Municipal Market Update May 19, 2015 Julie Santamaria Director RBC Capital Markets St. Petersburg, Florida 727-895-8871 [email protected] Jim

Municipal Market Update

May 19, 2015

Julie SantamariaDirectorRBC Capital MarketsSt. Petersburg, [email protected]

Jim KellyDirectorRBC Capital MarketsChicago, [email protected]

RBC Capital Markets2

Table of Contents

1. Market Conditions

2. Pension Funding

3. Green Bonds

Market Conditions

SECTION 1


1.000%

2.000%

3.000%

4.000%

5.000%

6.000%

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

10 Yr 20 Yr 30 Yr

Current Municipal Market Conditions: AAA MMD

AAA MMD January 1, 2007 to Present Shift in AAA MMD Since May 2014

Source: TM3, Thomson Reuters. 10, 20, and 30 year “AAA” MMD shown to represent different average lives of municipal transactions. Rates as of May 8, 2015

1.500%

2.000%

2.500%

3.000%

3.500%

4.000%

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

January 1, 2007 to Present

Maximum

Minimum

Current

Shift in 30-year "AAA" MMD

2008 2009 2010 2011 2012 2013 2014

0.790% -0.900% 0.520% -1.130% -0.740% 1.330% -1.340%

30 Year

5.940%

2.470%

3.130%

10 Year

4.860%

1.470%

2.180%

20 Year

5.740%

2.100%

2.940%

May 1, 2014 to Present10 Year 20 Year 30 Year

Maximum 2.380% 3.180% 3.440%

Minimum 1.720% 2.350% 2.500%

Average 2.104% 2.811% 3.038%


Yield Curve Comparisons

AAA MMD Yield Curve

Source: Municipal Market Data

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Year

05/06/2015 05/06/2014

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Year

05/06/2015 05/06/2014

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Year

05/06/2015 05/06/2014

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 15 yr 20 yr 30 yr

05/06/2015 05/06/2014

Treasury Yield Curve


Comparison of AAA MMD

Source: Thomson Municipal Market Data

2014 & 2015 Comparison Historical Ten Year Comparison

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

5 10 15 20 25 30

%

Min 05/08/2015 Max

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

5 10 15 20 25 30

%

Min

05/08/2015

Max

Current 2014 & 2015 10 Year

05/08/2015 Min Max Min Max

5 1.37 0.94 1.34 0.62 3.97

10 2.18 1.72 2.79 1.47 4.86

15 2.70 2.12 3.50 1.80 5.47

20 2.94 2.35 3.89 2.10 5.74

25 3.08 2.45 4.11 2.42 5.88

30 3.13 2.50 4.20 2.47 5.94


2015 Market Dynamics

Municipal market supply is extremely high, driven primarily by refundings

$9 – 10 billion pricing weekly, supply up 81% year over year

Dramatically increased number of financings has affected market rather than large issuers from CA, NY and TX

Fixed number of investors cannot absorb weekly volume

Each deal must be approved individually

Difficult for small-to-medium sized transactions to get investor’s attention

Credit spread has widened over past several weeks

Muni Bonds: 2015 Issuance versus Redemptions

$0

$10

$20

$30

$40

$50

Par

Am

ount

($B

N)

Actual Supply RBC Forecast Supply Redemptions

2013 – 2015 Municipal Weekly Volume

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jan

-13

Feb

-13

Mar

-13

Ap

r-13

May

-13

Jun

-13

Au

g-13

Se

p-13

Oct

-13

Nov

-13

Dec

-13

Jan

-14

Mar

-14

Ap

r-14

May

-14

Jun

-14

Jul-1

4

Au

g-14

Se

p-14

Oct

-14

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-15

$ m

illio

ns

Competitive

Negotiated

Average

Source: Bloomberg, Lipper and Thomson Municipal Market Data


2.30%

2.40%

2.50%

2.60%

2.70%

2.80%

2.90%

3.00%

3.10%

3.20%

09/02/14 10/02/14 11/02/14 12/02/14 01/02/15 02/02/15 03/02/15 04/02/15

20-Year MMD

0.90%

1.00%

1.10%

1.20%

1.30%

1.40%

1.50%

09/02/14 10/02/14 11/02/14 12/02/14 01/02/15 02/02/15 03/02/15 04/02/15

5-Year MMD

Number of factors have increased volatility:

- Consolidation has reduced number of active broker/dealers

- Regulatory changes have reduced liquidity from remaining dealers

- Many typical new issue market participants do not have capital to deploy in primary or secondary market

- Market indexes are not well geared to gauge/consider current market liquidity level and investor sentiment

- Periods of heavy supply create greater investor leverage in pricing

Significant credit spread shifts in addition to movement in MMD

However, credit spreads are tight compared to 5-year history

-6 bps

+9 bps

-17 bps +16 bps

-28 bps

-20 bps

+47 bps

+17 bps

+5 bps

-33 bps

+15 bps

-50 bps

+38 bps

-14 bps -21 bps

+12 bps+50 bps

-12 bps

Movement in 5 and 20-Year AAA MMD

Assessment of Secondary Market Liquidity is an Increasing Investor Focus

Source: Bloomberg, Lipper and Thomson Municipal Market Data

Credit Spreads Remain Tight

0

50

100

150

200

250

Ap

r-10

Ap

r-11

Ap

r-12

Ap

r-13

Ap

r-14

Ap

r-15

Bas

is P

oint

Spr

ead

to A

AA

MM

D

AA Spread

A Spread

BBB Spread


Municipal Market Fund Flows

Until Fund Flows stabilize, trading in municipal market will remain volatile

According to data from Lipper, for week ended May 8, 2015, weekly municipal bond funds reported $211 million in outflows, down from previous week’s $481 million of inflows

Long-term muni bond funds also saw outflows, losing $396 million in latest week, after experiencing inflows of $305 million in previous week

Four week moving average is currently $80 million, down from last week’s number of $124 million

Period ended May 6, 2015

Lipper Municipal Fund Flows

($5,000)

($4,000)

($3,000)

($2,000)

($1,000)

$0

$1,000

$2,000

Dec-10 Mar-11 Jul-11 Oct-11 Feb-12 May-12 Aug-12 Dec-12 Mar-13 Jul-13 Oct-13 Feb-14 May-14 Sep-14 Dec-14 Apr-15

Fun

d F

low

($

mill

ions

)

Flow Change

4-Wk Moving Avg

($5,000)

($4,000)

($3,000)

($2,000)

($1,000)

$0

$1,000

$2,000

4/1 4/8 4/15 4/22 4/29 5/6


Current Investor Preferences

Insurance companies and bank portfolios have been primary drivers of demand in 15-30 year range

In many instances, banks and insurers have been willing to purchase sub-5% coupons, reducing an issuer’s true interest cost

Bond funds remain somewhat active throughout yield curve

Professional retail investors have been reaching further out on yield curve, buying out to 15 years

Term / Maturity (Year)1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Money Market Funds

Corporate Cash Managers

Short-Duration Bond Funds

Municipalities

Professional Retail

Individual Retail

Intermediate Bond Funds

Bank Trust Departments

Insurance Companies

Long-Term Bond Funds

Relative-Value Buyers

Bank PortfoliosTarget high quality GO or essential service credits. Sweet spot is 20-30 years. Can buy sub-5% coupons depending on portfolio needs and credit quality.

Buyer Category Commentary

Active 13 months and in. Main buyers of sealed-bid maturities.

Target is 2 years and in; sometimes out to 5 years. Need high-quality paper with higher yield than agency debt.

Target 15-20 years. Can buy 4% or 5% coupons. Most focused on yield and retail arbitrage opportunities.

Target out to 8-10 years, where bonds are typically non-callable. Prefer par-ish bonds.

12 to 25 years; Are more dollar price sensitive than bond funds. Often will accept 4-handle coupons.

