Citigroupt TRANSMITTAL LETTER September 13, 2005 The Honorable Michael L. Fitzgerald State Treasurer?s Of?ce Capitol Building Des Moines, IA 50319 Dear Treasurer Fitzgerald: On behalf of Citigroup, we are pleased to respond to the Tobacco Settlement Authority?s (the ?Authority? or RFP for Senior Manager for its proposed 2005 issue of Tobacco Settlement Asset-Backed Bonds. While it is often dif?cult to distinguish the and qualifications of different investment banking ?rms, we believe Citigroup is particularly well quali?ed to serve you as a tobacco securitization underwriter. We have highlighted below the most important reasons why we believe Citigroup is best suited to serve as senior manager for the Authority?s contemplated program. Past and Present Experience with TSA. Citigroup was proud to serve as book-running senior manager for the Authority?s Series 2001 tobacco ?nancing and was the first to present the idea of a restructuring of that issue in order to provide new proceeds to the State. For the Series 2001 transaction, Citigroup worked closely with the Authority, the State, and PFM to develop an innovative budget reprogramming structure that helped the State fund its health care endowment, ?nance capital projects, and defease outstanding debt. In addition, Citigroup put our capital to work for the Authority by buying bonds in the secondary market immediately after the Series 2001 bond sale to stabilize the price of the bonds in the market. We are con?dent that we can utilize our tobacco expertise and ?nancial resources to design and market an appropriate restructuring transaction for the State, consistent with its risk transfer parameters and financing goals. Experienced Team Members. Citigroup is dedicating to the Authority?s ?nancing the same senior professionals who successfully brought the Authority?s bonds to market four years ago, including Jim Haddon (Managing Director, Head of the Tobacco Securitization Group and Co? Head of the Group), Tom Green (Managing Director and Co-Head of the Group), Nora Ostrovskaya (Vice President), Ray Kljajic (Managing Director and Head of the Midwest Region), and Ed Droesch (Managing Director and Head of Mimicnnai Undem-vriting). In addition to the Authority?s 2001 transaction, Jim and Ed have also worked on every Citigroup tobacco securitization since 1999, for a total of $21.7 billion in senior and co- senior managed volume. Most Experienced Tobacco Bond Underwriter. Citigroup has been the leading tobacco bond underwriter since originating the ?rst tobacco credit in 1999, laying claim to the longest track record of senior managing tobacco securitizations of any ?rm. We have senior managed 17 transactions for a total of $11.3 billion in par. We have educated the rating agencies on new developments and aggressively negotiated ratings and stress requirements to maximize upfront proceeds for our clients. In fact, we negotiated new stress tests with Moody?s Investors Service earlier this year that we believe will be directly favorable to the Authority, and we have incorporated these assumptions into our numerical analysis. We continue to work with each of our tobacco securitization clients to formulate innovative ways to securitize their tobacco settlement revenues. Instead of using a ?one-size-?ts-all? approach, we consistently develop unique debt structures and ?nancing solutions to meet our clients? funding goals and requirements. We are eager to do the same again for the Authority. Greatest Commitment to the Tobacco Secaritization Market. Citigr?oup has achieved and maintained its position as the secondary market leader in tobacco bonds by our willingness to buy and sell bonds in any market and by consistently maintaining the largest tobacco bond inventory (averaging approximately $200 million) of any underwriting ?rm. Our strong relationship with tobacco investors in the primary and secondary markets makes us aware of the current active buyers and potential ?anchor? buyers for large offerings such as the Authority?s proposed 2005 bonds. The Authority has market access at attractive interest rates today in large part because Citigroup has consistently supported the Authority?s bonds since 2001, even through the dif?cult post-Price case period. Commitment to raricr?pal tam-ice. Citigroup is without question the leading ?rm in municipal ?nance, having been ranked the #1 senior manager of negotiated issues for seven of the last eight years, including the ?rst six months of 2005. With 380 professionals, the Municipal Securities Division represents one of the largest commitments to municipals of any ?rm in the country. Crane-?tment to the State orowa. Today, Citigroup employs 1,656 people in Iowa with a total average annual payroll of more than $64.9 million. This includes 83 Smith Barney ?nancial consultants in 5 local branch of?ces. Our Iowa of?ces service 44,000 accounts with more than $370 million of assets held in municipal bonds. Citigroup?s commitment to being a corporate partner to the State and the Authority across all of our business lines, and particularly to public ?nance, should provide assurance that we will dedicate all necessary resources to executing this ?nancing. We appreciate this opportunity to submit our quali?cations to serve as the Authority?s senior manager for its upcoming tobacco bond issue. If you have any questions or require follow-up information, please do not hesitate to contact us. Thank you again for the opportunity to respond to this RFP. Sincerely, <7 Jim Haddon Tom Green Ray Kljajic Managing Director Managing Director Managing Director (Primary Contact) Citigroup Global Markets Inc. 390 Greenwich Street, 2nd Floor, New York, NY 10011 (212) 723-5569 I (212) 723-8581 fax 8.1 8.2 8.3 8.4 8.5 8.6 8.7 RFP Item Number None Firm Name: Address: Chapter 8 Bid Compliance and Certi?cation Form I certify that I have the authority to bind the investment banker indicated below to the specific terms and conditions and technical speci?cations required in this RFP and offered in the investment banker?s proposal. I understand that by submitting this proposal the investment banker indicated below agrees to the following: 8.2.1 The investment banker will provide services which meet the requirements of this RFP. 8.2.2 The investment banker will provide any additional terms offered by the investment banker. 