California Debt and Investment Advisory Commission Debt 1

California Debt and Investment Advisory Commission Debt 1: Debt Basics Session 5: Selection and Duties of Financing Consultants February 1, 2011 Panelists: Donald Field Partner | Orrick, Herrington & Sutcliffe LLP Dan Wiles Principal & General Counsel | Fieldman, Rolapp & Associates Celeste Davis Managing Director | RBC Capital Markets Stuart Weiss Vice President | Wells Fargo Bank National Association

Presentation Outline • Key Financing Team Participants • Selection of Team Participants • Roles and Duties of Key Team Participants 1

Key Financing Team Participants • Issuer • Bond Counsel • Financial Advisor • Underwriter/Placement Agent/Purchaser • Trustee/Paying Agent 2

Selection of Team Participants • Identifying Likely Firms • Formal or Informal Process • Using Selection as Opportunity for Free Advice 3

Formal (Request for Proposal) Process • Steps in the RFP Process • Components of an RFP - Scope of Work - Information on Qualifications - Procedural Rules - Criteria for Selection - Required Terms of Engagement - Evaluation 4

Selection Without a RFP • No Perfect Solution • Obtain Market Information • Informal Discussions 5

Need for Bond Counsel • Nineteenth Century Litigation Concerning Validity of State and Local Government Bonds • Independent Legal Expertise Avoids Loss and Promotes Liquidity of Bonds • Modern Concerns About Complexity of Laws and Frequency of Litigation Justifies Special Legal Expert and May Shift Certain Liabilities • Role of Bond Counsel Compared to General Counsel 6

Role of Bond Counsel • Analyze Financing Purposes, Structure and Goals in Legal Context • Advise on Proceedings for Issuing Debt • Draft Legal Documents • Deliver Legal Opinions • Consult on Post-Closing Matters 7

Role of Bond Counsel − Analyzing Financing Purposes, Structure and Goals • Purposes of Financing • Structure of Financing • Defining and Reviewing Financing Goals 8

Role of Bond Counsel − Advising on Proceedings for Issuing Debt • Satisfying Statutory Requirements • Delegation Concerns • Competitive Sale or Negotiated Sale • Due Diligence Review of Issuer, Borrowing and Disclosure 9

Role of Bond Counsel − Drafting Legal Documents • Basic Borrowing Documents • Disclosure and Underwriting Documents 10

Role of Bond Counsel − Delivering Legal Opinions • Final Opinion of Bond Counsel • Disclosure and Securities Law Opinion • Supplemental Opinions and Reliance Letters 11

Role of Bond Counsel − Consult on Post-Closing Matters • Interpreting Legal Documents (in light of subsequent events) • Arbitrage Rebate Analysis • Continuing Disclosure Reports • Trustee's Inquiries 12

Roles of Other Counsel • Issuer Counsel • Disclosure Counsel • Underwriter’s Counsel 13

Role of the Financial Advisor • Develop Policies • Debt Issuance Services • Special Financing Services 14

Role of the Financial Advisor –Financial Policies • Develop Policies • Debt Management • Community Facilities District Goals and Policies • Swap/Derivative • Reserve Level 15

Role of the Financial Advisor – Debt Management Services • Establish Financing Objectives • Coordinate Procurement of Additional Vendors (e. g. , printing, consulting) • Develop Financing Schedule – Manage Finance Team Effort • Advise on Sale Method – for negotiated sales, advise on syndicate structure • Coordinate Rating Process • Review Documentation – Legal and disclosure • Provide Independent Pricing Evaluation – both competitive and negotiated sales — Benchmark results – review orders • Recommend Award of Financing • Provide Pre-closing and Closing – monitor secondary market transactions 16

Role of the Financial Advisor – Special Financing Services • Continuing Disclosure Services • May provide Arbitrage Rebate Calculation Services • Specialized Quantitative Analyses 17

Financial Reform and Financial Advisors • Dodd-Frank Wall Street Reform and Consumer Protection Act requires registration of “municipal advisor” with the Securities Exchange Commission • Municipal Advisor is a person (not a municipal entity or employee of a municipal entity) that • provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues or • Undertakes a solicitation of a municipal entity • Municipal Advisor includes financial advisors, guaranteed investment contract brokers, third -party marketers, placement agents, solicitors, finders, and swap advisors, if such persons are described (i) or (ii) above and does not include brokers, dealers, municipal securities dealers serving as underwriters, investment advisers registered under the 1940 Act, attorneys offering legal advice and engineers providing engineering advice. • MSRB has also required registration. 18