Max yield buyers, focusing on 20-30+ years. More focused on liquidity and deal size than short/intermediate funds. Minimum 5% coupon.

Inside of 5 years. Need high quality credits. Can buy 2-5% coupons depending on maturity.

Target 2-15 years. Need the income and coupon protection of a 5% structure.

Out to 15 years and select maturities in 20, 25, & 30 years. Not sizable on their own but will accept lower coupons.

Target 5-20 years. Often need 5% coupons. Can play in middle-market deals when new-issue volume is light.

Target is 5 years and in. Can buy 3-5% coupons. Are less constrained by deal size than long-end funds.

Current Volatility Levels Require Strong Pre-Sale Investor Dialogue on Issues

Source: RBC Capital Markets


3.5%

5.5%

7.5%

9.5%

11.5%

13.5%

15.5% Bond Buyer Revenue Bond Index

Today's Rate at 4.47%

Bond Buyer Revenue Bond Index

36 Year Historical Perspective

Today’s 4.47% level is lower than 97% of historical rates since September 1979

Source: Bloomberg as of May 7, 2015 Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 25 Revenue Bond Yield with 30 year maturity, rated A1 by Moody's and A+ by S&P Arithmetic Average of 25 bonds' yield to maturity.

Bond Buyer Revenue Index since September 1979 % of Time in Each Range Since 1979

Yield Range

Less than 3.50% 0.00%

3.50% - 4.00% 0.00%

4.01% - 4.50% 4.46%

4.51% - 5.00% 13.50%

5.01% - 5.50% 21.95%

5.51% - 6.00% 13.45%

6.01% - 6.50% 9.09%

6.51% - 7.00% 3.82%

7.01% - 7.50% 6.72%

7.51% - 8.00% 5.38%

Greater than 8.00% 21.62%

Total 100.00%


Alternatives

Bank Loans

Can be more economical than publicly offered bonds if amortization is 20 years or less

GFOA best practices

– Governments should consult with their financial advisors and counsel

– Disclose bank loan information via Municipal Securities Rulemaking Board’s EMMA website

Many banks now limited on length of financing with just a few that can go out 20 years

May have tax risk, where bank can increase rate if tax laws change

Acceleration in the event of default

SRF Loans

State Revolving Fund run by DEP for drinking water, wastewater and stormwater projects

Interest rate subsidized by state and federal government

Loans are up to 20 years with level annual debt service

May be wage act requirements

SRF loans can be subordinate to outstanding bond issues and bank loans

Older loans may be able to be refinanced with bank loan or as part of bond issue as senior lien debt for savings

Pension Funding

SECTION 2


Typical pension bond is debt issued to reduce plan sponsor’s Unfunded Accrued Actuarial Liability (UAAL) for its

defined benefit pension plan

UAAL is Accrued Actuarial Liability (AAL) less Actuarial Value of Assets (AVA)

AAL is present value of projected future benefits discounted at retirement system’s assumed rate of return

UAAL amortized over predetermined period of time

Annual cost to amortize UAAL is added to Normal Cost (portion of cost of projected benefits allocated to

current plan year reduced by employee contributions) to determine Actuarially Required Contribution (ARC)

Debt service on bonds typically patterned after projected amortization payments

Due to use of funds, pension bonds are issued on taxable basis

What are characteristics of Pension Bonds?

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

2015$0

$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000$20,000

Annual Par Amount of Pension Bonds Issued ($bil)

Source: SDC; RBC.


