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									   FGFOA Conference – November 2006
Understanding Interest Rate Swaps - Outline

 Section I - General Swap Overview

                 A. Rationale for Use of Interest Rate Swaps and Discussion of Swap Termination
 Section II - Current Market Environment

                 A. Current and Historic Municipal Yield Curve Characteristics
                 B. Interest Rate History – 1990 – Current
                 C. Decreasing Forward Premiums
 Section III – Synthetic Fixed Rate Debt

                A. Variable Rate Indices
                B. Mechanics of Synthetic Fixed Rate Debt
                C. Advantages & Disadvantages of Synthetic Fixed Rate Debt
                D. Mechanics of Forward Starting Swap and Swaption
 Section IV – Synthetic Variable Rate Debt

               A. Mechanics of Synthetic Variable Rate Debt
               B. Advantages & Disadvantages of Synthetic Variable Rate Debt
 Section V – Basis Swaps Including Constant Maturity Swaps

                A. Mechanics of Basis Swaps
                B. Benefits and Considerations of Basis Swaps
                C. Tax Risk Overview and Impact of Marginal Tax Rate Change
                D. Overview and Applications of Constant Maturity Swaps
 Section VI – Current Swap Market Opportunities

                A. Opportunities with Existing Swap Positions
                B. Interest Rate Hedging Techniques
                     - BMA Cash Settled Swaps
                     - Ongoing Rate Lock
FGFOA Conference – November 2006



Understanding Interest Rate Swaps
By RBC Capital Markets


November 15, 2006

         Jeff Lindquist
            Director
        (303) 595-1205
 jeff.lindquist@rbcdain.com
Table of Contents


Section I     General Swap Overview

Section II    Current Market Environment

Section III   Synthetic Fixed Rate Debt

Section IV    Synthetic Variable Rate Debt

Section V     Basis Swaps including Constant Maturity Swaps

Section VI    Current Swap Market Opportunities




                                                              2
Section I
General Swap Overview




                        3
Rational For Swaps Done to Date

 Anticipated overall lower interest expense


 Hedge variable rate debt


 Lock in interest rate for future new money borrowing


 Lock in interest rate for future refunding issue


 Create synthetic variable rate debt


 Assume tax risk through basis swap


                                                         4
Why Consider The Use Of Financial Products

   Lower Interest Expense
      The most compelling reason of all; derivatives allow issuers to borrow at
         expected lower costs
   Derivatives Provide More Options
      Issuers can do things not generally available in the fixed-rate cash market;
         specifically the ability to efficiently lock-in today’s low interest rates for a future
         bond issuance
   Derivatives are good Asset/Liability Management Tools
      Issuers can more efficiently manage short-term assets and bring them into
         balance with balance sheet liabilities
   Derivatives Allow Easier Restructuring Opportunities
      Much more efficient market to redeem, extend or restructure debt payment
         streams
   Derivatives Provide Better Opportunities to “Monetize” market Movements
      Unlimited opportunities to capitalize on interest rate movements
   Derivatives Provide Access to a More Liquid Market
      Issuers can executive transactions much more efficiently and expeditiously in
         swap market than in traditional cash market



                                                                                                   5
Swap Summary

  The use of financial products, specifically interest rate swaps, has become an
   increasingly accepted technique
  Swaps are valuable tool that provides a means for risk management
  Interest rate swaps provide additional flexibility
  Interest rate swaps have market value which, if positive, can be extracted
                 Termination with swap provider
                 Sale to a different swap provider (subject to approval)
                 Reversal of initial swap transaction
  For the Issuer, a current starting interest rate swap may offer a lower cost of funds than
   traditional fixed rate financing particularly since the cash market is demanding callable
   premium bond structures which increase the borrowing rate
  An above-market swap rate could provide fixed payments similar to traditional fixed rate
   and an expectation of basis point benefit over time




                                                                                          6
Terminating an Interest Rate Swap


                                  The Issuer has the flexibility to terminate the
 When can the Issuer terminate     swap at any time at market value (the swap
 the swap?                         provider does not have this right unless the
                                   Issuer agrees to sell a termination option to the
                                   swap provider)
                                  The    swap agreement defines “additional
                                   termination events” (i.e., downgrades, defaults,
                                   etc.) which would allow either party to terminate
                                   the swap at market value
                                  Termination (“market”) value is essentially the
 How is the termination value      present     value    difference    between  the
 calculated?                       contractual fixed swap rate and prevailing
                                   market fixed swap rates discounted at a taxable
                                   rate for the remaining term of the swap


                                  Directly with the swap provider at the quoted
 What is the methodology for       market
 terminating the swap?
                                  Assign swap to a third party (subject to the
                                   swap provider’s credit approval)
                                  Enter into an offsetting transaction (a reversal)




                                                                                  7
Section II
Current Market Environment




                             8
Current Municipal Yield Curve
Characteristics

    Yield curves are extremely flat
    Cash Market (MMD) extremely “rich” to swap market
    67% LIBOR Swap rates are marginally lower than AAA MMD for maturities 15 years
     and longer

                                                                 Interest Rate Comparison
                                           Traditional Fixed vs. Synthetic Fixed Rates (BMA and 67% LIBOR)
                                                                         (as of 10/30/2006)



                                  5.000%

                                  4.000%

                                  3.000%

                                  2.000%

                                  1.000%

                                  0.000%
                                           1   3    5     7    9      11     13     15    17      19   21     23   25   27   29
                                 -1.000%
                                                                                     Years
                                 -2.000%
                                                                   BMA (plus 30bps of VR Costs)
                                                                   T raditional Fixed Rate (15 bps added to MMD)
                                                                   67% LIBOR (plus 30bps VR Costs)


- Rates do not include any underwriter costs or other financing costs.


