MUNICIPAL BONDS CREDIT ENHANCEMENT RATINGS AND INSURANCE Linda

MUNICIPAL BONDS – CREDIT ENHANCEMENT: RATINGS AND INSURANCE Linda Loup – Southwest Securities, Inc. Allen Douthitt – Bott & Douthitt, P. L. L. C. Jim Binette – Assured Guaranty Lauren Spalten & Todd Helman– Standard & Poor’s Corporation

Municipal Bonds In young districts, the initial installment (or first few installments) of bonds are usually issued as non-rated /non-insured bonds. As the assessed value in the district grows, the district’s financial health improves and other criteria are met, a district may qualify for ratings and/or insurance on subsequent bond issues (credit enhancement).

Credit Enhancement The use of the credit of an entity other than the issuer to provide additional security for the repayment of a bond. Most common types of credit enhancements available to water districts: Investment Grade Ratings Bond Insurance

Ratings Evaluations of the credit quality of bonds made by rating agencies. Intended to measure the probability of the timely payment of principal and interest on municipal securities Ratings are based on certain criteria (total AV, fund reserves, tax collection %, debt to AV ratio, etc. )

Ratings often are assigned upon issuance of the bonds, are periodically reviewed and may be amended to reflect changes in the issuer’s credit position. The ratings may derive from the credit worthiness of the issuer itself or from a credit enhancement feature of the security (i. e. the rating of the bond insurer).

Ratings Two major rating agencies for municipal bonds: Standard and Poor’s Corporation (“S&P”) Moody’s Investors Service (“Moody’s”)

Types of Ratings Investment Grade Ratings S&P Moody's Description AAA Aaa Minimal Credit Risk AA+ Aa 1 AA Aa 2 AA- Aa 3 A+ A 1 A A 2 A- A 3 BBB+ Baa 1 BBB Baa 2 BBB- Baa 3 Very Low Credit Risk Moderate Credit Risk

Credit Enhancement Purpose of credit enhancement: to reduce the interest rate on bonds. Lower interest rates mean reduced interest costs to the district. Allows district to issue all bonds necessary to reimburse the developer faster; More M&O allotment of total tax rate; May be able to reduce total tax rate sooner.

Interest Rate Comparison Water District Bond Sale Results – Week of February 19, 2013 District Waterwood MUD Harris Co. MUD No. 1 468 East Cedar Creek FWSD Fort Bend Co. LID #15 Par Amount $2, 215, 000 $4, 630, 000 $1, 435, 000 $6, 000 Insurance No Insurance Yes No Insurance Underlying Rating Non-rated BBB A Non-rated Insured Rating N/A AA N/A Sale Date 2/19/2013 2/20/2013 2/25/2013 Interest Rate 4. 112600% 3. 797000% 3. 257200% 3. 9104%

Insured vs. Non-Insured Municipal Bonds District Name Sold Rated Insured Interest Rate Harris Co. MUD #172 1/22/13 BBB+ Yes 3. 2956% Shasla PUD 1/17/13 BBB+ No 3. 6069% Interest Cost Savings Due to Bond Insurance: * Total Interest Cost – Non Insured (3. 6069%): $841, 489. 80 Total Interest Cost – Insured (3. 2956%): 764, 579. 20 Total Savings Due to Bond Insurance: $79, 910. 60 v. Calculation based on 20 year bonds and a bond par amount of $2, 000 for purposes of illustration.

Rated vs. Non-Rated Municipal Bonds District Name Sold Rated Insured Interest Rate Harris Co. ID #18 2/27/13 BBB- No 3. 5376% Waterwood MUD #1 2/19/13 No No 4. 1126% Interest Cost Savings Due to Bond Rating: * Total Interest Cost – Non Rated (4. 1126%): Total Interest Cost – Rated BBB- (3. 5376%): Total Savings Due to Rating: Less Cost of Rating: Net Savings Due to Rating: $972, 424. 38 822, 492. 00 $149, 932. 38 (9, 500. 00) $140, 432. 38 v. Calculation based on 20 year bonds and a bond par amount of $2, 000 for purposes of illustration.

Becoming Rated &/or Insured Once district meets minimum criteria for a rating and/or insurance, the financial advisor makes application to the rating agency and insurance companies on behalf of the district. General Financial Overview Preliminary Official Statement Past 3 Years Audited Financial Statements Finance Plan Budget / Bookkeeping Report

District’s Financial Strength An important criteria in the assignment of a rating and/or bond insurance is the district’s financial strength Large tax base (high assessed valuation) No developer advances Sufficient fund reserves High % of taxes collected Overall debt burden and overlapping debt %

QUESTIONS Linda Loup: lloup@swst. com 512 -320 -5859 Allen Douthitt: allen@bottdouthitt. com 512 -733 -0700 Jim Binette: jbinette@assuredguaranty. com 212 -408 -6005 Lauren Spalten: lauren_spalten@standardandpoors. com 214 -871 -1421