Segmenting Market RiskFixed Rate Bonds

Hospital RatingBonds with Bank

FacilityDirect Bank

Placement/LoanBonds with Bank

FacilityDirect Bank

Placement/Loan

Interest Rate RiskRisk of change in cost of funding due to fluctuation of interest rates a a

Trading Spread RiskRisk that the interest rate widens from its relative index due to change in investor perception of credit facility provider (bank or self-liquidity)

a a

Put RiskRisk that investors will put the bonds back to the credit provider or trustee

a a

Bank Renewal RiskRisk that the pricing of the credit facility increases or the credit facility is unable to be renewed

a a a a

Counterparty RiskRisk of bankruptcy or deteriorating financial position of a swap counterparty

a a

Termination RiskRisk that a cancellation option is exercised by a counterparty a a

Basis RiskRisk of change in interest rates and the payment/receipt on swaps due to the value of tax exemption or market disruption

a

Tax RiskRisk that changes in U.S. Tax Code could adversely affect trading of bonds

a a

Variable Rate Debt Synthetic Fixed Rate Debt

12

Financing Option – Fixed Rate Bonds

Most conservative structuring alternative; Eliminates ongoing interest rate risk Issue with a maturity of up to 40 years; Bonds typically not callable for 10 years Bonds issued based solely on the credit strength of the borrower Security, covenants and disclosure may include all, or most of the following:

Revenue pledge, mortgage, debt service reserve fund Tightened liquidity and capital structure covenants – additional ratios have emerged, including variable

rate and short term debt ratios/measures Quarterly disclosure Credit rating from multiple agencies

4.14

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

07/19/13

07/08/13

05/15/13

11/30/12

Steepening yield curve 1-year yield has not

changed Current 30-year yield

164 basis point increase since the low on November 30, 2012 (approximately 8 months)

100+ basis point increase since May 15, 2013 (2 months)

Current and Historical MMD Rates

13

• Municipal Market Index (MMD) "Municipal Market Data," is a proprietary yield curve for municipal market (tax-exempt) issues published daily by Thomson Financial Services and widely used as a benchmark for determining interest rates on new issue and secondary market tax-exempt issues.

• In November 2012, the 30-year MMD maturity fell to its historic low of 2.47%. As of July 19, 2013, the 30-year MMD maturity was 4.14%.

AAA MMD10, 20 and 30-Year Maturity Historical RatesJuly 2011- July 2013

AAA MMD30-Year Maturity Historical RatesJanuary 7, 2013 to Present

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

06/2

7/20

11

07/2

7/20

11

08/2

7/20

11

09/2

7/20

11

10/2

7/20

11

11/2

7/20

11

12/2

7/20

11

01/2

7/20

12

02/2

7/20

12

03/2

7/20

12

04/2

7/20

12

05/2

7/20

12

06/2

7/20

12

07/2

7/20

12

08/2

7/20

12

09/2

7/20

12

10/2

7/20

12

11/2

7/20

12

12/2

7/20

12

01/2

7/20

13

02/2

7/20

13

03/2

7/20

13

04/2

7/20

13

05/2

7/20

13

06/2

7/20

13

10 Yr MMD 20 Yr MMD

30 Yr MMD

2.79

3.52

4.13

3.83

3.96

4.14

2.00

2.50

3.00

3.50

4.00

4.50

01/0

7/20

13

01/1

4/20

13

01/2

1/20

13

01/2

8/20

13

02/0

4/20

13

02/1

1/20

13

02/1

8/20

13

02/2

5/20

13

03/0

4/20

13

03/1

1/20

13

03/1

8/20

13

03/2

5/20

13

04/0

1/20

13

04/0

8/20

13

04/1

5/20

13

04/2

2/20

13

04/2

9/20

13

05/0

6/20

13

05/1

3/20

13

05/2

0/20

13

05/2

7/20

13

06/0

3/20

13

06/1

0/20

13

06/1

7/20

13

06/2

4/20

13

07/0

1/20

13

07/0

8/20

13

07/1

5/20

13

Credit Spreads – Tax-exempt Healthcare Bonds

14

Municipal Market Data High-Grade Yield Curve Industry standard (Both Buy Side and Sell