                                                                                                                                  9
Municipal Yield Curve Comparison -
1 Year Ago

    Yield curves are steeper
    67% LIBOR Swap rates are significantly lower than AAA MMD for maturities 5
     years and longer

                                                             Interest Rate Comparison
                                       Traditional Fixed vs. Synthetic Fixed Rates (BMA and 67% LIBOR)
                                                                       (as of 10/26/2005)



                             6.000%

                             5.000%

                             4.000%
                             3.000%

                             2.000%

                             1.000%

                             0.000%
                                       1   3      5     7     9      11     13    15   17        19   21     23   25   27   29
                             -1.000%
                                                                                   Years
                             -2.000%
                                                                  BMA (plus 30bps of VR Costs)
                                                                  T raditional Fixed Rate (15 bps added to MMD)
                                                                  67% LIBOR (plus 30bps VR Costs)


- Rates do not include any underwriter costs or other financing costs.


                                                                                                                                 10
 Interest Rate History

 Short-term rates are rising while long-term rates remain near historically low levels

                                                                     BMA vs. 67% of LIBOR vs. Bond Buyer GO 20 Index
                                                                                  January 1990 - Present
             9.00
             8.00
             7.00
             6.00
 Rates (%)




             5.00
             4.00
             3.00
             2.00
             1.00
             0.00
                    01/04/90


                                    12/20/90


                                               12/05/91


                                                          11/19/92


                                                                       11/04/93


                                                                                  10/20/94


                                                                                             10/05/95


                                                                                                           09/19/96


                                                                                                                        09/04/97


                                                                                                                                        08/20/98


                                                                                                                                                       08/06/99


                                                                                                                                                                  07/20/00


                                                                                                                                                                             07/05/01


                                                                                                                                                                                           06/27/02


                                                                                                                                                                                                         06/12/03


                                                                                                                                                                                                                    05/27/04


                                                                                                                                                                                                                                   05/13/05


                                                                                                                                                                                                                                              04/28/06
                                                                                  BMA                                              67% of LIBOR                                          BBGO20



                                                 BMA                                                                  67 % of LIBOR                                                                   Bond Buyer GO 20
                               Index as of 10/26/06:           3.56%                                    Index as of 10/26/06:                      3.564%                               Index as of 10/26/06:                  4.300%
                               Low since 1990:            0.700%                                        Low since 1990:                      0.699%                                     Low since 1990:                   4.180%
                               High Since 1990:           7.890%                                        High Since 1990:                      6.114%                                    High Since 1990:                   7.560%
                               Average since 1990: 3.067%                                               Average since 1990: 3.019%                                                      Average since 1990: 5.563%


                                                                                                                                                                                                                                                     11
  Decreasing Forward Premiums

     The cost of entering into a forward starting swap has been trending downward
      over the last 3 years
     Extreme flattening of yield curves in recent months has placed additional
      downward pressure on forward premiums

                              BMA and 67% of LIBOR 1 Year Forward Premiums (15-Year Average Life)



                                                                                     Current BMA 1 Yr Premium = 5 bps
                       60
                                                                                     Current 67% of LIBOR 1 Yr Premium = 0 bps
                       50

                       40

                Bps 30

                       20

                       10

                        0
                        Jan-03      Jul-03     Jan-04     Jul-04   Jan-05   Jul-05     Jan-06    Jul-06

                                                        BMA                    LIBOR


Source: RBC Capital Markets. As of 10/26/06.
                                                                                                                                 12
Section III
Synthetic Fixed Rate Debt




                            13
Variable Rate Indices

 The variable rate exchanged in an interest rate swap can be based on
  different underlying indices, also known as reference rates
    The choice of index will affect the determination of the fixed interest rate
      exchanged

 The most commonly used indices for municipal interest rates swaps are
  BMA and LIBOR (as a percentage)
    BMA: The BMA Municipal Swap Index is the principal floating rate benchmark for
      municipal issuers. Since 1990, the BMA Index has been accepted as the market
      benchmark for short-term, tax-exempt rates, replacing the J.J. Kenny High-Grade
      Index.
    LIBOR (London Interbank Offered Rate): It is the rate of interest at which banks
      borrow funds from other banks, in marketable size, in the London interbank market.
      LIBOR is the most widely used short-term taxable interest rate benchmark or
      reference rate. LIBOR is quoted for many different terms, but 1 Month and 3
      Month are typically used.