8.2.3 The investment banker will provide the services at the prices quoted by the investment banker in the proposal. I certify that in making this proposal that the investment banker has not consulted with others for the pmpose of restricting competition. I certify that the information contained in the proposal is true and accurately portrays all aspects of the investment banker?s ability to provide the services described in the RFP. The investment banker has not made any knowingly false statements in its proposal. I am aware that any substantive misinformation or misrepresentation may disqualify the proposal from further consideration. Investment banker here certifies that it has had no discussions with any of the municipal credit rating services subsequent to the date of receipt of this RFP about the intentions. Investment banker acknowledges this condition and prohibition will extend from the date of receipt of this RFP until the conclusion of the selection process. Investment banker hereby certi?es total compliance with all terms, conditions and specifications of this RFP except as expressly stated below. Add a separate page if necessary. Comments None Citigroup Global Markets Inc. 390 Greenwich St. 2?d Floor New York, NY 10013 Authorized Signature: ?ak/An. Printed Name: James Haddon Title: Managing Director Telephone: (212) 7 23-5569 Fax Number: Date: (212) 723-8581 September 12, 2005 Chapter 9 Authorization to Release Information Form The undersigned, on behalf of the ?rm designated below, hereby authorizes the Treasurer to obtain information regarding the firm?s performance on other contracts, agreements or other business arrangements, its business reputation, and any other matter pertinent to evaluation and the selection of a successful ?rm in response to this Request for Proposal. The ?rm hereby releases, acquits and forever discharges the State of Iowa, the Treasurer, and the TSA and their of?cers, directors, employees and agents from any and all liability whatsoever, including all claims, demands and causes of action of every nature and kind affecting the firm that it may have or ever claim to have relating to information, data, opinions, and references obtained by the Treasurer in the evaluation and selection of a successful investment banker in response to this Request for Proposal. The ?rm authorizes representatives of the Treasurer to contact any and all of the persons, entities, and references which are, directly or indirectly, listed, submitted, or referenced in the ?rm?s proposal submitted in response to this Request for Proposal. The firm further authorizes any and all persons and entities to provide information, data, and Opinions with regard to the ?rm?s performance under any contract, agreement, or other business arrangement, the firm?s ability to perform, the ?rm?s business reputation, and any other matter pertinent to the evaluation of the ?rm. The ?rm, and it?s partners, of?cers, directors, employees and agents hereby releases, acquits and forever discharges any such person or entity and their officers, directors, employees and agents from any and all liability whatsoever, including all claims, demands and causes of action of every nature and kind affecting the undersigned that it may have or ever claim to have relating to information, data, opinions, and references supplied to the Treasurer in the evaluation and selection of a successful firm in response to this Request for Proposal. A photocopy or facsimile of this signed Authorization is as valid as an original. Sincerely, Citigroun Global Markets Inc. Name of Firm James Haddon, Managing Director Name and Title of individual authorized to bind Firm :7 Signature of individual authorized to bind irm PROPOSAL TO SERVE As SENIOR MANAGER FOR THE TOBACCO SETTLEMENT AUTHORITY PREPARED BY: CITIGROUP GLOBAL MARKETS September 13, 2005 TABLE OF CONTENTS General Information about the Firm. 1 Experience and 2 Responses to Senior Manager Proposal Questions .. 9 Pricing. 18 TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 1 General l'nformatiml about the Firm 5.1 Name, address, telephone fax number and e-mail address oftlze?rm all d/b/a ?s or assumed names or other operating names ofdre?rm. I i Information Citigroup Global Markets Inc. 390 Greenwich Street 2nd Floor New York, NY 10011 Primary Contact: James F. Haddon, Managing Director (212) 723-5569 (212) 723-8581 fax 5 .2 Identify and specf?,? the location?s) and telephone numbers of'dre major offices and other?reilifies that relate to the ?rm ?3 performance under the terms offhis RFP 5.3 Local office address and phone nmnber (Hairy). Citigroup combines the tobacco securitization and Iowa ?nancing expertise in its New York, Boston, Chicago, and Minneapolis Public Finance of?ces to form the team assigned to the Tobacco Settlement Authority (the ?Authority? or The Authority?s proposed bonds would be priced from our New York underwriting desk. Contact details for the main contact in each of our dedicated of?ces are provided below. New York Boston Chicago Minneapolis James Haddon Tom Green Ray ajic Cory Hoeppner Tobacco Seem'itization Tobacco Sccuritization Iowa Financing Iowa Financing Expertise Expertise Expertise Expertise 390 Greenwich Street 2 International Place 8500 Sears Tower 333 South Seventh Ave. 2?d Floor 19th Floor Chicago, IL 60606 Suite 2390 New York, NY 10013 Boston, MA 02110 Minneapolis, MN 55402 (212) 723?5569 (617) 346-9253 (312) 876?3550 (612) 371-8827 I 5 .4 Firm ?s net excess capital and ability to hold bonds in inventory. I 3 '7'Capital Position :1 of July 31,2005 5' Citigroup Global Markets Inc.?s net capital position as of July 31, 2005 is provided in the adjacent table. Based on current I excess net capital levels, Citigroup Global Markets Inc. has the Tom capital $16,00530003000 regulatory capacity to underwrite approximately $25 billion in Eqility Capital 93233000900 municipal securities. Net capital 4,173,000,000 Excess Net Capital 3,608,000,000 Citigroup is arguably the largest market maker in the tobacco securitization bond market. We have provided a bid for tobacco bonds in even the most adverse market conditions, including the period following the Price ?lights? litigation developments and subsequent rating TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 2 downgrades in March?April 2003. Notably, our inventory of tobacco securitization bonds places us at the top of the industry, at an average of approximately $200 million over the past year. In the week following the pricing of the Authority?s Series 2001 bonds, Citigroup used its capital to support the bonds in the secondary market and purchase bonds that were ??ipped? or sold immediately by certain firms immediately after pricing. Our capital commitment served to stabilize the market and assure investors that they had purchased them at pricing at a fair market value. Our consistent capital commitment to tobacco bonds enables us to secure the best pricing for our tobacco securitization clients and to sustain that pricing in the secondary market. Experience and Quali?cations i 5.5 Describe any particular expertise your?mt cozdd provide regarding tobacco secm?itization. Citigroup has consistently taken advantage of structuring innovations and market opportunities to maximize the bene?t to our clients, and we are eager to do the same for the Authority. As the Authority is aware, we were the ?rst to present the idea of a residual-to-turbo restructuring to provide upfront proceeds to the State. This concept, as we will discuss later, takes advantage of current favorable market conditions and further leverages up the Authority?s existing pledge of 78% of the State?s TSRs, extracting more proceeds for the State?s use today. The idea we brought forth to the Authority is exemplary of the innovative approach Citigroup takes to each tobacco securitization we senior manage. Citigroup has been the leader in tobacco settlement revenue securitizations since November 1999, beginning with the landmark $709 million City of New York (TSASC) ?nancing, which has served as the prototype for all subsequent