Financial guarantors fall out: Losing the AAA ratings

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Bondholders Perspective
www.wellscap.com
Wisconsin Health and Educational Facilities
Authority Workshop 3/10/08 Bruce Johns
2
Agenda

• Wells Capital Management, Inc.
• Bondholders perspective and what bondholders
  want
• Monoline insurance update
• Credit information
• Security, covenants continuing disclosure
• Market update
• Conclusion

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Wells Capital Management, Inc

• Wells Capital Management, Inc Assets under
  management
• AUM as of 12/31/07 220 BB
• AUM Funds 156BB Private A/Cs 64BB
• Equity 17.5 BB Funds
• Money Market 106BB Funds
• Fixed Income 42 BB Total
• Muni Assets 5.6BB Total
• Muni team 6 Portfolio Managers 6 Research
  Analysts

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Bondholders Perspective

• Unprecedented liquidity/credit crunch hits the
  muni markets. Wisconsin State 7-day ARCS Pension
  Bonds Auction reset 15.
• Spreads started to widen 7/31/07. Spreads widen
  by 40 bps.
• Spreads now have widen another 100 bps (2/08).
• Absolute cost of capital is marginally higher and
  is increasing.
• Financial guarantors fall out Losing the AAA
  ratings. Insurance or no insurance?
• We have always looked at underlying credits, but
  now more in-depth. All investors are forced to
  look to the underlying credits.
• Rated verses non rated? How many ratings?
  Internal credit ratings verses the agencies
  ratings.
• Bondholders are looking more in-depth into
  credits. Differentiation of credits within a
  ratings spectrum will effect spreads on your
  deal.

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What do bondholders want?

• Popular belief. Not really.
• Tell your story Positives, negatives,
  operations, changes in the marketplace and how
  you have adapted.
• Project funds uses How the project will change
  your business. Have risks to the project been
  mitigated.
• Proper security covenants for your credit
  profile risk.
• Disclosure requirements changing from NRMSIRs to
  EMMA for the future.
• Bondholders want certainty, but we are in
  uncertain times.
• Muni auction rate debt failing (Max Rates
  12-25), subprime housing market fallout, CDOs,
  TIF, declining state GO revenue, possible CMS
  cuts, a slowing economy, bond insurer turbulence,
  large 1BB accounts unwinding and the lack of
  bank liquidity.
• Reduce the risks that can be controlled.

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Monoline Insurers as of 2/25/08

• Moodys SP Fitch
• Ambac Aaa Review Downgrade(1/16) AAA Affirmed
  Watch Neg(2/25) AA DowngradeWatch Neg(1/18)
• Assured Aaa Stable AAA Stable AAA Stable
• CIFG Aaa Review Negative(2/22) AAA Affirmed
  Negative(2/25) AAA Watch Neg(2/5)
• FGIC A3 Review Down/Neg(2/14) A Watch
  Dev(2/25) AA Watch Neg(1/30)
• FSA Aaa Stable AAA Stable AAA Stable
• MBIA Aaa Review Downgrade(2/26) AAA Watch
  Neg(2/25) AAA Watch Neg(2/05)
• SCA/XLCA A3 Negative(2/07) A- Watch Neg(2/25) A
  Watch Neg(1/24)

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Traditional Buyers and Non-traditional Buyers

• Traditional buyers muni funds, insurance
  companies, private individuals, private managed
  accounts corporate accounts.
• Newer buyers arbitrage buyers, hedge funds,
  foreign accounts, TOB structures, and CDOs, YES
  CDOs.
• Some non traditional buyers are exiting the
  market - TOBs, MUNI- hedge funds forced to
  unwind. CDOs not placed and the debt is looking
  for a home.
• Some non traditional buyers are entering the
  marketplace. corporate accounts buying, taxable
  hedge funds with auction crossover purchases.
• Competition is increasing and decreasing with
  some investors increasing exposures some
  investors decreasing exposures.
• The future. Who knows?

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Hospital Credits

• History/Mission You have to know where you have
  been to know where you are going. Target missions
  and markets.
• Future/Demand Demographic changes, competition
  changes, business changes. Market share,
  utilization trends, physicians trends, position
  in the marketplace with new competition.
• Finances Balance sheet trends, operating trends,
  cash flow trends, capex trends, M D As.
• Project costs, GMPs, contingencies, payment
  performance bonds, liquidated damages clauses and
  flexibility. Try to mitigate as much risk as
  possible out of the project and the transaction.
• Tell your story. Hospital credits are story
  credits.
• Tell your successes Past, future business plans
  and goals along with budgets.
• Tell your failures How you addressed them and
  fixed the problems. Future challenges.
• Make sure you are benchmarked with the proper
  collateral and covenants for your equivalent
  rating and risk.
• Address continuing disclosure issues.