                                                                                      14
Mechanics of Synthetic Fixed Rate Debt

                                                                 Fixed rate

    Synthetic fixed rate                   Issuer                                 Provider
     debt is an alternative                                     Variable Rate
     to natural fixed rate                                   (BMA or % LIBOR)
     debt:
                                           VRDB          Actual
                                                      floating rate
                                                     +Support costs


                 Mechanism:                                                Applications:

 • The issuer receives floating and pays fixed        • Manage existing variable rate exposure
   against newly issued or existing floating
   rate bonds                                         • Convert variable rate demand bonds (VRDB‟s)
                                                        to a fixed rate obligation
 • Net cost of synthetic fixed rate debt = fixed
   swap rate +/- floating rate trading spread +       • Lock-in future refunding savings
   support costs
                                                      • Achieve lower cost fixed rate debt vs. natural
                                                        fixed rate obligations
                                                      • Lock in a favorable borrowing rate for a future
                                                        new money capital financing

                                                                                                  15
Advantages & Disadvantages of Synthetic
Fixed Rate Debt

                                      Advantages of Synthetic Fixed Rate Debt
Rate                Lower rate available in the swap market than in the traditional fixed-rate bond market.
Liquidity           Very liquid market – swap can be unwound at any time based on prevailing market conditions.
Flexibility         Flexibility to remain in swap or terminate.
                                     Disadvantages of Synthetic Fixed Rate Debt
Termination Risk    Risk that a swap will be terminated before maturity due to a violation of the minimum rating
                    requirement for either party or a breach of other covenants in the swap agreement. The Issuer may
                    be required to make a cash payment to the Counterparty in the event of a termination. The Issuer
                    has the exclusive right to optionally terminate the swap.
Counterparty Risk   Risk that the Counterparty will be unable to meet its obligations resulting in swap termination.
                    Credit exposure can be limited by selecting a highly rated Counterparty and requiring
                    collateralization or termination in the event either party to the swap falls out of the „A‟ category.
Basis Risk          Potential mismatch between interest rate of variable rate bonds and variable rate received based
                    upon index due to market reasons, changes in credit quality of the Issuer or Liquidity Provider,
                    Remarketing Agent performance or interest rate levels (% of LIBOR swap).
Tax Event Risk      Risk that income tax rates decrease, resulting in higher tax-exempt variable bond rates (increase in
                    BMA). This would cause a mismatch between the higher tax-exempt variable bond rate paid and
                    the lower % of LIBOR (taxable) rate received.
Other Risks         The Issuer is subject to Liquidity Provider renewal risk or possible increased Liquidity Provider
                    costs caused by tightening credit enhancement market conditions.



                                                                                                                        16
Mechanics of Forward Starting Swap

 Forward starting swaps provide an attractive hedge to ensure protection against
  increasing costs of debt



     Today                                   Effective Date of Swap                  Maturity
    Execute Forward              2           Issue variable rate bonds,
1   Starting Swap                              and commence swap
    Agreement, interest
    rate is committed                                    Fixed rate
                                            Issuer                        Provider

                                                       Variable Rate
                          Actual floating
                          rate + Support
                               costs

                                        VRDB




     The forward starting swap locks in the fixed cost of capital until maturity at the
      current rate plus a forward starting premium
     Most issuance costs are paid at the issue date when the new bonds are issued.
     Result is a low synthetic fixed rate and substantial savings in a rising interest
      rate environment
     Forward premiums on synthetic fixed rate debt at historic lows

                                                                                                17
Mechanics of Swaption

A swaption is a contractual agreement under which the Issuer grants, in exchange for a one-time
or over a period of time, cash receipt, an option to a Counterparty that would give the Counterparty
the right, but not the obligation, to “put” the Issuer into a fixed pay interest rate swap at a
predetermined rate and for a predetermined notional amount and structure at a future date.


   At Sale of Swaption:

                                          Upfront Payment

                      Issuer                                            Provider

                                      Option to enter into Swap




                                                                                                       18
Mechanics of Swaption

   Timeline:                                     Counterparty Exercises Option
                                                 -Issuer issues variable rate refunding bonds.
                                                 -Applies bond proceeds for payment              of
                                                 redemption, premium and issuance cost.
                               Counterparty
                               has an Option     -Swap becomes effective resulting in Synthetic
   Execute an Interest Rate     to put Issuer    Fixed Rate.
Swaption. Counterparty pays   into a fixed pay
 Issuer an upfront premium.         swap.




               Today             Exercise Date                                            Bonds Mature


                                                 Counterparty Does NOT Exercise Option
                                                 -No variable rate refunding bonds are issued.

                                                 -Issuer retains full amount of upfront premium
                                                 received.

                                                 -Issuer retains the call option rights on the
                                                 bonds.