tobacco securitizations. We also brought to market the first tobacco-backed Capital Appreciation Bonds (Westchester County, 1999), the ?rst true securitization enhanced with a state?s appropriation credit (New York, 2003), the first tobacco securitization refunding (Puerto Rico, 2002), and the ?rst residual?to-turbo restructuring (Westchester County, 2005). We were a co~senior manager with 50% book-running senior manager credit for the most recent tobacco deal with a taxable component (NY Counties Tobacco Trust IV), which also used an innovative taxable-to-tax-exempt ?Cinderella Bond? structure. In addition, Citigroup has senior managed ?ve jumbo tobacco?related transactions with a par amount of over $1 billion: $2.6 billion for the state of California (2003); $2.5 billion for the State of New York (2003); $1.8 billion for the State of New Jersey (2002); $1.2 billion for the Commonwealth of Puerto Rico (2001); and a $1.4 billion cigarette tax securitization for the State of New Jersey (2004). We have a track record of fast execution in adverse market conditions, being the only ?rm that has successfully executed a tobacco securitization in three weeks, closing a $397 million tobacco securitization in the aftermath of $140 billion judgment in the Engle case against the tobacco industry that occurred between pricing and closing (Puerto Rico, 2000). We have achieved and maintained our presence as the tobacco market leader by: (1) providing research on ongoing tobacco litigation, consumption, and other credit issues to investors and issuers; (2) creating an orderly secondary market for tobacco bonds by always providing a bid in the market for the bonds, even in the face of volatile litigation? and ratings-related price movements (we maintain what we believe is the largest tobacco bond inventory of any ?rm, and our strong relationship with tobacco investors in the primary and secondary markets makes as closely aware of the current active buyers and potential ?anchor? buyers for large offerings such as the Authority?s proposed bonds); and (3) conducting a continuing dialogue with key tobacco participants such as rating agencies, investors, and economic consumption consultants (Citigroup negotiates with the rating agencies to promote more favorable credit terms and stress test analyses, and holds various one-on-one discussions with investors in?between tobacco ?nancings to help in their credit analysis TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 3 of tobacco bonds). These will allow us to optimize rating strategy, maximize proceeds and obtain the lowest yields in the marketplace for the Authority. Series 2001 Case Study. Having senior managed the Authority?s ?rst tobacco ?nancing in 2001, our team has developed a strong working relationship with key members of the working group and is familiar with the legal and tax issues affecting the Authority?s upcoming financing. Below, we highlight some of Citigroup?s value added in the 2001 transaction: 0 Legal Structure Use of Proceeds. To structure the tax-exempt portion of the financing as a capital ?nancing for tax purposes, Citigroup helped the Authority and its ?nancial adviser to design and execute an innovative ?budget reprogramming? structure, creating budget relief by allowing the State to use tobacco proceeds to refund certain debt and fund capital projects that were initially programmed to be ?nanced on a pay-as-you go basis from the State?s General Fund or the Rebuild Iowa Infrastructure Fund. The freed-up General Fund moneys were then used to fund an Unrestricted Endowment that ultimately ?nanced both health care initiatives and interim budget relief for the schools. 0 Market. Conditions. The Series 2001 Bonds priced on October 11, 2001, approximately one month after a tobacco securitization by the State of Arkansas. The five-week municipal supply indicator for that week was $34.6 billion over twice the supply during the Arkansas pricing. At this time, the market was particularly sensitive to tobacco supply levels, and Iowa faced a dif?cult market competing for funds with the $1.212 billion Louisiana financing scheduled to price two weeks after Iowa. 0 Pricing Results. There was a perception in the marketplace in 2001 that investors imposed a yield penalty on the Residual tobacco bond structure (in which the State selling TSRs gets both up?front proceeds and an annual residual amount payable after the tobacco bond debt service is paid) compared to the Turbo structure (all TSRs are used for debt service until bonds are fully paid), since the Residual structure transfers more of the long-term tobacco risk to the investor. However, Citigroup assured the Authority that with proper marketing, the Residual structure could achieve equal or better pricing results. We delivered for the Authority on this advice. The transaction was marketed and placed to a diverse group of investors, including several first?time institutional buyers. As a result, the long term bond in the Authority?s Residual structure transaction (weighted average life: 22.4 years) priced at a spread to MMD 33 basis points lower than that of a comparable term bond in the Louisiana Turbo transaction (weighted average life: 14.9 years), priced two weeks later by Bear Stearns. The Authority?s Series 2001A taxable term bond priced at a 250 basis-point spread over the comparable Treasury yield. Even though it had a longer weighted average life, the 2001A taxable term bond priced 25 lower than the taxable term bond of the Louisiana transaction and 50 lower than the taxable term bond of the March 2001 South Carolina transaction, both priced by Bear Stearns. I Citigroup has actively maintained a secondary market bid for the Authority?s Series 2001 Bonds. Immediately after the successful primary market pricing, Citigroup purchased 2001 Bonds in the secondary market to sustain the primary market pricing levels. We have continued to support the market for the Series 2001 Bonds in all market environments, including the period following the adverse court decision in the Illinois Price case. Describe the ?rm ?s experience as a senior/co-senior manager in ihe issuance ofiobacce bonds. Piease ideni?fi? each issuance separaiebi, youi'?rm ?s speci?c role, the date issued and the principal (liltOi-il'ii issued. Please refer to the following page for a complete list of Citigroup?s senior and co-senior managed transactions and the structuring innovations associated with each. Citigroup has completed or been appointed as senior or co?senior manager on 28 tobacco ?nancings totaling approximately $26.7 billion in par amount, including $179 million in senior?managed taxable tobacco issuance. We have been selected to execute a tnnvative Structuring ea or Legal Structure i Innovative Legal Aggroachee issuer TSASC (New York City - First tobacco securilizalion - Capital ?nancing executed on a tax-exempt basis A $709,280,000 - Flexible amortization structure introduced the concept of MSA as executory Nov-99 - Dual Amortization contract lately to be upheld in case of bankruptcy Nassau County Tobacco Settlement Corporation (NY) $294,500,000 - Flexible amortization structure - Dual amortization residual structure - rating with tow leverage to