Side) Represents where high-grade, natural Aaa

paper is trading The MMD curve serves as a benchmark for

municipal bonds just as Treasury bonds do for corporate bonds

Healthcare Credit Spreads30-year maturity spread to Bloomberg's 30-year AAA General Obligation Index

Source: Bloomberg

0%

1%

2%

3%

4%

5%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

AA Rated Healthcare Spread A Rated Healthcare Spread

BBB Rated Healthcare Spread

15

10YR AAA MMD versus 10YR US Treasury Yields

5/2MMD: 1.66UST: 1.62102%

7/12MMD: 2.66UST: 2.58103%

16

Municipal Fund Flows vs 20 year MMD

(12,000.00)

(10,000.00)

(8,000.00)

(6,000.00)

(4,000.00)

(2,000.00)

0.00

2,000.00

4,000.00

6,000.00

Dec-10

Jan-11Feb-11M

ar-11Apr-11M

ay-11Jun-11Jul-11Aug-11Sep-11O

ct-11N

ov-11D

ec-11Jan-12Feb-12M

ar-12Apr-12M

ay-12Jun-12Jul-12Aug-12Sep-12O

ct-12N

ov-12D

ec-12Jan-13Feb-13M

ar-13Apr-13M

ay-13Jun-13Jul-13

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Funds Flow 20Y MMD

YTD 2013: $8.5B outflows

June 2013: $10.7B outflows

17

Variable Rate Alternatives – Key Differentiating Factors

Variable Rate Demand Bonds

• Letter of Credit (LOC) or Standby Bond Purchase Agreement (SBPA)

• Renewal Risk• Basel III Regulatory Risk

Bank Purchased Bonds

• Priced as spread to percent of LIBOR or SIFMA

• Limited Put Risk• Longer Tenor than Letter of Credit

Public Floating Rate Notes (FRN)

• Newest Product• Priced as a spread to LIBOR or SIFMA• No LOC or SBPA required

18

Municipal Bond Issuance

Total municipal issuance peaked in 2010 followed by a sharp decline in 2011.

Variable rate issuance has declined following the events of 2008 which heightened awareness of certain risks.264.4

310.7 294.7327.6

266.5

366.8395.6

258.7

345.9

161.6

95.3

97.694.1

102.3

123.1

42.937.6

29.0

27.2

13.9

359.7

408.3388.8

429.9

389.6409.7

433.3

287.7

373.1

175.5

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Billi

ons Fixed Rate

Variable Rate

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13

Billi

ons

2011 2012 2013

19

History of Municipal Variable Rate Bond Issuance

$51,410,123,000

$124,870,154,000

$41,502,630,000

$30,212,967,000

$24,447,686,000 $23,809,480,000

$12,387,902,448

0

20,000,000,000

40,000,000,000

60,000,000,000

80,000,000,000

100,000,000,000

120,000,000,000

140,000,000,000

2007 2008 2009 2010 2011 2012 2013Annualized

VRDB Issuance

% Change 07-08142% increase

% Change 08-0967% decrease





20

Total VRDN Market Size ($000)

$391,844,805

$424,254,920 $417,181,468

$395,934,747

$373,230,665

$344,078,555

$301,454,364

$250,000,000

$270,000,000

$290,000,000

$310,000,000

$330,000,000

$350,000,000

$370,000,000

$390,000,000

$410,000,000

$430,000,000

$450,000,000

Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13

VRDN Market Size

21

Financing Option – Variable Rate Bonds with Bank Letter of Credit

Variable Rate Demand Obligation (VRDO) with Direct-Pay Letter of Credit (LOC) Short-term multi-mode interest rate reset (daily, weekly, monthly, etc.) Exposure to interest rate risk Produces lower cost of debt when yield curve is normal (upward sloping) Provides the most flexible redemption options The bonds will be sold on the credit strength of the bank providing the LOC LOC terms can be extended 3 to 5 years with annual renewal provisions