                                                                                                      19
Mechanics of Swaption

   The fixed payments based on the fixed swap rate payable to the Counterparty,
    plus ongoing support costs, are approximately the same as the payments on
    the series of Bonds being refunded
   The receipt of a floating rate from Counterparty is estimated to approximately
    offset the debt service payable on the Issuer’s variable rate refunding bonds
   If the variable rate payment under the swap is not sufficient to pay the Issuer’s
    variable rate debt service on the refunding Bonds, the Issuer is still obligated to
    make such payment with the net result being a reduction or elimination of the
    “savings” associated with the refunding

                                           Fixed (Swap) Rate Cost
                                Issuer                                     Provider
                                         Revenue = Variable Rate Receipt
                                                (% of LIBOR or BMA)
               Cost =
           Variable Rate Bond
                Payment         V.R.B.
           (including support
                  costs)




                                                                                      20
Section IV
Synthetic Variable Rate Debt




                               21
Mechanics of Synthetic Variable Rate Debt

                                                                Variable
  Synthetic variable rate                                       Rate
   debt is an alternative to                Issuer                                 Provider
   natural floating rate                                       Fixed rate
   debt:

                                          Fixed Rate
                                                         Actual Fixed
                                            Bonds         Rate Bond
                                                            Costs



                 Mechanism:                                                Applications:

 • The issuer receives fixed and pays floating       • Achieve variable rate exposure without
   against newly issued or existing fixed rate         incurring high support costs
   bonds
                                                     • Certain markets allow synthetic variable rate
 • The issuer‟s net cost is the floating rate          debt to be lower cost than traditional variable
   index +/- the difference between the fixed          rate instruments
   bond and swap rates                               • Match rate mode of assets to liabilities



                                                                                                     22
Advantages & Disadvantages of Synthetic
Variable Rate Debt

                                      Advantages of Synthetic Variable Rate Debt
No Liquidity Costs   Need for liquidity facility is eliminated
No “Put” Risk        No underlying floating rate bonds
No Remarketing       The underlying obligations are fixed rate bonds, consequently there are no ongoing remarketing
Risks                fees or exposure to remarketing agent performance
Call Provisions      Maintain ability to refinance underlying fixed rate bonds
                                     Disadvantages of Synthetic Variable Rate Debt
Counterparty Risk    Risk that the Counterparty will be unable to meet its obligations resulting in swap termination.
                     Credit exposure can be limited by selecting a highly rated Counterparty and requiring
                     collateralization or termination in the event either party to the swap falls out of the „A‟ category.
Flexibility          Less flexibility to redeem bonds prior to maturity




                                                                                                                         23
Section V
Basis Swaps Including Constant Maturity Swaps




                                                24
Mechanics of Basis Swaps


                                      Variable
                                     Rate (BMA)
                      Issuer                             Provider


                                 Variable Rate (% of
                               LIBOR) + Fixed Spread


How a Basis Swap Works – a Basis Swap is a floating-to-floating swap
Swap agreement facilitates the exchange of variable rates
     Issuer receives a variable rate based on LIBOR Index
     Issuer makes a variable rate payment to Counterparty based on the BMA Index reset
Net results:
     Introduces tax risk into swapped bonds in exchange for a fixed spread over the
       LIBOR index
     Ongoing cash flow benefits to Issuer as long as the percentage of LIBOR (plus
       spread if applicable) received is greater than BMA payment


                                                                                    25
Benefits and Considerations of Basis Swaps

 Benefits
       Ongoing positive cash flows as long as BMA obligation is less than % of LIBOR receipt
       Flexibility in structuring the swap initially and in restructuring or terminating under
        favorable market conditions
       Assuming a stable U.S. income tax structure during term of the swap, a basis swap
        should have a positive termination value as time moves along and it gets closer to final
        maturity of the underlying bonds
       Standardized documents
 Considerations
       Tax risk could result in decrease of projected savings and possible loss of all savings
           - A significant change in the relative value of tax-exempt income (realized through a
              higher relative BMA index) because of reduction in marginal tax rates or introduction
              of a consumption or flat tax system could result in significant losses to the Issuer
           - The potential loss scenarios would ultimately be determined by the timing of such
              change, the degree to which the relative value of tax-exempt income is effected and
              the overall level of short-term interest rates during the remaining term of the swap
           - The lower the level of short-term interest rates, the less potential loss under a tax-
              change scenario
       Interest rate swap market valuation
       Financial reporting and disclosure
       Ongoing management and monitoring


                                                                                                 26
 Tax Risk Overview

Tax risk is a function of the BMA/LIBOR ratio, which in turn is driven by the relationship of short term taxable and tax-
exempt rates.
If federal income tax laws are changed to lower the tax rate on interest income, the probable result will be
higher short-term, tax-exempt interest rates which would
         Narrow the relationship between tax-exempt and taxable interest rates, and
         Reduce the anticipated cash flow benefits of a basis swap
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the highest tax rate from 38.6% from
35.0%, retroactively, effective January 1, 2003. Theoretically, the current BMA/LIBOR ratio should trade near
a level of approximately 65%, (1 - 0.35)
The Advisory Panel on Federal Tax Reform delivered its report to the President on November 1, 2005. The
tax panel endorsed two reform proposals:
         Simplified Income Tax System - new streamlined tax code with maximum marginal rate of 33%-would have
          minimal impact on tax-exempt debt trading value
         Growth and Investment Tax - more along the lines of a consumption based tax with interest, dividends and capital
          gains subject to maximum rate of 15%. This would have a significant impact on tax-exempt debt trading value
An efficient market will adjust the pricing of tax-exempt investments relative to taxable investment
alternatives. In the extreme scenario, if a change in federal tax law eliminated the exclusion of interest
income, there may be no material difference between the tax-exempt and taxable markets
Ultimately, exposure to tax risk is influenced by:
         The magnitude of change in marginal tax rates
         The implementation and timing of any changes in tax law
         Overall market conditions and prevailing interest rates