maximize - Working capital ?nancing structure helped the County to address budget de?cit Nov-99 proceeds Westchester Tobacco Asset Corporation (NY) - Flexible amortization residual structure - Working capital ?nancing structure $103,504,553 First Convertible CAB structure Dec?99 Niagara Tobacco Asset Securitization Corporation (NY) - Freebie amortization residual structure - First Go. Refunding that utilized Tobacco Securitization $47,920,000 - Convertible CAB structure Capital Refunding; Financing created budget relief, Octr00 Executed in less than 8 weeks though bonds issued for capital for tax purposes Children?s Trust Fund (Puerto Rico) $397,005,000 - Flexible amortization residual structure {Superstoker} Capital ?nancing with very short weighted average life of assets Oct-00 First time terms rated to ultimate maturity Ulster Tobacco Asset Securitlzation Corporation (NY) - Flexible amortization residual structure - Capital Financing $28,352,454 - First Combination structure used to Jan-01 meet County's speci?c debt service requirements District of Columbia Tobacco Settlement Financing Corp {supersinker} - Proceeds used to defease 6.0. debt $521,105,000 - First tobacco ?nancing with noncaitable - Financing created budget relief, although bonds issued for Mar-01 flexible amortization term for tax purposes; Financing resulted in (3.0. rating upgrade Guam Economic Development Authority - Flexible amortization turbo structure - Financing executed in two series for tax reasons: GEDA - Convertible CAB ?xed amortization serials working capital and endowment Territory of Guam and Flexible amortization 003 terms - Endowment structured to deaitocale proceeds $25,477,459 - Structure adapted to Guam?s uneven TSR per universal cap calculation Jun-01 stream to optimize debt capacity - Deallocated proceeds spent for operating budget relief Tobacco Securitlzatlon Authority of Northern California - Flexible amortization turbo structure - Executed in two series for tax reasons: capital endowment Sacramento County, CA - First Endovnnent ?nancing - Endomnent structured to dealiocate proceeds $199,620,000 per universal cap calculation Aug-01 - Deallocated proceeds spent for operating budget relief Tobacco Settlement Authority (iowa) Taxable! Tax-Exempt - Budget reprogramming structure allows issuance for $644,245,000 - Flexible amortization residual structure capital purposea to fund projects previoust budgeted for Oct?01 - Endowment ?nancing as pay-as-you-go as watt as 6.0. defeasance. Tobacco Settlement Financing Corporation U.S. Virgin islands Flexible amortization turbo structure - Convertible CAB ?xed amortization serials - Capital Financing $1.801,455,000 Aug-02 $21,709,802 and Flexible amortization 013 terms Nov-01 California Statewide Financing Authority (CSAC Pool} - Flexible amorbzabon structure - tobacco ?nancing to use multiple endowments California Counties - Multiple endowment ?nancing - Pooled ?nancing to reduce Costs of Issuance $190,545,000 and immuntze effect otpopulation share June - July 02 adjustment for each Countyin Pool Tobacco Settlement Financing Corporation (NJ) - Turbo Amortization structure - Children's Trust Fund (Puerto Rico) $1,171,200.000 Mayu02 - Combination Refunding and New Money - Flexible amortization structure - Turbo Amortization structure - First ever Refunding of Tobacco Securitizalion Bonds Tobacco Settlement Financing Corporation (NY) $2,310,705.000 Jun?03 - First post-Price case tobacco securitizaticn First tobacco secuntizaticn enhanced with State Appropriation mecha nism Golden State Tobacco Securitlzation Corporation (CA) $2,5?2,285,000 Sop-03 - First tobacco securitizalion in California enhanced with State Appropriation mechanism Westchester Tobacco Asset Corporation (NY) Restructuring of Residual to Turbo Structure 1st Quarter 2006 $246,325,000 Sop-00 $210,600,000 - First NY unenhanced tobacco securitizaticn n-05 over after March 2003 Price decision Tobacco Settlement Financing Corporation (NJ) - Turbo Amortization structure $2.000,000,000 (expected; subject to change) - Refunding of Series 2002 Bonds Tobacco Settlement Financing Corporation (Louisiana) $1,202,??0,000 Oct-01 Badger Tobacco Asset Securiltzation Corporation {Wt} May-02 Tobacco Settlement Financing Corporation (R1) $685,390,000 Jun-02 rsasc {New York City} $500,000,000 Jut~02 Golden State Tobacco Securitizatton Corporation (CA) $3,000,000.000 Janv03 Tobacco Settlement Financing Corporation (NY) $2,240,415,000 Decv03 Tobacco Settlement Flnancing Corporation (VA) 344826000000 May-05 New York Counties Tobacco Trust IV NYSAC $539,190,207.55 Aug-05 {Citigroup co-senior with 50% book-runner credit; - included $179 taxable bonds; $124 mm fonvard delivery bonds - Refunding lreslructuring - 1st time issuance of 2060 non-rated CAB Tobacco Settlement Financing Corporation (NJ) $3,000,000,000 (expected; subject to change) 3rd Quarter 2005 TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 4? refunding of New Jersey?s Series 2002 tobacco bonds (approximate par amount of $2 billion), which we - st . . expect WIll be 801d In 1 Qualtel TOP SEMORMANAGERS OF TOBACCO SECURITIZATIONS 1999-2004 5. 6 ldeutai? the individuals ?'om your firm i-viio would be 5133502 involved in providing the services cor-itemplaied by this RFP. Cltiql?OUpJ Provide a brief restm-ie ofeacli individual that includes the following iiyformation: l) Full Name; 2) Education; 3) Years of experience and employment history particularly as it relates to the Morgan scope of services specified herein; and 4) Expected role in the Secmes tram-actions. UBS [financier Semoes inc BearStearre Co 510.4112 $i,435.2 Merriil Co Citigroup?s TSA ?nance team combines the most experienced and knowledgeable tobacco securitization bankers in the industry with our long- Volume (s millions} standing Iowa bankers. Our team will be led by Jim Haddon, Managing Director, Head of the Tobacco Securitization Group and Co-Head of In??astructure Group, who has served as lead banker on each of Citigroup?s 17 completed senior~managed tobacco transactions to date. Jim will coordinate with Tom Green, Managing Director and Co-Head Group, and Nora Ostrovskaya, Vice President, to design and implement an optimal plan of finance. Jim, Tom, and Nora will have additional regional support from Ray ajic, Managing Director and Head of the deest Region, and Cory Hoeppner, Vice President in our Minneapolis o?ice. The Authority?s bonds will be priced by Ed Droesch, Managing Director and Manager of the Mmicipal Syndicate, who along with Jim has worked on each Citigroup tobacco ?nancing since 1999. Jim, Tom, Nora, and Ray were happy to have the opportunity to serve the Authority during its 2001 . transaaion? and Will ensure iowa Pumic Finance Tobacco Securitization Finance that the Authority ??in I_RayKljajic,ManagingDirecfor continue to have our team?s d? i focus and the vast resources of Citigroup at its disposal. Resumes for each team member are provided below. I I I I JAMES HADDON NEW YORK Managing Director, Head of Tobacco Securitization Group (Io?Head ofln??asu?ucture Group (212) 723?55 69 With over 20 years of experience in the municipal bond industry, Mr. Haddon will serve as the Authority?s primary contact. His responsibilities