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Long Term Care

• History/Mission Description of the past, target
  market, description PPE, past business model.
• Future/Demand Demographic changes, Future
  changes in the business plan (Type A,B,C,
  Rental), You compared to your competitors, wait
  lists, presale velocity, quality of presales,
  deposit size (Skin in the game)
• Finances Balance sheet trends, operating trends,
  cash flow trends, capex trends, M D As
  turnover trends.
• Projected financials with the project, Project
  costs with GMPs, payment performance bonds,
  liquidated damages clause. Capitalized interest
  time frame contingencies.
• Managements adaptability to changes in plans and
  marketing strategy.
• Tell your story, successes, failures. LTCs are
  story credits.
• Make sure you are benchmarked with the proper
  collateral and covenants for your equivalent
  rating and risk.
• Address continuing disclosure issues.

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Security Covenants

• Security
• Mortgage pledge on all obligated group assets. NO
  springing mortgages.
• Gross revenue pledge of the obligated group with
  a UCC perfected lien.
• Debt service reserve funds. NO springing
  reserves.
• Covenants
• Rate Covenant 1.10x or 1.20x? Failure to maintain
  a DSCR for any fiscal year of at least 1.00x
  shall constitute an Event of Default.
• Liquidity tests Days Cash on Hand gtX day.
• Addl debt test Historic tests and proforma.
• Negative covenants Liens on assets, withdrawal
  from the OG, Substitution of notes and MTIs
  without bondholders consent. Disposition of
  assets maximums.

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Continuing Disclosure/Negative Attributes

• Continuing Disclosure
• Quarterly reporting to the NRMSIRs Bondholders
  directly (45 days). Annual audit (120 Days).
• Old disclosure NRMSIRs verses new disclosure.
  EMMA is coming and it is ran by the SEC.
• Should include Financials, utilization data,
  MDAs, relevant appendix A statistics from the
  OS. payor mix, physicians, market share. Also
  construction monitor updates and presale
  marketing data with occupancy data.
• Talking to investors verbally- Hold conference
  calls.
• Slow turnaround verses a quick turnaround could
  hurt your bonds pricing and your bondholders.
• Your bond prices everyday and NO information is
  uncertainty which could hurt your bonds price.
• Negative Attributes
• Purchase in lieu of redemption
• Amendments to documents without bondholders
  consent.
• Changes in control of a borrower without
  bondholders consent.

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Market Update

• Spreads are widening, but absolute rates are
  drifting up marginally.
• Investors are demanding tighter covenants,
  collateral, legal language changes and additional
  information.
• Return to traditional investors.
• Some deals are not getting done.
• General view is that there is an uneasiness or
  uncertainty about the marketplace.
• Credit spreads are becoming more important and
  differentiation of credits within a rating
  category matters.

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Credit spreads over MMD
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Senior Living Interest Rate Ranges Tax-Exempt
Revenue Bonds (October 26, 2007)

• Non-state specific
• Long-term (25-30 Yr), fixed rate
• The range is usually 1.25 to 1.75 for existing
  projects
• Represents an upfront insurance premium of 200
  basis points for a BBB quality credit
• SOURCE Research from the Senior Living Team of
  Ziegler Capital Markets

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Senior Living Interest Rate Ranges Tax-Exempt
Revenue Bonds (February 8, 2007)

• Non-state specific
• Long-term (25-30 Yr), fixed rate
• The range is usually 1.25 to 1.75 for existing
  projects
• Represents an upfront insurance premium of 200
  basis points for a BBB quality credit
• SOURCE Research from the Senior Living Team of
  Ziegler Capital Markets

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Absolute rates verse credit spreads

• 
  10/07 2/08
• BBB Rated 88/103 160/180
• All in 5.2/5.35 5.9/6.1
• A Rated 78/88 110/125
• All In 5.1/ 5.2 5.4/5.55
• Unrated CCRC Stable 138/158 195/220
• All in 5.7/5.9 6.25/6.5

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Conclusion

• Cost of capital is increasing in credit spreads
  while absolute spreads are rising more modestly.
• Differentiation in credit is becoming more
  important in credit spreads.
• Tell your story now and in the future with
  disclosure requirements.
• Make sure you have the proper security and
  covenants in your deal.
• More timely information, discussions with
  bondholders via conference calls will help your
  deal.
• Address potential project problems and reduce
  risks with contracts Risk reductions add to
  bondholder confidences.
• The best packaged deals will get the best rates.

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National Federation Municipal Analyst

• Website www.nfma.org
• Recommended Term Sheet and Legal Provisions for
  Hospitals
• Recommended Best Practices in Disclosure for
  Hospital Debt Transactions 
• Recommended Best Practices in Disclosure for Long
  Term/Senior Living
• Recommended Best Practices in Disclosure
  for Private Colleges and University Transactions
• Call current bondholder

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Bondholders Perspective
www.wellscap.com
Wisconsin Health and Educational Facilities
Authority Workshop 3/10/08 Bruce Johns