                                                                                                                    27
Impact of Marginal Tax Rate Change

 Changes in marginal tax rates will have an inverse relationship with the projected
  cash flow benefits of a Basis Swap
           Projected
             Cash
             Flow
            Benefits



                       Cash Flow Benefits                        Cash Flow Benefits
                            Increase                                  Increase
                       Cash Flow Benefits                       Cash Flow Benefits
                           Decrease                                 Decrease




                             Marginal Tax Rates Decrease   Marginal Tax Rates Increase

 If federal income tax law change results in a decrease in marginal tax rates, the result is
  higher tax exempt rates (relative to taxable rates) and a corresponding increase in the
  BMA/LIBOR ratio which will cause incremental cash flow to be reduced or result in negative
  cash flow situation

 On the other hand, if federal income tax law change results in a increase in marginal tax
  rates, the result is lower tax exempt rates (relative to taxable rates) and a corresponding
  decrease to the BMA/LIBOR ratio which will increase incremental cash flow

                                                                                         28
 DISCUSSION OF CONSTANT MATURITY SWAPS
          (A Form of Basis Swap)




                                          29
Overview of Constant Maturity Swap Structure

 What is a Constant Maturity Swap transaction (“CMS”)?
    Rather than receiving a variable payment based on BMA or a percentage of a short-term
      LIBOR index, under a CMS transaction the Issuer receives a variable payment based on
      a longer tenor index; typically the then prevailing 5 or 10 year LIBOR swap rate adjusted
      quarterly. In addition, 5 or 10 year BMA swap rates may also be used
     By receiving based on a longer tenor index, an Issuer would benefit from a return to a
      steeper yield curve where long-term rates are higher than short-term rates as opposed to
      the absolute level of interest rates.
     The relatively flat yield curve in the current environment presents an opportunity for
      Issuers to consider an alternative floating index in connection with an interest rate swap.
 This alternative index can be structured to either include tax risk in which case the issuer is
  generally paying BMA or to eliminate tax risk in which case issuer pays Libor.
 Issuers also retain the right to terminate the CMS swap if the yield curve returns to a steeper
  slope. There is potential for significant termination value in such environment.
 The primary risk to issuers is a period of prolonged yield curve inversion.
 Only Issuers with the ability to sustain periods of potential negative cash flow should entertain
  a CMS transaction.


                                                                                               30
Yield Curve History
         As illustrated in the graphs below, the 29-month old Federal Reserve tightening
          policy that has resulted in 17 rate increases to date has caused the yield curve to
          flatten significantly as short-term rates have increased more than long-term rates
                                            Fed Funds Target Rate                                                                                                       USD LIBOR Swap Curves
                                              (2000 to Present)                                                                                 (During the Recent Federal Reserve Tightening Period May 2004 to Present)
7.00%


                                                                                                                   6.00%



6.00%
                                                                                                                   5.00%




5.00%                                                                                                              4.00%




                                                                                                                   3.00%                                                                                          25-Oct-06
4.00%
                                                                                                                                                                                                                  31-Jan-06

                                                                                                                   2.00%                                                                                          30-Sep-05

                                                                                                                                                                                                                  22-Mar-05
3.00%
                                                                                                                                                                                                                  16-Nov-04
                                                                                                                   1.00%
                                                                                                                                                                                                                  4-May-04


2.00%
                                                                                                                   0.00%




                                                                                                                                                                 Y



                                                                                                                                                                        Y




                                                                                                                                                                                      Y




                                                                                                                                                                                                    Y




                                                                                                                                                                                                                   Y




                                                                                                                                                                                                                                       Y
                                                                                                                     1Y

                                                                                                                           2Y

                                                                                                                                3Y

                                                                                                                                      4Y

                                                                                                                                           5Y

                                                                                                                                                6Y

                                                                                                                                                     7Y

                                                                                                                                                          8Y

                                                                                                                                                                9Y
                                                                                                                                                               10



                                                                                                                                                                      12




                                                                                                                                                                                    15




                                                                                                                                                                                                  20




                                                                                                                                                                                                                 25




                                                                                                                                                                                                                                     30
1.00%

                                                                                                                                                           Relative Curve Steepness as measured by the
                                                                                                                                                      Spread between 2-Yr and 10-Yr LIBOR Swap Rates (in bps)
                                                                                                                                     25-Oct-06            31-Jan-06         30-Sep-05     22-Mar-05     16-Nov-04         4-May-04
0.00%
                                                                                                                                           3                   10              22            85            135                238
             -00