at the Firm include serving on the Department?s Operating Committee and managing the Tobacco Securitization Group and General Infrastructure Group. He was the lead banker on the Authority?s 2001 transaction and each of Citigroup?s 17 senior managed and 9 consenior managed tobacco securitizations since 1999, for a total of $21.7 billion in par amount. With arguably longer experience with tobacco securitization bonds than any investment banker, Mr. Haddon is well?known in the tobacco investor community, has testi?ed before state legislatures considering securitization, and has been a principal speaker at conferences held by The Bond Buyer, the Municipal Group of New York, and other organizations. His state clients include the states of Iowa, South Carolina, Virginia, California, New York, and Louisiana, all of whom have securitized tobacco revenues. He is a graduate of Wesleyan University and the Stanford University Graduate School of Business. CItIgroupl TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 ?Page 5 THOMAS GREEN BOSTON Managing Director, (To-Head offiyi?astructure Group (61 7) 346~9253 Mr. Green has 15 years of experience in municipal ?nance and currently specializes in infrastructure project ?nance. He has served as a senior banker on multiple tobacco securitizations, including the Authority?s 2001 ?nancing. From 1992 to 1997, Mr. Green served as First Assistant Attorney General of Massachusetts, where he supervised that state?s case against the tobacco industry. In that role, he participated actively in two tobacco settlements with Liggett Myers and was a lead staff attorney for the Attorneys General in their multi-state negotiations with the tobacco industry. This experience has given him a keen understanding of MSA?related issues. Mr. Green holds a B.A. in Government from Harvard College and MBA. and JD. degrees from Harvard Business School and Harvard Law School, respectively. NORA OSTROVSKAYA NEW YORK ice President, Tobacco Secm?itization Group (212) 723-4127 As she did for the Authority in 2001, Ms. Ostrovskaya will contribute her debt structuring analysis and rating expertise to the Authority?s 2005 tobacco ?nancing. During the past six years, she has concentrated on developing highly technical structuring and rating analyses for more than 20 issuers, including structuring, cash flow, pricing, and Monte Carlo simulation modeling. She has been integral in the development of the Finn?s proprietary model used in running the Monte Carlo simulations required by Moody?s Investors Service. Ms. Ostrovskaya has performed the structuring and rating analysis on 16 out of 17 of the ?rm?s senior managed tobacco securitizations, for a par amount of over $10.5 billion. She holds an MS. in Mathematics from the Russian State University and an M.B.A. in Finance from the Wharton School at the University of RAY KLJAJIC CHICAGO Managing Director and Head of?ie Midwest Region (312) 8 76-3 550 Mr. Kljajic is the Manager of Citigroup?s Central Region and has overall responsibility for all ?nancings in the Midwest. He has over 27 years of professional experience, beginning in 1978 as a municipal bond credit analyst, advancing to Public Finance commercial banking in 1982 (direct lending, credit enhancement and investment banking services), and specializing in Public Finance investment banking in 1984. In addition to serving as senior regional banker on the 2001 TSA transaction, he has senior managed over $10 billion in ?nancings largely in the areas of general infrastructure, convention center and sports venues, public facilities, surface transportation, aiiports and public power, including the largest tax?exempt zero-coupon securities offering for the Metropolitan Pier and Exposition Authority (Illinois) in 2002, which had a present value of $659 million and ?nal maturity value of $3.6 billion. His client list includes the states of Illinois, Indiana, Idaho, and Wisconsin, as well as the Missouri DOT, Illinois State Toll Highway Authority, Kansas DOT, and Colorado DOT. Mr. Kljajic is a graduate of Wabash College and received his MBA. from the University of Chicago, where he specialized in ?nance. CORY HOEPPNER MINNEAPOLIS Vice President, Midwest Finance Group (612)-3 71-8827 Mr. Hoeppner will provide additional regional coverage for the Authority?s 2005 tobacco ?nancing. Mr. Hoeppner has almost 10 years of municipal experience and joined Citigroup from Piper Jaffray in November 2004. Previously, he worked at a national ?nancial advisory ?rm specializing in providing quantitative cash ?ow analyses, pricing, and program development for issuers of municipal housing bonds. Mr. Hoeppner has assisted state agencies across the country in executing transactions in tobacco, housing, student loans, state revolving funds and stadium ?nance. Mr. Hoeppner received his BS. in Finance from the University of St. Thomas, St. Paul Minnesota. cutlgroupl Sept. 13, 2005 ?Page 6 TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager ERIC FRIEDMAN NEW YORK Associate, Tobacco Secaritization Group (212) 723-5195 With five years of public ?nance experience, Mr. Friedman has been a member Of Citigroup?s tobacco settlement securitization team since 2003 and focuses entirely on tobacco structuring analyses. Mr. Friedman played a pivotal role in structuring the recent $216.6 million tobacco restructuring for Westchester County (NY), the $1.4 billion New Jersey cigarette tax revenue bond ?nancing, and the $2.6 billion California Series 2003B tobacco securitization, as well as provided quantitative analyses to a number of other issuers. Prior to pursuing his M.B.A., Mr. Friedman worked in Citigroup?s Atlanta of?ce for three years, executing over 20 senior~managed transactions for a variety of issuers throughout the Southeast. Mr. Friedman received his B.A. in Economics and Public Policy Studies from Duke University and an M.B.A. from the Wharton School of the University Of AMY LEE NEW YORK Analyst, Tobacco Securitization Group (212) 723-4127 Since joining Citigroup in 2003, Ms. Lee has focused her efforts on tobacco securitizations, project ?nance, and state revolving fund transactions. Clients she has worked with include Westchester County (NY), State of California, State of New Jersey, Kansas Development Finance Authority, and New York State Environmental Facilities Corporation. She graduated from the Massachusetts Institute of Technology with B.S. degrees in Economics and Management Science. GERARD DRUMM NEW YORK Analyst, Tobacco Securitization Group (212) 723?9694 Joining Citigroup in 2005, Mr. focuses in the areas of tobacco securitization and project ?nance. He has worked on quantitative analyses for tobacco clients in the states of California, New York, and Louisiana, others He raduated from Princeton Universi with A in Economics NEW YORK (212) 723?7093 EDWARD DROESCH Managing Director, Head of Municipal Underwriting Mr. Droesch joined Citigroup in 1996 and has over 20 years of experience in the pricing and underwriting of municipal securities. He has been the lead underwriter for each Of Citigroup?s senior and co-senior managed tobacco securitizations, including the Authority?s 2001 transaction, for a total of $21.7 billion in par. Mr. Droesch will be responsible for the pricing and underwriting commitment for the Authority?s tobacco bond issue. A member of BMA Municipal Division?s Executive Committee, he received a degree in Management from Hartwick College in 1982. 