Interest rates at historically low levels Successful remarketing each week

Bank letters of credit may be challenging to procure Fewer options due to credit deterioration throughout the industry Bank renewal concern Pricing may be tiered to rating and/or financial performance Ancillary business may be required

22

SIFMA Index

0%

1%

2%

3%

4%

5%

6%

7%

8%

Max 5.840 4.480 1.850 1.360 1.990 3.510 3.970 3.950 7.960 0.670 0.340 0.290 0.260 0.180

Min 2.930 1.100 1.010 0.700 0.870 1.480 2.930 3.090 0.850 0.220 0.150 0.070 0.060 0.050

Median 4.190 2.380 1.350 1.060 1.075 2.515 3.475 3.610 1.820 0.380 0.270 0.175 0.160 0.100

10yr Rol l ing Avg 3.415 3.237 3.097 2.958 2.799 2.665 2.667 2.663 2.535 2.246 1.863 1.621 1.500 1.488

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

SIFMA – Median, Maximum and Minimum Rates(2000 to Present)

23

Liquidity and Letter of Credit Trends After spiking in early 2009, liquidity and LOC pricing has declined considerably

Depending on Credit Profile, Term and Structure LOC pricing at 150+ basis point in early 2009, now as low as 60 – 125 basis points

Multi-year commitments now available (1 Year LOCs were common in 2008 and 2009)

Incremental business expectations have lessened, but continue

Greater variation in remarketing rates based on liquidity or LOC provider Variation has settled somewhat, but market extremely sensitive

Fewer acceptable names causing greater concentration Money market eligibility Greater interest in self liquidity issues

Exclusion of “Auction Rate Mode”

Inclusion of a “Bank Mode” Takes advantage of bank qualification Can include “draw down” provisions

Especially beneficial for long construction projects Conversion into public market may require additional work

Rating, Disclosure document, Remarketing agreement

Inclusion of an “Index Mode”

24

Access to Commercial Bank LOC’s

Highly Rated, Relationship Banks = Best Partner/Provider One-off transactions may not prove to be reliable long term (i.e.,

renewal/extension concerns)

Pending Regulations Bank capital reserve requirements Direct Bank Placements may be offered as an alternative

Increased Awareness on Covenants and Other Terms/Conditions More restrictive covenants Increased focus on term out provisions, expiration dates (i.e., long-term

balance sheet classification) Grid pricing, rating triggers Yield protection language

Ancillary Requirements

Capacity/Hold Limits

25

US Banks’ Municipal Holdings – Cost Basis

78.7

78.1

73.8

75.0

76.5

86.6

92.0

93.6

97.7

101.9

109.3

112.2

124.3

137.0

144.2

154.6

158.0

179.6

207.8

254.0

0 50 100 150 200 250 300

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012 As of December 31

1993 to 2012 Increase of $175.3 billion 222.7% increase

2012: 22.3% 2011: 15.7% 2010: 13.7%

26

What is a Direct Bank Placement/Loan?

A Direct Bank Loan is a financing structure in which debt is purchased by a financial institution instead of being publicly sold / remarketed in the capital markets

Tax-exempt Direct Bank Loan structures have been used with increasing frequency over the past two years due to decreased bank capacity for letters of credit and significant number of expiring letters of credit on variable rate bonds

Driven by borrowers’ desire to shed bank trading risk and lock in a fixed spread

Issuer / Borrower

- Proceeds from bank loan used to finance tender of existing bonds or for new money purposes