                             -01




                                             -02




                                                             -03




                                                                             -04




                                                                                             -05




                                                                                                             -06
        0




                        1




                                        2




                                                        3




                                                                        4




                                                                                        5




                                                                                                        6
   Feb-0




                   Feb-0




                                   Feb-0




                                                   Feb-0




                                                                   Feb-0




                                                                                   Feb-0




                                                                                                   Feb-0
            Aug




                            Aug




                                            Aug




                                                            Aug




                                                                            Aug




                                                                                            Aug




                                                                                                            Aug




                                                                                                                                                                                                                                     31
Applications of CMS

   CMS applications to consider:
      An alternative “basis swap” applied to existing or new money fixed rate
       bonds with or without the assumption of tax risk. An Issuer can apply
       either a BMA vs. CMS basis swap (tax-risk and yield curve risk) or a fully
       taxable 1M LIBOR vs. CMS basis swap (just yield curve risk). In addition,
       swapping short-term BMA for long-term BMA (yield curve risk only) can
       be an appropriate alternative due to the infrequency of inversion
       between these indices.
      An overlay on an existing synthetic fixed rate obligation where the issuer
       pays fixed and currently receives BMA (no tax risk exposure) or a
       percentage of short-term LIBOR (assumption tax risk)
      An alternative receipt for proposed synthetic fixed rate obligations
   With today’s slightly negative current cash flow from the fully taxable
    CMS trade, an Issuer should consider executing it as a forward starting
    trade with an effective date 1 to 2 years forward. The cost of such a
    forward in today’s market would be very minimal.


                                                                                32
 Application to Existing or Proposed
 Fixed Rate Bonds
 Issuer pays the fixed rate on the existing or proposed bonds and enters into a CMS swap with
  RBC; essentially an alternative form of a basis swap
     Issuer receives variable interest based on a percentage of a predefined long-term LIBOR
      swap rate from RBC, and
     Issuer pays variable interest based on a short-term index (BMA or LIBOR) to RBC
 If Issuer decides to pay a percentage of a short-term LIBOR Index, the expected net benefit
  will result from the assumption of yield curve risk. If Issuer elects to pay BMA, the expected
  net benefit will result from the assumption of yield curve risk and tax risk
                              Proposed CMS Trade              Current or Proposed Bonds
                                Variable Rate Receipt -
                                  Percentage of CMS

                                                             Issuer


                                Variable Rate Payment –                   Payment of
                                BMA or LIBOR (1 month)                Fixed Rate Interest
                                                                   (Tax-exempt or Taxable)




                                                              Bonds


                                                                                             33
 Application to Existing Synthetic
 Fixed Rate Obligation
 Issuer overlays a Constant Maturity Swap transaction on an existing LIBOR fixed pay swap
    Issuer receives variable interest based on a percentage of a predefined long-term LIBOR
      swap rate from RBC, and
    Issuer pays variable interest based on a short-term index (BMA or LIBOR) to RBC
 The “net” effect of this type of transaction is that the variable rate receipt on the existing
  swap will directly offset the variable rate payment obligation on the new CMS Swap resulting
  in Issuer effectively receiving CMS to offset the underlying VRDBs
                           Proposed CMS           Current Synthetic Fixed Rate Financing
                       Variable Rate Receipt -
                         Percentage of CMS
                                                                   Fixed Rate

                                                 Issuer                            Counterparty

                      Variable Rate Payment –
                                                              Variable Rate Payment –
                      BMA or LIBOR (1 month)
                                                            BMA or LIBOR (1 or 3 month)

                                                          Variable Rate Interest

                                                 Variable
                                                  Bonds



                                                                                                  34
 Application to Create a Synthetic
 Fixed Rate Obligation
 If Issuer has existing variable rate bonds or proposed new variable bonds and
  wants to convert its variable rate exposure to a synthetic fixed rate obligation, it
  can consider percentage of long-term CMS as an alternative to BMA or a
  percentage of a short-term LIBOR index as the variable receipt under a fixed pay
  swap transaction(1)
 The expected net benefit will result from the assumption of yield curve risk
                                                        Proposed Synthetic Fixed Transaction

                                                                  Fixed Swap Rate

                                           Issuer
                                           Issuer
                                              Issuer             Variable Rate Receipt -
                                                                   Percentage of CMS
             Variable Rate Interest




                                          Variable
                                           Bonds

  (1) Issuers should consult with their legal, tax and audit professionals to determine the ability to integrate such a transaction
  for tax purposes and the potential accounting implications under existing hedge accounting practices.

                                                                                                                                      35
Section VI
Current Swap Market Opportunities




                                    36
  Opportunities with Existing Swap Positions

 For Issuers who have executed % of LIBOR trades (fixed pay swaps, swaptions or
  forward starting swaps), current market conditions create an opportunity to unwind
  the existing transaction and issue traditional fixed rate bonds with a basis swap.
  This new structure will match the existing tax risk already present in the existing %
  LIBOR trade and will provide several other potential benefits:
      Eliminates Basis Risk on underlying variable rate bonds

      Retains economic advantage of LIBOR swap: Issuer achieves virtually same cost of
       capital that was present in fixed pay LIBOR Swap

      Fixed Rate Bonds are callable: Allows for future refinancing opportunity (not present with
       synthetic fixed rate structure)

      Higher Investment Yield: Arbitrage Yield is higher which allows for greater construction
       fund earnings