5. 7 Provide tire/otiowing information regardit-ig the?rm ?s experience: I) ojivecrs in business 2) Number ofvears experience with providing the types ofservices sought by the RFP. 3) Provide contact it-tfortnotion of at least two (2) government issuers of tobacco bonds has i-vot'keo? directly i-vitit. With a 200-year history beginning with the founding of the City Bank of New York in 1812, Citigroup has provided investment banking services to municipal issuers for more than 50 years, ranking perennially as the top national underwriter of municipal debt. We originated the tobacco credit with the ?rst-ever tobacco settlement revenue securitization in 1999, laying claim to a longer track record of senior managed tobacco experience than any other ?rm. We are happy to have been able to serve the Authority as senior manager on its 2001 financing. The references below are also familiar with the scope and quality of service that Citigroup provides, and have TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 ?Page 7 worked with the Citigroup bankers assigned to the Authority. We encourage the Authority to contact these individuals for additional con?rmation of the level of service, state debt and tobacco securitization expertise, and professionalism you can expect from our Citigroup team. Additionally, as we believe that institutional investor references can provide the best evidence of Citigroup?s commitment, credibility and presence in the tobacco market, we have provided such a reference below. a settlement Revenue.Seeuritiza'tion Johu E. McCormuc Mini? Go?fzalez Lm' Louie Yl'eosurer Vice Pre?dem Assistant Director of Public Finance State of New Jersey Government Developfnent Bank for California State Treasurer?s Of?ce (Tobacco Settlement Financing Puerto RICO (Golden State Tobacco Corporation) sewer?)? offhe OfDWecmrS Securitization Corporation) 125 West State Street Tlie,Ch'ldren Tm? Fund 915 Capitol Mall, Room 110 Trenton, NJ 08625 Mmmas G9Vel'nmm Center Sacramento, CA 95814 Phone: (609) means De meg" Avenue Phone: (9i 6) 653-2903 John.McCormacG?treasstateni .us . gov niiniagouzalezdabgfgobiemom 3' 5 3' '1 {Reference 1: {2:91; -: if. 1 Scott Cartier Por?bh'o Manager Oppenheimer Funds! Rochester - Largest institutional holder of tobacco securitization bonds - Over $1.16 billion in publicly disclosed holdings in a $17.5 billion unenhanced market Phone: (585) 383-1300 scottier@oppenheimerfunds.com i 5.8 Provide mi): other relevam informant?: regarding your?rm ?s ?mobilities. I Technical Structuring Resources. While other ?rms may rely on quantitative generalists within their departments to structure tobacco securitization ?nancings, Citigroup has a core team devoted exclusively to structuring tobacco-related transactions. The senior tobacco bankers on Citigroup?s ?nance team have worked on every Citigroup tobacco securitization since 1999. Collectively, our team provides the Authority with experience in structuring more deals using a greater variety of structures than any other ?rm. Additionally, since educating and negotiating with the rating agencies for the first-ever tobacco securitization, we have consistently maintained contact to apprise them of new conditionsfdevelopments affecting the credit, and negotiated with them to achieve the most favorable stress scenario requirements for our clients. Per independent research rankings as of year-end 2003, 4 out of the 5 highest?levered tobacco transactions transactions resulting in the most proceeds to the issuer) were executed by Citigroup. Note: no tobacco ?nancings were completed in 2004. Iowa Distribution Network. Citigroup has had, and continues to have, a substantial presence in the State. Our commitment to lowa is evidenced by being an active insurer, investor, employer and taxpayer in addition to maintaining our investment banking presence. Citigroup?s in?state employment has grown to 1,656 professionals, including 83 Financial Consultants in 5 Smith Barney sales offices. Our Smith Barney retail system boasts more than 44,000 Iowa retail accounts currently holding nearly $5 billion in assets. .510?: Cit). -Fort Dodge r? i input-t -Des Moines TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 8 I :3 '3 I I'Citigroup in Iowa 3'3: i Global Wealth Mana ement 150 . - . Global Consumer Ba?k 1,492 Retail Of?ce Tom Assets Toglserigligi l; Davenport 29 13,331 51,652,431,961 693 $69,413,39? 0 T031 1 656 Des Moines 29 12,730 1,934,005,635 565 191,759,618 5 Fort Dodge 4 2,442 134,142,774 55 3,400,494 National Distribution Capabilities. It is not Sioux CW 14 6397 469,133,976 157 29,929,362 possible to be a top underwriter without WestDesMoines 7 3,942 673,821,420 236 76,840,425 . 1 ti h. to SBAcctsatOtherBanks - 742 59,572,245 13 3,021,523 avmg exce en 16 a 0 ?35 an access a Aiilowa 33 44,634 343130074111 1,729 $324,364,323 of the major institutional buyers. In addition to our Iowa presence, Citigroup has a 22-member institutional sales force (16 in New York, 3 in Los Angeles, and 3 in Chicago) and four regional underwriters who perform institutional sales duties along with their underwriting responsibilities. These professionals exclusively market municipal bonds to more than 250 national accounts. We have 104 middle-market institutional specialists in our retail of?ces marketing municipal bonds to over 2,000 smaller institutional accounts throughout the country. In addition, we currently have 5 research providing information on 21 sectors to our investor base. To supplement our institutional reach, Citigroup has 11,842 Financial Consultants in 513 of?ces nationwide who market municipal bonds to retail investors. Acting as liaisons between our underwriting desks and these Financial Consultants are 38 Retail Sales Coordinators who focus exclusively on municipal bonds. Institutional Distribution Capabilities for Tobacco Secm'itization Bonds. Since originating the tobacco bond credit and defining the market in 1999, Citigroup has broadened the tax-exempt and taxable investor base with each subsequent tobacco securitization, playing a key role in investor education and helping to grow the number of institutional investors in tobacco bonds from 18 investors in November 1999 to over 100 investors presently. We are proud to note that institutional investor market leaders such as Franklin Funds, Putnam Investments, and Merrill Asset Management first purchased tobacco securitization bonds senior managed by Citigroup. In addition, during the March?April 2003 tobacco market crush caused by the Price case decision and subsequent rating downgrades, Citigroup was the only market maker in tobacco bonds bidding and trading up to $130 million bonds a day. This support has a tremendous impact on our relationships with major tobacco investors and the ?rm?s institutional distribution capabilities. Retail Distribution Capabilities for Tobacco Securitization Bonds. Tobacco transactions senior managed by Citigroup have sold the most bonds to retail investors on both a percentage