The Stifel Nicolaus GOAL Program

Government
OPEB
Asset &
Liability Program

David W. Noack
Senior Vice President
414-270-0190
 Stifel’s GOAL Program Overview
¾ Maximum initial funding amount equals the actuarial determined OPEB liability

¾ OPEB Trust established by the Municipal Entity

¾ Trust Note borrowing backed by a Moral Obligation Agreement of the Municipal Entity

9 Should the value of the investment decrease to trigger points, the Municipal Entity has a Moral
Obligation to contribute additional funds to the Trust

9 Trust Notes are purchased by a Bank

9 Bank receives assignment of CDO Investment as collateral

¾ CDO Investment funded with Trust Note proceeds and contribution of the Municipal Entity (6%-8%)

9 Municipal Entity contribution can be funded either through existing Municipal Entity funds or through

a short-term note issuance

9 Initial Collateralization of 106%-108%; cash surplus generated by Trust will increase the value of
the over-collateralization

9 If Trust value, CDO Investment plus cash surplus, is less than 101% times the amount of Trust
Note outstanding, the Municipal Entity will be asked to contribute additional funds to raise the value
of the trust above this point

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CONFIDENTIAL – Proprietary Information
 Stifel’s GOAL Program - The CDO Investment
¾ Trust invests the Note proceeds and Municipal Entity contribution in synthetic
collateralized debt obligations

9 Pool of 105 companies with sector and geographical diversification (55% United States; 45%
international)
Capital Structure Default Risk Return (1)
9 Average exposure to each company < 1%
LOW
AAA Notes LIBOR + 90
9 Average credit rating of CDO = BBB+ category (investment grade)
AA Notes LIBOR + 120

AA- Notes LIBOR + 150

¾ The Trust invests in the “AA-” tranche of the CDO A Notes LIBOR + 180

9 Maturity of CDO is set to match maturity of the Trust Notes A- Notes LIBOR + 200

9 5 – 10 year maturity is typical (depending on market conditions) BBB Notes LIBOR + 225
HIGH
9 Can also employ mix of AA and AAA

¾ Stifel Nicolaus requires additional “credit protection” to the “AA-” tranche of the CDO

9 An active manager is instituted to monitor the CDO performance daily

9 If individual corporate credits within the CDO under-perform or are placed on Credit Watch, the
manager may remove the Municipal Entity’s exposure to them within the tranche
1) Preliminary and subject to change based on market conditions and other factors at time of pricing

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CONFIDENTIAL – Proprietary Information
Stifel’s GOAL Program - Example CDO Rating Criteria
4.50%

Example Standard & Poor's (AA-) CDO Attachment Point = 3.95%

4.00%

¾ Example CDO Investment: HIGH

How does Standard
3.50% & Poor's assign a AA-
9 AA- rating by Standard & Poor’s rating?
3.00%
9 All investment-grade companies
2.50% DEFAULT RATES
9 Industry Sector Diversification
2.00%
9 Geographical Diversification

9 Investment Grade Portfolio with 1.50%

LOW

average S&P Rating of BBB+ 1.00%

Historical 7-Year Rolling Average Corporate Default Rate = 1.06%

0.50%

0.00%

¾ Historical 7-Year Rolling Average Corporate Default Rate: 1.06%

9 Assumes 40% recovery rate on defaults

¾ Example Standard & Poor’s (AA-) CDO Attachment Point: 3.95%

9 AA- class of notes begins to lose principal

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CONFIDENTIAL – Proprietary Information
 Stifel’s GOAL Program - Synthetic CDO Flowchart

CDO Notes /
Credit Tranches

Originator Pays AAA

Credit Default Premium to SPV SPV
Swaps (CDS) AA
(CDO Issuer) OPEB
SPV issues Notes Receives "AA" Note TRUST
Contracts issued by Originator Receives A
CDO Originator * Reference with varying credit Issued by SPV
Credit Default
(Financial Institution) Pool ratings due to default Equity (Receives premium
Protection every 3 months)
of Assets * protection.