                                                                                            37
Summary of New Structure Analysis

 Risks Analysis                             Current         New
                                           Structure      Structure

                                          Overall VR
                                            Paper
                                         Basis Leakage

                                          Credit Risk
           Risks in
           Structure                       Tax Risk

                                         Non-Callable    Yield Curve
                                                            Risk*
                                         Liquidity and     Tax Risk
                                         Remarketing     (BMA CMS)
                                          Yield Curve
                                                         Non-Callable
                                              Risk
                                                         Liquidity and
                                                         Remarketing
            Risks
           Mitigated                                      Credit Risk
                                                            Tax Risk
                                                         (LIBOR CMS)
                                                         Basis Leakage
                                                          Overall VR
*Assumes
                                                            Paper
           issuer enters into CMS swap


                                                                         38
 Interest Rate Hedging Techniques




                                     39
Cash Settled Swaps as Interest Rate Hedge

   Interest costs for expected future borrowings (new money or refunding) can be fully fixed,
    partially fixed, or capped prior to the completion of the bond financing



      Exposure to                                    Hedging                Long Term
      be Hedged                 Goal                Alternative             Borrowing



                                                                        Conventional Fixed
                          Remain Exposed           Do Nothing
                                                                              Rate



                                               Forward Delivery Bond-   Conventional Fixed
    Future   Bonds
                                                   Cash Market                Rate


                                                Rate Lock – Uses Cash   Conventional Fixed
                                                  Market MMD Index            Rate
                         Lock in today’s low
                         rates, plus forward
                              premium          Cash Settled Swap-Uses   Conventional Fixed
                                                 BMA swap mkt fwd             Rate
                                                        curve

                                               Forward Starting Swap-
                                               Uses BMA swap mkt fwd    Synthetic Fixed Rate
                                                       curve




                                                                                               40
BMA Cash Settled Swap - Mechanics
      Execute Forward Starting
      Swap Agreement
 1                                       2
                                                    Issuer can cash settle the swap anytime
                                                    during the forward period


                                             Issue fixed rate bonds and
                                     3       cash settle the swap                                                                      Maturity
        12/1/06                              12/1/07
                                                Fixed (Swap) Rate
                                Issuer                                    Provider
                        -

                     BMA                             BMA                                      Swap is Cash Settled, Fixed Rate Bonds are Issued
                    Variable
                     Rate

                                                           Bonds
                               V.R.B. Actual Variable Ratecosts
                                       Interest + Support



Upon settlement, one of the following scenarios would occur:
 Outcome 1: Swap market rates are higher than the hedged rate
   Counterparty makes a termination payment to the Issuer
   The termination payment is used to reduce the size of the bond issue
   The resulting debt service on the smaller issue at higher rates equals the debt service on the original bond issue at the
     hedged rate

 Outcome 2: Swap market rates are lower than the hedged rate
   The Issuer makes a termination payment to the Counterparty
   The termination payment is funded from bond proceeds, thus increasing the bond issue size
   The resulting debt service on the larger bond issue at lower rates equals the debt service on the original bond issue at the
     hedged rate

                                                                                                                                                  41
Strategy for an Ongoing Rate Lock (“ORL”)

 Issuer executes one rate lock today used as needed over the course of the 10 year program
     If current market rates at time of borrowing are higher than ORL, use portion of ORL for borrowing
     If current market rates at time of borrowing are lower than ORL, issue bonds as traditional fixed rate in current
        market



                                 10 Year Rate Lock Period




                                                                         Use Ongoing Rate
                        Cash Flow Benefits
                                                                              Lock
 Rate Established            Increase
 by Ongoing Rate
      Lock                  Borrow in Tax-
                               Exempt
                               Market




                            Rates Lower than ORL                Rates Higher than ORL


                                                                                                                  42
Ongoing Rate Lock Mechanics

   Timeline:
                                                                                       Rates Higher
                                            The Borrowing            Issuer issues variable rate bonds for capital project
                                            date may occur           or refunding purpose. Pays Synthetic Fixed Rate
                                            multiple times           established through ORL and receives 68%
                                             during the 10           LIBOR or;
     Execute an Ongoing Rate Lock.          year period for          Terminate rate lock; execute new interest rate
      Rate established for 10 Year          new money or             swap
                 Period                        refunding             or;
                                               purposes              Terminate rate lock; receive termination payment;
                                                                     issue tradition fixed rate bonds


                       Today                        Borrowing Date                                       Maturity

               Estimated ORL (1)
                                                                                      Rates Lower
        4.45% plus 30 bps estimated                                  Leave rate lock in place and use conventional
       liquidity and remarketing for                                 cash market to issue bonds
            variable rate bonds                                      Save rate lock for higher interest rate
                                                                     environment for future borrowing
(1) Indicative level. Subject to final structure, credit and
market conditions. Actual results will vary. Payments
for 68% LIBOR.