and dollar amount basis. As an example, our August 2002 tobacco securitization for the Tobacco Settlement Financing Corporation (New Jersey) sold $452 million bonds to retail investors almost 25% of the total $1.8 billion ?nancing. Furthermore, our Smith Barney?s retail system is the 6th largest holder of tobacco bonds with over $500 million in holdings. Through our 17 senior managed tobacco securitizations, our retail sales force has been educated extensively on the complex legal/structural elements of tobacco bonds and can therefore better market them to investors. Our unsurpassed in marketing to retail investors is one factor that has allowed Citigroup senior?managed tobacco securitizations to price better than those of our competitors, and we will maximize retail participation for the Authority. TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 ?Page 9 For Pro 1053] Questions Res Jonscs to Senior Mana 6.1 A/[firnis proposing to serve as senior manager or co-manager must answer fhefoflowing: In your ?rm ?s view, how is {he carrem? market for tobacco bonds dipj?erenl than the market in 200] i-vhen the TSA completed its initial secin'ii?ization? Are the buyers the some or has there been a change in buyers for tobacco asser- bached bonds? The major difference between the market for tobacco bonds in 2001 and 2005 is the institutional investor appetite for the bonds. In 2005, we see a signi?cant in?ow of investment dollars coming into bond funds, hedge funds and managed accounts, and many more investors looking to buy higher-yielding tobacco bonds as a result. Notably, the surging demand for high yield bonds in the current market has led investors to accept longer maturities, lower ratings, and subordinated liens of Capital Appreciation Bonds (CABS) that were not perceived as ?sellable? even 6 to 8 months ago. In contrast, in 2001, we saw a limited number of tobacco bond investors, and a full forward calendar of tobacco deals enabled this handful of buyers to virtually dictate the terms of the market. The price leverage that buyers had in 2001 could only be neutralized if an underwriter was willing to provide liquidity for the bonds as Citigroup did in 2001 to ensure that the Authority successfully achieved the lowest interest cost for its first tobacco securitization. Institutional and retail investors are more knowledgeable in today?s market, since there is now a 5-year history of: domestic cigarette consumption results, amortization of tobacco bonds indicating that planned expected debt-service schedules have been met, and positive litigation results in federal and State courts. This increased understanding of the tobacco credit, combined with high cash-driven demand, has helped to signi?cantly reduce the tobacco ?premium? that investors place on tobacco bonds. For more on our approach to these new buyers, please see our response to Question 6.2.4. 6.1.2 Describe (an! sigm'?carn changes in your jirn-i?s public ?nance, safes, and trading deparnnem organization or Ieadershn) since Angth 2002 and {?irty changes are amicipafed in (he near?nm'e. There have not been, nor are there expected to be, any material changes in Citigroup?s general public finance, sales, and trading department organization or leadership since August 2002. However, we have expanded our public ?nance presence extensively in the Midwest in recent years, including the establishment of a new Minneapolis of?ce, which now plays a key role in our Iowa coverage. 6.1.3 Describe any investigative, disciplinary or enforcers-zen! acricms pending agahist your firm and aprormation on any such investigations i-vhich concluded with an enforcement or discirpiinaiy action against your firm in the last three years. As is the case with most large ?nancial institutions, Citigroup Global Markets Inc. (?Citigroup?) and its affiliates have from time to time received inquiries and grand jury subpoenas from law enforcement of?cials relating to the conduct of its customers and its employees. Citigroup and its af?liates operate under strict legal prohibitions relating to the disclosure of such investigations. See 18 U.S.C. Section 1510. No indictment or judgment of conviction of Citigroup or any of its affiliates has resulted from any such investigation. In addition, from time to time Citigroup and its employees are the subject of inquiries and investigations conducted by federal or state regulatory agencies. Citigroup routinely cooperates with such investigations. In addition, Citigroup is involved in a number of civil legal proceedings and arbitration proceedings concerning matters arising in connection with its business. As a public company, Citigroup Global Markets Holdings TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 10 Inc. the parent company of Citigroup, files periodic reports with the SEC as required by the Securities Exchange Act of 1934 which include current descriptions of material regulatory proceedings, investigations and litigation, if any, concerning Citigroup. To the best of our knowledge, information and belief, we are not aware of any threatened or pending proceedings, investigations or litigation concerning Citigroup or CGMHI which could reasonably be expected to have a material adverse effect on Citigroup?s ability to perform the services contemplated by the Request for Proposal. Copies of periodic reports are on file with the SEC. Citigroup?s Form BB is on ?le with the SEC and with each State. We are pleased to provide additional detail upon request regarding the pending material litigation and/or regulatory matters involving Citigroup. 6.2 All ?rms proposing to serve as senior manager must answer the jolloi-ving. In providing your responses to Questions 6.2.1 and 6.2.2, please assume pricing the tobacco bonds as of Tuesday, August 30, 2005. Indicate your projected coupons, yields, tnai-iageinentfee, underi-vriter ?s counsel, n-iiscellaneous expenses and takedowns as oft/mt date. Please clearly slioi-vyour assumed spread to il/?l?ID for the tax?exetnpt bonds and spread to US. Treasuries for taxable bonds. Assun-ie costs of issuance other than banking fees at $1,700,000. Assume tliefolloi-ving account balances: Debt Service Fund $19,137,934; Capital Reserve Fund $48,135,625; Trapping Account $18,906,472. 