-

200

400

600

800

1,000

1,200

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -

10

20

30

40

50

60

70

80

90

100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ARC Employer Contributions

Overview of a Sample Municipal Retirement Fund

Employer Contributions ($ millions) Unfunded Actuarial Accrued Liability ($ millions)

Asset Allocation Investment Earnings ($ millions)

(300)

(200)

(100)

-

100

200

300

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Domestic Equity

58.26%

International Equity9.41%

Fixed Income28.17%

Short Term Investments

4.15%


Points of View When Considering Pension Funding Bonds

Investment expectations should be consistent with overall Retirement Fund Planning should be undertaken regarding investment of bond proceeds given potential size of investment Poor performance of Fund’s investment may lead to negative perception of issuer

Investment Expectations Based on Overall Pension Fund

Actual investment results for entire fund over time are important, but impact of introducing PFB proceeds to reduce or eliminate Unfunded Liability has net positive impact on funded ratios even if investment returns are below bond rate going forward

PFB Proceeds Have Net Positive Impact on ARC and Funded Ratio

Rating agencies now combine UAAL of debt (plus OPEB obligation) in determining credit strength of issuer Issuing PFB will greatly reduce amount of unfunded pension liability required to be disclosed on sponsor’s

balance sheet by immediately improving plan’s funded ratio This is offset by addition of pension bond principal

PFB Now Has Greater Impact on Unfunded Liabilities

Annual PFB debt service obligations are fixed and negative consequences of non-payment is far greater than deferring pension contributionSoft vs. hard liability

Dependent on future investment performance means that at time of borrowing, it is unknown whether investment returns rate will exceed the cost of PFBs

Ability to generate sufficiently high level of return

Potential for crowding out debt capacity (both from balance sheet and annual budget viewpoint) for infrastructure needs

Impact of increased debt on borrowing capacity


Pension Funding Bond Issues

PFB Issuances

Issuer Sale Date Par Issued Objective

Illinois Jun 2003 $10.0 bn Reduce large UAAL; achieve budgetary savings

Oregon Oct 2003 $2.1 bn Reduce large UAAL

Wisconsin Dec 2003 $850 mmFund UAAL of pension and accrued sick leave (OPEB) plans; achieve budgetary savings

Puerto Rico Jan 2008 $1.6 bn Increase funding of closed pension systems with few assets

Connecticut Apr 2008 $2.3 bn Reduce large UAAL; implement reforms for COLA calculation

Denver Public Schools Apr 2008 $450 mm Reduce UAAL to enable merger into statewide system

Chicago Transit Authority Jul 2008 $1.9 bnSecure reforms negotiated with unions to significantly reduce benefits and increase employee contributions; also OPEB bond issue to remove employer obligation to fund retiree healthcare

Milwaukee County Mar 2009 $400 mmFund large UAAL and create pension stabilization reserve to absorb volatility from future UAAL as result of sub-par investment returns

Kentucky Aug 2010 $468 mm Refinance Commonwealth loans to Retirement Systems at lower rate

Fort Lauderdale Sep 2012 $338 mmReduce large UAAL; establish ordinance requiring full funding of benefit enhancements at time benefits granted

Baltimore County Nov 2012 $256 mmFund UAAL created as result of reduced investment return assumption

Source: Official Statements.


Pension Funding Bond Mechanics

Investors

Principal & Interest Payments

Bond Proceeds

Pension Retirees

Benefit Payments

EmployeesContributions

Net Proceeds

Contributions

Issuer Pension System


Bond Proceeds

36%

UAAL10%

Base Assets54%

Unfunded Liabilities Earn Zero Return, but Increase at Actuarial Rate

Cost:Normal Contributions

Earns:7.50%

UAAL Cost:7.50%

Earns:0.00%

Bonds Cost:3.96%

Earns:7.50%

Replacing portion of UAAL borrowing (7.50%) with lower cost of bonds (3.96%) is expected to save Issuer $32.4 million per year – or eliminate the UAAL 13 years sooner

Blended Cost of Capital moves from 7.50% to 4.73%

(1) Assumes Bond Proceeds to increase funding to 90%


Sample Pension Bonding Results

Status Quo Proportional Solution versus Status Quo

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2016 2022 2028 2034 2040 2046