- Pays a fixed spread over variable index rate for initial purchase period

Bank LoanProceeds Bank Loan

Purchaser

- Buys debt from Issuer under Credit Agreement- Holds debt at a variable index rate plus a fixed spread for a specified period

27

Direct Bank Loan Structures

Similar to variable rate bonds

– Direct Bank Loan is treated as another mode

– Requires a Trust Indenture

– Allows bonds to be converted to variable rate with letter of credit

– Requires a Bond Trustee

– Provides additional flexibility allowing borrower to convert to other modes in the future

– Bank covenants and terms in separate document (i.e. Bondholder Agreement, Funding Agreement– similar to Reimbursement Agreement)

Alternative structure

– No Trust Indenture

– Bank covenants typically in Loan Agreement

– Assumes debt will remain in Direct Bank Loan form

28

Bank Loan as an Alternative to a Public Offering

Direct Bank Loans have become an attractive alternative to public offerings of fixed or variable rate bonds

Bonds are usually placed with a long-term maturity and can have periodic puts/renewals (e.g., 3, 5 or 7 years)

Can be structured as variable or fixed rate (conventionally fixed based on cost of funds or interest rate swap)

Variable rate are priced at a spread to LIBOR and adjusted by a tax factor

– The credit/loan spread is determined by the credit profile of the borrower

– Tax factor is typically 65-70%

– Pricing may look like (70% of 1 Month Libor) + credit spread

29

Upfront Cost Comparison

Direct Bank Loan Capital Markets

Official Statement/Disclosure Requirements NO YES

Rating Agency NO YES

Indenture YES YES

Tax-Exempt Opinion YES YES

Underwriter NO YES

Underwriters’ Counsel NO YES

Bank Counsel YES NO

Bond/Tax Counsel YES YES

30

Direct Bank Loan vs Direct-Pay Letter of Credit

Benefits of a Direct Bank Loan

Reduce remarketing risk by moving outstanding debt out of the capital markets and placing directly with the bank

– Avoid liquidity event caused by a failed remarketing

Reduce bank counterparty risk in uncertain environment for bank ratings– Interest rate paid is tied to underlying index– Rate not affected by changes in bank rating or investor sentiment

Reduce exposure to unexpected market shocks causing bonds to be “put back” by investors

Possible longer tenor on facility, reducing renewal risk

Possibly reduce annual costs by eliminating remarketing and trustee fees

Benefits of Direct-Pay Letter of Credit

Mature structure with full acceptance in the capital markets

Potentially lower up-front costs when switching credit providers due to familiarity of structure and consistency of documentation across transactions. Up-front costs are becoming more comparable

More conducive structure for bonds with bullet maturities

– Direct bank loan may require some level of annual principal amortization

Multi-year term-out provisions typical in the event of a failed remarketing– Term-out provisions are not typical with Direct Bank Loan structures– Full principal is typically due at the end of purchase period if facility is not renewed or replaced

Floating Rate Notes (“FRNs”)

No bank support and no ongoing remarketing

Float relative to an index, typically SIFMA, but can be priced as a percentage of LIBOR. The pricing spread is determined at the time of pricing and fixed for the duration of the Floating Rate Note Period

The Floating Rate Note Period is typically 1 to 5 years in length, but PNCCM has observed periods as long as 10 to 15 years

FRNs can be issued with either a hard put or a soft put. With a hard put structure, upon maturity or the mandatory tender date, outstanding principal is due and failure to pay is an event of default

With a soft put structure, upon maturity or the mandatory tender date, failure to pay at the tender date constitutes a “failed remarketing” and can trigger interest rate escalation to a maximum rate and/or accelerated amortization. An FRN with a soft put could also be structured with an interest rate that gradually “steps up” to the max rate instead of directly defaulting to max rate at the time of the failed remarketing

FRNs generally are not subject to optional redemption until six months prior to the end of the Floating Rate Note Period. If the FRNs are not retired at maturity or at the end of the Floating Rate Note Period, the FRNs may be remarketed into a new Floating Rate Note Period or refinanced by new FRNs, variable rate demand obligations (VRDBs), fixed rate bonds, or other obligations.