                                                                                                                      43
Swap Mechanics for Rate Lock

                    Synthetic fixed rate debt is an alternative to natural fixed rate debt


      Structure                     Issuer                       Fixed rate
                                                                                      RBC
                                                               Floating Rate
                                            Variable rate


                                                  Actual floating rate
                                    VRDB           +Support costs



  Mechanism                                                         Advantages
   The issuer receives floating and pays fixed against              Liquid Market with many billions outstanding
    floating rate bonds with the expectation that                    Lowest interest rate cost of all markets
    floating rate receipts under swap agreement will                 Easy, quick market access for issuers
    offset floating rate obligations to VRDBs holders
                                                                     Highly efficient market to lock-in “forwards”
   Net cost of synthetic fixed rate debt = fixed swap
                                                                     Lowest “bid-ask” spreads
    rate +/- floating rate trading spread + support
    costs                                                            Easy to restructure debt service payment schedule
                                                                     Opportunity to “monetize” gains due to interest rate
                                                                      fluctuations
                                                                     Lower issuance costs than fixed-rate market



                                                                                                                          44
Pricing Components for ORL


                                                                                        10 Year Forward
Hedge Structure              Forward Period               Base Pricing Rate                 Premium               ORL Hedge Rate
                                                                                                                     (1)



68% LIBOR Fixed
                                    10 Years                        4.05%                    40 bps                       4.45%
   Pay Hedge




                                   Applications of Ongoing Rate Lock
                                    Funding New Money Needs
                                    Locking in Potential Refunding Savings



 (1) Pricing as of August 2, 2006. Pricing assumes average life of 12 years equating to 20 year level debt service at time of
 borrowing(s). Estimated liquidity and remarketing costs of 30bps not included in ORL Hedge Rate




                                                                                                                                  45
ORL Considerations

Benefits, Risks and Considerations


   Benefits
      Lock in current interest rates
      Flexibility maintained – no limitations on future bonds
      Straight forward derivative transaction with no bond issuance required at trade execution
      Minimal transaction costs at the time of the trade execution
   Risks
      Basis Risk
      Tax Risk (decrease in marginal tax rate and tax law change)
      Counterparty Risk
      Insurer Risk
      Market Access risk
   Considerations
      Possible early termination (could result in cost or benefit to Issuer)
      Interest rate swap market valuation
      Financial reporting and disclosure
      Ongoing management and monitoring


                                                                                               46
ORL Considerations (Continued)

   By entering into a rate lock agreement, Issuer has, effectively, reached the following
   conclusions:


  Additional underlying variable rate debt is acceptable
  Risks associated with variable rate debt are manageable
          Liquidity rollover, availability and cost
          Remarketing
          Basis/Tax risk
          Use of finite bank capacity
          Choice of structure (VRDB or Auction Rate)
  Ongoing synthetic fixed rate debt is acceptable




                                                                                        47
Disclaimer

The foregoing presentation must be read together with the oral presentation that accompanied it. The presentation is a preliminary discussion of a potential
transaction and is subject to the following limitations:


Sources of Information: This presentation is based on information we received from you and/or public or other sources that we believe are reliable. We have
not tried, however, to verify the information independently and so do not guarantee its accuracy or completeness. We have not tried to set forth a complete
analysis of every material fact.


Projections and Estimates: All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are
noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend upon events outside of your or our
control. Changes in assumptions may have a material impact on results. Estimates and projections represent our judgment as of this date and are subject to
change without notice. There can be no assurance that estimated returns and results will not be materially different in the context of an actual transaction over
time. Past performance does not necessarily reflect and is not a guarantee of future results.


Terms of Hypothetical Transaction: The terms, structures and prices shown in this presentation are indicative only and do not represent an offer to engage in
a transaction. Prior to any transaction, (a) we and RBC will conduct internal approval processes, and (b) you should satisfy yourselves that you have done a
thorough investigation and received all the information you require to make an independent decision. Should you decide to enter into a transaction of the kind
presented here, the final terms would be set forth in legal documentation and the terms, pricing and structure would be determined based on prevailing conditions
at the time.


Role of RBC Capital Markets: RBC Capital Markets is a trade name used by affiliates of Royal Bank of Canada (“Royal Bank”), including RBC Capital Markets
Corporation and the fixed income businesses of RBC Dain Rauscher Inc. in the U.S. (members NYSE – SIPC), RBC Dominion Securities Inc. in Canada
(member CIPF), and Royal Bank of Canada (Europe) Ltd.. RBC Capital Markets is not a financial advisor or fiduciary to you with respect to any derivative
transaction in which Royal Bank is or may be the counterparty. Thus, RBC Capital Markets will not provide advice, and you may not rely on RBC Capital Markets
for advice, as to the economic risks and merits of the transaction, its suitability, or the legal, tax, regulatory or accounting considerations. You should consult your
own advisors, including your tax or accounting advisors as to requirements under GASB and FASB 133, and without relying on us you should be sure that the
appropriate senior authorities in your organization have a sufficient understanding of the risks associated with any tax or accounting requirements. We and you
each will be free to disclose any information concerning the tax treatment of the transaction, except where securities laws require otherwise.

General Disclaimer: RBC Capital Markets disclaims all liability relating to the information contained in this presentation. Opinions expressed in the presentation
are current opinions only and subject to change without notice.




                                                                                                                                                                     48

								
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