Mill

ions

Outstanding PrincipalOutstanding UAALStatus Quo UAAL

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2016 2024 2032 2040 2048U

AA

LC

ontr

ibut

ion

Contribution UAAL

Assumptions

Costs of Issuance 0.25%

Underwriters' Discount 0.50%

Delivery Date 07/01/2015

Funding Target Date 07/01/2050

Target Funding Level 90.00%

Actuarial Rate 7.50%

Payroll Growth Rate 3.70%

AVA $1,263,000,000

AAL $2,296,000,000

UAAL $1,033,000,000

Funded Ratio 55.01%

Summary of Results

Uniform Expected Savings Proportional Expected Savings Frontloaded Expected Savings Backloaded Expected Savings

All-in-TIC 3.968% 3.957% 3.975% 3.702%

Gross Expected Savings $1,076,441,314 $1,134,783,454 $994,387,772 $1,636,659,602

PV @ All-in-TIC $510,184,636 $512,806,403 $508,606,314 $574,455,220

PV @ Actuarial Rate $296,483,576 $288,907,788 $305,422,535 $208,206,055

Deposite to Retirement Fund $870,181,360 $870,181,360 $870,181,360 $870,181,360

Average Life 29.6 years 27.9 years 31.9 years 14.1 years

Year funded if expected savings are reinvested 2037 2040 2036 2050

(1) Expected savings portrayed above represent the difference between RBCCM’s forecasted UAAL amortization and debt service. Achieving these payment reductions are contingent on the Fund meeting its actuarial assumptions, in particular, but not exclusively, those related to the Retirement Fund’s investment earnings. Fund investment performance and meeting other actuarial assumptions will impact what results are ultimately achieved over the life of the bonds.


Hallmark of “successful” pension bond financing is low borrowing cost

RBCCM analyzed 50 of largest pension bond financings since 1994

We performed analysis of hypothetical investment portfolio with 60-35-5 allocation in stocks, bonds, and cash

Utilized benchmarks of S&P 500, Barclays Aggregate Bond Index and 3-month T-Bill

Hypothetical investment returns calculated from Q1 after issuance to final bond maturity or 12/31/14

For variable rate financings, borrowing cost calculated from swaps or original forecasted variable cost in official statement

Results indicated that the 50 largest issues would have had an average investment return of 8.51% compared to the average all-inclusive true interest cost of 6.04% on the pension obligation bond issues for this period

8 of the 50 issues would have had pro forma investment returns below their borrowing costs

The average borrowing cost of these 8 is 6.92%, with average pro forma investment returns of 5.85%

For the 20 POBs issued over the last 10 years, average borrowing costs have been 5.60% compared to average pro forma returns of 9.25%

Analysis does not represent actual investment performance of each pension fund, but provides guideline to compare borrowing cost of pension bond to generalized investment returns

Hypothetical Investment Return Compared to Pension Bond Borrowing Costs


Tax and Revenue Anticipation Notes for Pension Systems

How does modifying timing change Actuarially Determined Contribution (ADC)?

Actuary determines size of ADC not just on normal cost and any unfunded liability amortization, but also considers when contributions are expected to be received and how long they may be invested by Fund during year

Annual contribution that participants make is available to be invested by Retirement Systems at actuarial rate

Therefore, a contribution made in June can only be invested for a single month, while a contribution made at beginning of July is expected to earn at actuarial rate for 12 months

Because contributions made sooner are worth more to Retirement Systems than those made later, actuary will lower ADC if contributions are made in July rather than periodically throughout year

Participants can Save Money by Changing Contribution Timing

Plan sponsor can either fund upfront contribution with cash or issue notes

Could also develop pool program to issue 1-year cash flow note to fund local participants’ entire ADC in July

Actuarial recalculation would reduce ADC required to fully fund System

Difference between PV of status-quo contributions over course of year and P+I of the note equals savings

In example below, net savings for program could exceed $22.0 million each year after interest and issuance costs are included

Short term notes can provide savings simply by adjusting timing of pension contributions