2012 through2013 Year to Date

Numberof Issues Issue Amount

Total FRN Market 80 $17.5 Billion

Healthcare 13 $1.3 Billion

BBB Healthcare 3 $306.0 Million

Market Overview of FRNs

The market for FRNs has grown significantly since the auction market collapse in 2008. Initial issuances involved highly rated issuers, but FRNs are now available as a tool for issuers in a broad range of credit quality

The market initially expanded as a result of reduced capacity in the bank market. More recently, the market has grown as long-term municipal investors increase exposure to variable rate products to position for rising rates. FRNs serve as a non-bank alternative to a traditional VRDBs

“Linked-rate” volume increased by 17.56% from 2011 to 2012. Volume increased 123% in the first quarter of 2013 over 2012, and we expect continued growth in this market

FRN Market Stats 2012-2013YTD# Issues 120

# Series 276

Total Par $18.7 B

Ave Deal Size $156 MM

Max Deal Size $964 MM

Min Deal Size $1 MM

Ave Maturity Size $68 MM

Max Maturity Size $964 MM

Min Maturity Size $1 MM

Max Rating Aaa / AAA

Min Rating w/ insurance Baa3 * - / BBB- * -

Min Rating w/o insurance BBB

THOMSON-REUTERS SDC FINANCIAL REPORTED LINKED RATE ISSUANCE (000s)1

1 March 31, 2013

$9,303

$12,340

$14,326

$3,773

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2010 2011 2012 2013

FRN Considerations

BENEFITS CONSIDERATIONS

Third-party credit and liquidity support is not required – eliminating bank renewal risk, counter-party risk and ongoing remarketing risk

During the Floating Rate Note Period, the bonds can not be tendered by investors

Borrowers can select SIFMA, LIBOR, or a % of LIBOR as the underlying index. This may be beneficial if the borrower has existing swaps that they do not wish to terminate and can use as a hedge for an FRN with a matching index

FRNs can be issued as part of a multi-modal issue providing flexibility at the end of the Floating Rate Note Period to refinance into a variety of alternate structures (or a subsequent Floating Rate Note Period)

Interest rate risk is inherent to this structure and is based on the selected underlying index (SIFMA, LIBOR, or a % of LIBOR)

At the mandatory tender date or maturity, the borrower is subject to refinancing risk and potentially higher spreads to the underlying index based on a change in market conditions, changes in tax law, or the borrower’s credit profile

If structured with a “hard put” the borrower may be required to fund the entire purchase price of the FRNs. If structured with a “soft put” the interest rate could escalate to the maximum interest rate and/or accelerated principal payments (if remarketing is unsuccessful)

Optionality within the structure is achievable but the extent of optionality will be less than what is embedded within a typical VRDB solution

Term on both put structures is getting longer, but price discovery is critical in this phase of the market’s development

Call Date (6 months prior)* Maturity

Nominal

Call Date (6 months prior)*

Mandatory Tender Maturity

-Fixed Rate Bonds

-New FRNs

-Alternative Variable Rate Structure

-Bank Solution

-Event of Default

Call Date Mandatory Nominal(6 months prior)* Tender Maturity

-Fixed Rate Bonds

-New FRNs

SOFT PUT -Alternative Variable Rate Structure

-Alternative Mode

-Bank Solution

-Refinance

* This is feature, not a structural requirement -Accelerated Amortization (term out)

-Floating rate resets to failed remarketing rate (as defined in documents)

Index + Spread

Index + Spread

Index + Spread

HARD PUT w/

mandatory tender

HARD PUT w/

maturity

"Failed Remarketing

Event"

FRNs- Hard Put vs Soft PutHard Put

A hard put can be incorporated in a structure with a mandatory tender or maturity. Both structures typically incorporate a call date 6 months prior to the principal payment date