A Credit Default Swap is

a mechanism to gain
exposure to a corporate The CDS contracts
entity's debt without provide exposure to
corporate debt Purchase "AA" Note.
actual cash buying of
Trust proceeds held as Collateral
the corporate bonds.
COLLATERAL
Underlying Assets Funds are placed in Trust and
9 Investment Grade Corporate Debt invested in 'Aaa' securities.
9Geographical Diversification Funds remain in this Trust
9Industry Diversification until maturity unless they are
9100+ Companies drawn upon in the case of
defaults within the AA Tranche.

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CONFIDENTIAL – Proprietary Information
Stifel’s GOAL Program - Risk Factors
The risk factors below are selective and do not suppose to be a complete outline of the possible risk of the transaction.
¾ Liquidity Risk
9 The investment in this transaction is not required to be registered with the U.S. Securities and Exchange
Commission under the Securities Act of 1933, as amended (the “1933 Act”), or any State Securities Law.
9 The investment may not be offered, sold or transferred in the absence of an effective registration
statement or an applicable exception.
9 There are no assurances that a secondary market exists for the investment.

¾ Nature of the Unfunded Liability

9 There may be future state or federal legislation that significantly changes the amount of the liability.
9 A law that removes the OPEB liability from the Municipal Entity’s balance sheet may require the
liquidation of the transaction.

¾ Asset Valuation
9 The value of any investment in this transaction will change continuously during the term due to market
conditions.

¾ Credit Risk
9 The investment involved in this transaction could experience a loss due to future defaults.
9 Investors are urged to consider the suitability of the investments and associated risks.

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CONFIDENTIAL – Proprietary Information
Wall Street’s Approach

What happens if Investment Return is less than Cost of Borrowing of 6% ?

Municipality is required to make OPEB expenditures AND pay debt service !
9 This Wall Street program
$30
assumes that the Municipal
Entity borrows at 6% and
Invest Borrowed Funds in
$25 portfolio comprised of 70/30 invests in the equities market
Stocks/Bonds
with an expected return of 8%
Millions

Earnings on Portfolio used

for "pay as you go" OPEB
$20
expenditures
9 This spread of 2% comes with
Anticipated Return 8% substantial risk to the issuer
$15

9 What happens if the stock

$10 market returns less than 6%?
Borrow Funds for 20-year period at
taxable interest rates

Anticipated Rate 6%
$5
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026

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CONFIDENTIAL – Proprietary Information
OPEB Accounting Summary
¾ Governments are required to expense an amount equal to the Annual OPEB Cost (derived from
Annual Required Contribution or “ARC”)
– ARC is the sum of;

¾ Normal Cost: represents the portion of the present value of future benefits recognized in the current year, and

¾ Amortization for the current year of the Unfunded Actuarial Accrued Liability (UAAL): represents the portion of
the actuarial present value allocated to prior years of employment (amortized over 30 years)
¾ The ARC is an amount that is actuarially determined in accordance with the requirements of Statements 43 and 45 so that, if paid on an
ongoing basis, it would be expected to provide sufficient resources to fund both the normal costs for each year and the amortized unfunded
liability

¾ In the Financial Statements that use accrual accounting a government is not required to place
an initial liability on the Balance Sheet when this GASB standard is first implemented

¾ Difference between Annual OPEB Cost and Actual OPEB Contributions creates a Financial
Statement Liability (Net OPEB Obligation)
– Annual OPEB Cost – derived from the ARC with required adjustments in some circumstances and is the amount
recognized as OPEB expense for the period in financial statements prepared on the accrual basis of accounting,
regardless of the amount paid

– Actual OPEB Contributions – typically the pay-as-you-go expense

– Each year the Annual OPEB Cost is greater than the Actual OPEB Contribution this will result in an
increase to the Net OPEB Obligation on the balance sheet.

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CONFIDENTIAL – Proprietary Information
OPEB Accounting Summary
¾ Example:

– Present Value of OPEB Liability ; $100 Million

– Annual OPEB Cost (derived from ARC); $7 million

– Pay-as-you-go (Actual OPEB contribution); $4 million

¾ First Year Liability on the Balance Sheet = $3 million (Net OPEB Obligation)

$10,000,000

$9,000,000

$8,000,000

$7,000,000

$6,000,000 Stifel’s OPEB liability

program is designed to
$5,000,000 mitigate this difference

$4,000,000
Actual OPEB Contribution (Pay-As-You-Go): $4 million
$3,000,000

$2,000,000

$1,000,000

$0

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CONFIDENTIAL – Proprietary Information