What Does Financial Reform Mean to Issuers Municipal Advisors are held to a fiduciary duty standard • Fiduciary duty: • A Fiduciary Duty is the highest standard of care at equity or law and exists when one person or entity, in a position of vulnerability, justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests. • There can not be a conflict of interest in any degree whatsoever. • Your lender (bank, underwriter, etc. ) can NOT be a fiduciary because they always have some responsibility to other parties than the issuer 19

Role of Underwriter The Underwriter handles the structuring and sale of the Issuer’s bonds to the Investors • Works with financing team to analyze and develop structure • Works with financing team to present financing alternatives and determine optimal financing structure • Participates in documentation process with team • Updates Issuer on market conditions and optimal pricing timing • Coordinates due diligence efforts for Underwriting Syndicate and Investors • Coordinates marketing effort for Issuer bonds – • Retail buyer outreach • Institutional buyer outreach 20

Role of Underwriter – During the Pricing The Underwriter handles the structuring and sale of the Issuer’s bonds to the Investors • Provides periodic update to Issuer on Market conditions • Advises on timing for pricing • Assists in providing pricing comparisons for Issuer • Presents a pre-pricing scale to Issuer for consideration • Works with financial advisor to fine tune scale and ensure it meets expectations • Opens order period for sale at agreed upon scale • Market bonds to Individual buyers (Retail Order Period) • Market bonds to Institutional buyers (Institutional Order Period) • Sell all bonds during the order period at the agreed upon prices • Price adjustments as needed and agreed upon to reflect marketing results • Underwrite or “takedown” unsold balances, as necessary 21

Role of Underwriter – Post Sale Wrap-up The Underwriter handles the structuring and sale of the Issuer’s bonds to the Investors • Allotment Process – Underwriter allocates bonds to various investors based on orders received. In a successful sales, Investors will get allotted only a percentage of bond orders placed • Issuer/client will work with financial advisor to review and approve allotment process • Underwriter must monitor and ensure the integrity of the sale process • Orders are “real” orders • Bonds are kept away from speculators • To the extent possible bonds are placed “going away” with “buy and hold” investors • Cost reconciliation process • Preparation of Post-Pricing book which provides Issuer with good summary and record of pricing and sale process 22

Definitions for the Trustee Industry • Corporate Trust: a financial and fiduciary service provided to corporate and public issuers of various types of debt instruments. • Trustee: a financial institution with trust powers as authorized by the Comptroller of the Currency. The trustee acts in a fiduciary capacity for the benefit of bondholders by enforcing the terms of the bond documents. • Trust Indenture: a contract between the issuer of the bonds and the trustee for the benefit of the bondholders. It establishes the rights, duties, responsibilities and remedies of the issuers and trustees. Additionally, it establishes the maturity date, interest rate, denominations, payment dates and other terms and conditions of the bond issue. 23

Typical Roles Offered by the Corporate Trustee • Fiscal Agent • Registrar • Paying Agent • Transfer Agent • Tender Agent • Escrow Agent • Dissemination Agent • Calculation Agent • Filing Agent 24

Duties of the Trustee • Participate in the review process of governing documents • Attends pre-closing/closing if held if person • Executes and enters into the indenture and other bond documents as applicable • Authenticates and delivers the securities • Disburses the bond proceeds • Sets up accounts/ticklers/debt service schedule and bond register • Monitors the issuer’s performance of its obligations to the bond holders • Holds title to collateral pledged to secure the bonds • Protects the bondholders legal interest, especially in the event of default • Pays Interest and Principal as Governed by the Security • Handles sinking fund redemptions including selection of bonds and notice publication 25

Check up on Your Trustee Items to keep track of • Know and check the flow of funds and other trust account activities • For variable rate debt, verify the trustee interest rate spreadsheets • Understand how and when bonds are to be redeemed • Understand your rebate requirements (what role is your trustee playing? ) • For BABs issues that receive IRS rebates, is the trustee also acting as filing agent? 26

Trustee selection Things to think about, things to ask about • General explanation of larger organization and how corporate trust fits in • Number of offices in California/number of employees in California • Client service model • Biography of the administrator • Experience with specific financing structures • Back-up support for administrator • References for administrator • Explanation of technology available to clients • Examples of trust statements 27