Deposit Assumed Earnings Balance Deposit Assumed Earnings Balance

Jul-15 54,290,425 - 54,290,425 624,487,857 4,104,171 628,592,028

Aug-15 54,290,425 356,800 108,937,651 - 4,131,144 632,723,172

Sep-15 54,290,425 715,945 163,944,021 - 4,158,294 636,881,466

Oct-15 54,290,425 1,077,450 219,311,896 - 4,185,623 641,067,089

Nov-15 54,290,425 1,441,331 275,043,652 - 4,213,131 645,280,219

Dec-15 54,290,425 1,807,603 331,141,681 - 4,240,820 649,521,039

Jan-16 54,290,425 2,176,283 387,608,389 - 4,268,691 653,789,730

Feb-16 54,290,425 2,547,385 444,446,199 - 4,296,745 658,086,475

Mar-16 54,290,425 2,920,927 501,657,551 - 4,324,983 662,411,458

Apr-16 54,290,425 3,296,923 559,244,900 - 4,353,407 666,764,865

May-16 54,290,425 3,675,391 617,210,716 - 4,382,018 671,146,883

Jun-16 54,290,425 4,056,345 675,557,487 - 4,410,817 675,557,700

Total 651,485,105 24,072,382 624,487,857 51,069,844

Monthly Deposits Upfront Deposits


Pre-Funding Pension Contributions

Many California issuers, including Orange County, CA and City of Los Angeles, fund annual Pension contributions at beginning of fiscal year with a note issuance instead of funding equally over monthly payments or at year end

Structure creates true arbitrage benefit between cost of Notes and assumed rate of return on Pension funds

City of Los Angeles issued $1.37 billion tax and revenue anticipation note in 2014 and used $625 million to pre-fund annual pension contribution to Fire and Police Pension Plan and $412 million to pre-fund contribution to Los Angeles City Employees’ retirement system

Benefits of Structure


Portfolio Analysis: January Lump Sum Contributions vs. Dollar Cost Averaging Contributions

RBCCM has analyzed quarterly returns for S&P 500 index, US Treasury bills, and Barclays Aggregate Fixed Income index

Goal to compare returns of two similar portfolios on quarterly basis over last 21 years

- Utilized portfolio mix of 60% stocks, 5% US Treasury bills, and 35% fixed income securities (bonds)

- In first portfolio, contributions made at beginning of period, in this case, January 1 (Lump Sum Portfolio)

- In second portfolio, investments made in quarterly installments at beginning of each quarter (Dollar Cost Averaging Portfolio)

Compared to dollar cost averaging, lump sum investing in January provided superior returns 17 out of last 21 years

Annual S&P 500 Total Return 3-month T.Bill

Annual Barclays Agg

Index Lump SumDollar Cost Averaging

Superior Performance

12/31/1994 1.32% 3.99% -2.92% 99.97$ 101.71$ Dollar Cost Avg

12/31/1995 37.58% 5.52% 18.46% 129.30$ 116.23$ Lump Sum

12/31/1996 22.96% 5.02% 3.64% 115.30$ 110.51$ Lump Sum

12/31/1997 33.36% 5.05% 9.64% 123.65$ 114.10$ Lump Sum

12/31/1998 28.58% 4.73% 8.70% 120.42$ 113.23$ Lump Sum12/31/1999 21.04% 4.51% -0.82% 112.56$ 108.99$ Lump Sum12/31/2000 -9.11% 5.76% 11.63% 98.90$ 97.34$ Lump Sum12/31/2001 -11.89% 3.67% 8.43% 96.00$ 101.08$ Dollar Cost Avg12/31/2002 -22.10% 1.66% 10.26% 90.42$ 95.52$ Dollar Cost Avg12/31/2003 28.68% 1.03% 4.10% 118.70$ 113.78$ Lump Sum