An event of default occurs if the FRN is not funded on the date of the mandatory tender or maturity

The primary concern for investors is the ability of the borrower to access the market at the mandatory tender date

Soft Put

A soft put is typically structured as part of a term mode remarketing of multi-modal bonds, often with a call date 6 months prior to the soft put date

In soft put structures, investors will also focus on refinancing risks and the maximum rate in the case of a failed remarketing

Soft puts can be structured with a step coupon, where at the time of failed remarketing the interest rate gradually steps up to increasingly penalizing rates until it reaches the max rate

Capital Structure ConsiderationBANK FRN

(Direct Purchase)

FIXED RATE BANK LOAN

FRN PUBLIC OFFERING 67%

of LIBOR

FRN PUBLIC OFFERING

SIFMA

TAX-EXEMPT FIXED RATE

NOTE

VRDB with LETTER OF CREDIT*

Offering Documents Not Required Not Required Required Required Required Required

Costs of I ssuanceBond Counsel + Bank Counsel

Bond Counsel + Bank Counsel

Full Full Full Full

Public Rating Not Required Not Required Required Required Required Required

Optionality FullPrepayment

Penalty

Difficult Given Rating

(Expensive)


(Expensive)


(Expensive)


(Expensive)

Term Short Term Short Term

Market Access Risk Retained Retained Retained Retained Retained Retained

I ndicative Pricing3 Years

5 Years

10 Years

Period Spread to Index

1 2014 + 5 bps

2 2015 + 15 bps

3 2016 +30 bps

4 2017 +45 bps

5 2018 +55 bps

6 2019 +65 bps

7 2020 +75 bps

8 2021 +85 bps

9 2022 +95 bps

10 2023 +105 bps

11 2024 +115 bps

12 2025 +125 bps

13 2026 +130 bps

Floating Rate NotePublic Offering

36

Sources of Capital – Summary of Costs and Risks

AAFixed Rate

AFixed Rate

BBBFixed Rate

VRDB with LOC

VRDB Self Liquidity

Direct Bank Placement

30-Year Bond Yield 5.14% * 5.64% * 5.94% * SIFMA * SIFMA *

Letter of Credit/Bank Rate100 bps

(3 year LOC)70% 1M LIBOR

+ 125 bps

Annual Remarketing 10 bps 10 bps

Cost of Capital 5.14% 5.64% 5.94%SIFMA

+ 1.10%SIFMA

+ 0.10%70% 1M LIBOR

+ 1.25%

Risks

Put Risk No No No Yes Yes No

Bank Renewal Risk No No No Yes No Yes

Bank/Credit Risk No No No Yes Yes No

Interest Rate Risk No No No Yes Yes Maybe

Tax Risk No No No Yes Yes Maybe

Borrower Downgrade No No No Yes Yes Yes

Reserve Fund No Maybe Yes No No No

Mortgage No Maybe Yes Maybe No No

* 30-year Municipal Market Data on July 19, 2013 was 4.14%; SIFMA reset on July 24, 2013 at 0.06%.Note: Yields are indicative estimates.

Capital Structure & Bank Renewal Consideration

Bank Renewal Risk

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

Series 2009 A Series 2009 B Series 2009 C Series 2010 Series 2012

Outstanding Average Final LOC LOC Call Call Swap Variable Out. Notional Swap SwapSeries Par (000) Mode Cost Maturity Ratings Provider Expiration Date Price Receipt Amount (000) Fixed Rate Expiration

Fixed Rate

Series of 2012 $10,000,000 Bank Qualified 1.990% 1 12/2032 2 NR

Series of 2010 $23,415,000 Bank Qualified 3.040% 1 12/2017 4 NR

Variable Rate

Series A of 2009 $19,040,000 Weekly VRDB 0.179% 3 12/2039 AA+/A-1 PNC Bank 07/2015 Any IPD 100%