12/31/2004 10.88% 1.23% 4.34% 108.11$ 106.52$ Lump Sum

12/31/2005 4.91% 3.01% 2.43% 103.95$ 103.61$ Lump Sum

12/31/2006 15.79% 4.68% 4.33% 111.23$ 108.45$ Lump Sum

12/31/2007 5.49% 4.64% 6.97% 105.97$ 102.90$ Lump Sum

12/31/2008 -37.00% 1.59% 5.24% 79.71$ 83.19$ Dollar Cost Avg

12/31/2009 26.47% 0.14% 5.93% 117.96$ 115.77$ Lump Sum

12/31/2010 15.06% 0.13% 6.54% 111.33$ 109.90$ Lump Sum

12/31/2011 2.11% 0.03% 7.84% 104.01$ 103.22$ Lump Sum

12/31/2012 16.00% 0.05% 4.21% 111.08$ 104.61$ Lump Sum

12/31/2013 32.39% 0.07% -2.02% 118.73$ 111.19$ Lump Sum

12/31/2014 13.69% 0.03% 5.97% 110.30$ 106.64$ Lump Sum

Portfolio Performance

Source: Bloomberg; RBC Capital Markets.

Green Bonds

SECTION 3


Overview, Proceeds, Principles and Certification

Green Bonds are standard bonds dedicated to financing projects with clearly identified environmental and climate benefits

Green Bond Principles (GBP) recognize broad categories of Green Projects:

– Renewable Energy

– Energy Efficiency (including efficient buildings)

– Sustainable waste management

– Sustainable land use

– Biodiversity conservation

– Clean transportation

– Clean water and/or drinking water

GBP recommend that all designated Green Project categories provide clear environmental benefits that can be described, assessed, and quantified

For buildings, LEED (Leadership in Energy and Environmental Design) Certification generally achieves Green Bond criteria of being in top 15% of energy efficient buildings

– Must be approved by U.S. Green Building Council, which assigns points to projects based on levels (Silver, Gold, and Platinum) of achievement in improved environmental performance

Municipal Green Bond Issuance

Green Bond Principles and Certifications

Green Bonds: Definition

Green Bond Use of Proceeds


Green Bonds Have Risen to Prominence in Municipal Sector

Total par amount of $2.9 billion financed in 2015 YTD, with expectations of $100 billion

Green Bonds have recently been issued by:

– Water and Sewer issuers such as City of Venice, FL, East Central Regional Wastewater Treatment

Facilities Operations Board (Palm Beach County), District of Columbia Water and Sewer Authority, The

Metropolitan District, Hartford County, Metropolitan Water Reclamation District of Greater Chicago

– Higher education institutions such as MIT, University of Cincinnati, and Indiana University

– State-level issuers such as California, Indiana Finance Authority (SRF), NY Environmental Facilities Corp and

Massachusetts

In corporate bond market, Green Bond issuance was $36 billion in 2014, $14 billion in 2013 and $2 billion in 2012

Green Bonds Designation Implies Commitment to Environmental Standards

Use of Green Bond proceeds have clearly stated environmental benefits

Green Bond issuers may have reporting requirements on use of proceeds

Municipal Green Bond Issuance


The Bond Buyer: Green Bond Funds Take Interest in Municipals

In September 2014, The Bond Buyer published article titled “A Flood of Green Debt Stands Out”

According to article, muni managers are turning to Green Bonds to meet rising demand from investors

Municipal green bonds account for 1.83% of Standard & Poor’s Green Bond Index

Fund managers have found that interest in green funds is generally result of investors motivated by desire to promote conservation or help offset global warming, not just prospect of earning a return

No green bond funds have yet been devoted entirely to municipal debt – the ones in existence include corporate and asset-backed bonds

Municipal issuers recently issuing green bonds have been able to attract new investors to their credit, and in some cases, municipal bonds as a whole

Bond funds have also been able to increase and diversify the type of investors in their funds by going green

Green Bond funds have attracted new investors without outperforming benchmark municipal or corporate bond funds with similar maturities


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Documents

Municipal Market Update May 19, 2015 Julie Santamaria Director RBC Capital Markets St. Petersburg, Florida 727-895-8871 [email protected] Jim