Series B of 2009 $19,040,000 Weekly VRDB 0.179% 3 12/2039 AA+/A-1 PNC Bank 07/2015 Any IPD 100%

Series C of 2009 $20,000,000 Weekly VRDB 0.179% 3 12/2039 AA+/A-1 PNC Bank 07/2015 Any IPD 100%

TOTAL $91,495,000

1 Fixed Rate Bank Loan2 Bank has right to Put the note back on the 5th, 10th and 15th anniversaries3 Average Remarketing Rate Since 7/23/20094 7 Year Maturity Date; 21 Year Amortization.

Capital Structure & Interest Rate Risk Consideration

Outstanding Par Rate ModeFinal

Maturity*LOC Bank/

InsurerLOC

ExpirationCall Date Call Price

Swap Variable Receipt

Outstanding Notional

Swap Fixed Rate

Swap Expiration

Series 2009B $111,530,000 Fixed 2/1/2038 Assured - 2/1/2019 Par N/A N/A N/A N/ASeries 2010 $27,150,000 Fixed 2/1/2018 - Non-callable - N/A N/A N/A N/A

$138,680,000

Series 2009A $34,585,000 Variable 2/1/2035 LOC 4/2/2014 At all times Par N/A N/A N/A N/A

Series 2009C $56,450,000 Variable 2/1/2033 LOC 5/13/2014 At all times Par (65% L) + 145 bps$55,700,000

(as of last audit)

3.51%Through maturity

Series 2009D $18,615,000 Variable 2/1/2039 LOC 5/13/2013* At all times Par N/A N/A N/A N/A

$109,650,000

Total Outstanding $248,330,000

Series

Fixed Rate Bonds

Variable Rate Bonds

*EMMA indicates the LOC on Series 2009D expires May 2013 and LOC for Series 2009C expires in 2014. Bloomberg indicates both LOCs expire in 2013.

Composition of Underlying Debt

Interest Rate Exposure

Fixed Rate$138,680,000

56%

Variable Rate$109,650,000

44%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Fixed Rate,$138,680,000

56%

Synthetically Fixed$56,450,000

23%

Variable Rate$53,200,000

21%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

39

Standard Disclosure

PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. PNCCM is an affiliate of PNC Bank, National Association; however, it is not a bank or a thrift and is a separate and distinct corporate entity from its bank affiliate.

This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written permission of PNCCM. Under no circumstances should it be used or considered as an offer to sell or a solicitation of an offer to buy any of the securities or other instruments mentioned in it. The information contained herein is based on information PNCCM believes to be reliable and accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such. Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions expressed herein are subject to change without notice. The securities or other instruments mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; and their value and the income they produce may fluctuate and/or be adversely affected by changes in exchange rates or interest rates or other factors.

PNCCM and/or its affiliated companies may make a market or deal as principal in the securities mentioned in this document or in options or other derivative instruments based thereon. In addition, PNCCM and its affiliated companies, shareholders, directors, officers and/or other employees may from time to time have long or short positions in such securities or in options, futures or other derivative instruments based thereon. One or more directors, officers and/or employees of PNCCM or its affiliated companies may be a director of an issuer of securities mentioned in this document. PNCCM or its predecessors and/or affiliates may have managed or co-managed a public offering of or acted as initial purchaser or placement agent for a private placement of any of the securities for any issuer mentioned herein within the last three years, or may from time to time perform investment banking or other services for or solicit investment banking or other business from any company or issuer mentioned in this document.

PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by The PNC Financial Services Group, Inc. through its subsidiaries PNC Bank, National Association and PNC Capital Markets LLC. Services such as public finance advisory services, securities underwriting, and securities sales and trading are provided by PNC Capital Markets LLC. Foreign exchange and derivative products are obligations of PNC Bank, National Association

July 29, 2013 Summer Educational Event Donald J. Persinski Managing Director PNC Capital Markets LLC...

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