2015 (Tax CIB) 5.750% 5.750% 1.320% 2045 (TE CAB) 0.000% 6.125% 1.865% 2021 (TE CIB) 4.500% 4.650% 0.780% 2045 (TE CABY 0.000% 6.625% 2.365% 2026 (TE CIB) 5.000% 5.100% 1.030% 2050 (TE CAB) 0.000% 7.200% 2.940% 2033 (TE CIB) 5.125% 5.150% 0.890% 2060 (TE CAB) 0.000% 7.800% 3.540% 2039 (TE CIB) 5.125% 5.250% 0.990% 2045 (TE 5.125% 5.300% 1.040% 2045 (TE CAB) 0.000% 6.625% 2.365% 2050 (TE CAB) 0.000% 7.200% 2.940% 2060 (TE CAB) 0.000% ?.800% 3.540% Tax CIB Taxable Current Interest Bonds; TE CIB Tax-Exempt Current interest Bonds; TE CAB Tax?Exompt Capital Appreciation Bonds *Scenario 2 Only The 'llS'A ?s current 200} Bot-ids have a planned ?nal nmtui'itv of 2027. Assun-iing the TSA. prefers to keep a comparable expected ?nal maturity on the 2005 refunding bonds, structure would you recommend and how much additional net-v money proceeds could be generated? As senior manager for the Authority?s 2001 transaction, we structured the 2001 bonds as a Residual financing that resulted in a low cost of capital, a pledge of 78% of the State?s TSRs, and residual TSRs ?ows into the Endowment For Iowa?s Health Account. The RJR downgrade in 2003 led to a trapping event that interrupted the residual ?ow. Given current 10w tobacco yields, Citigroup has identi?ed that the Authority can achieve additional leverage of the 78% of TSRs currently pledged to the Series 2001 Bonds, resulting in upfront proceeds to the State. Below, we discuss several alternative methods to achieve this additional leverage. Base Case and Rating Recommendation. The Series 2001 Bonds are currently rated with negative outlook by and Baa3 by Moody?s. These bonds were priced at a time when the majority of tobacco securitizations carried ratings from all three rating agencies; however, our view at the time was that all three ratings were not necessary for the Authority to obtain the best pricing. Therefore, we appropriately advised the Authority to apply for only two ratings. This strategy was successfully implemented and did not result in TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 ?Page a yield penalty. Given the current investor demand for tobacco securitization bonds, Citigroup would like to take this approach one step further and recommend that the Authority apply for a credit rating from only one of the three major rating agencies. This recommendation is based on extensive research of the current market and existing investor base, and we are con?dent that it will not cause a yield penalty. Applying for only one rating will decrease ?xed costs on the transaction, but more importantly, it will allow the Authority to maximize leverage and upfront proceeds. Varying rating levels between agencies reflect the varying views of the agencies on the acceptable leverage level (debt service coverage), with Fitch requiring the highest coverage and Moody?s the lowest. Please note that this has not always been the case in fact, Citigroup has recently negotiated a new stress approach with Moody?s that has resulted in higher possible leverage under their requirements. Therefore, to achieve the lowest cost of capital and the highest upfront proceeds in our Base Case scenario for the Authority, we structured this case with current interest turbo term bonds with a final rated maturity of 2045, and leverage consistent with Moody?s Baa3 rating. The summaly below compares the results of this refunding scenario (Scenario 1) with a CABs?only additional leverage case that does not require a refunding of Series 2001 Bonds (Scenario 2). In Scenario 2, the CABS are subordinated to the Series 2001 Bonds and are backed by residual payments that are projected to become available upon ?tl??ment of the trapping requirement. The CABS are structured with a ?nal rated maturity of 2045 and a final planned amortization of 2027 (as is the Base Case). Given yield assumptions as of August 30, escrow cost, and debt service reserve assumptions, Scenario 2 produces about $19 million Snel?ggate 12:33): more in upfront proceeds than Taxablepar 3,413,090,, 59 Scenario 1 (the Base Case). Tax~Exe1npt Initial Par 715,355,000 189,407,329 yield assumptions for the CABS are Gross Proceeds ss4i,39i,7es $189,407,329 more uncertain since relatively COiiUndenvritet?s Discount (2,991,151) (4,535,945) few of these securities have Debt Service Reserve (58,805,944) 0 been priced to date- due 2001 Trapping Acct&l)SRF (62:23:32) 3 to a higher cost of capital Net Proceeds to the State 165,823,964 184,821,383 (over 100 basis points over the Final Rated Maturity 6i1i2045 611(2045 Base Case) and the accretion Fina}PlannedAmerlizaiion 6i1f202? 62'11'202? of outstanding par, the CABS- only Scenario 2 amortizes more slowly than the Base Case in stress scenarios. For example, assuming a cigarette consumption decline of 3.25%, the ?nal amortization of Scenario 2 extends to 2037, versus 2035 when assuming the same consumption decline in Scenario 1. The longer amortization for Scenario 2 in stress scenarios suggests that if revenues come in lower than expected, the State will actually start to recapture TSRs later than it would in Scenario 1, making Scenario 2 less attractive from a risk transfer perspective. At the same time, there are several variables that are likely to affect the refunding case proceeds positively: (1) the negative arbitrage in the escrow, currently about $27 million, may decrease; (2) the break?up fee on the currently outstanding 5.405% GIC for the Series 2001 Bonds is likely to produce a payment to the Authority, and (3) utilizing our Surety product (see discussion below) may increase proceeds by approximately $12 million. TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 12 Citigroup looks forward to working with the Authority and its Financial Advisor to optimize all the above variables at the time of sale to pick a scenario that generates maximum upfront proceeds at the lowest cost of capital and has the best risk transfer pro?le. Escrow Cost. Our escrow was structured with Agency securities permitted by the Series 2001 Indenture. Funding an escrow with Agencies results in about 25 basis points of savings compared to Treasuries. Still, the escrow incurs negative arbitrage of $26936 million. Surety Product. Citigroup has negotiated and secured an innovative surety product for the Authority?s transaction that would replace a traditional, cash-funded debt service reserve fund. This product will require an upfront fee of 1.5% of the surety balance, as well as an ongoing annual fee payable out of TSRs. The annual fee will be subordinated to the rated debt service on the bonds, but will be senior to turbo redemptions. All refunding cases presented by Citigroup assumed a cash-funded debt service reserve fund of approximately $59 million. Utilizing a surety will eliminate the necessity of funding the reserve from proceeds and will thus have a positive effect on the upfront proceeds available to the Authority. However, without earnings on the debt service reserve balance, the amount of available funds to pay debt service will be lower than in the cases presented above, which has a negative impact on sizing. The net bene?t of the surety is thus significantly lower than the full amount of the debt service reserve balance, constituting approximately 20% of this balance. Tax Law Considerations. Citigroup worked closely with the State, the Authority and PFM in the 2001 transaction to ensure the most tax?ef?cient approach to implementation of the Program Plan, including reduction of the taxable bond portion to only $40 million. We would take a similar in?depth approach to reviewing tax issues with counsel, PFM and the Authority on its 2005 issue. Speci?cally, we believe there are several ideas that may assist the Authority in optimizing its use of tax-exempt ?nancing, while minimizing the cost and size of any taxable bond ?nancing. First, as in 2001, we recommend that any 2005 taxable component be sold in the earliest maturities to minimize cost, with the Authority taking advantage of the relatively long lives of the tax-exempt capital assets financed in 2001 (and any 2005 new money projects) to issue tax-exempt bonds on the longer end of the yield curve. Second, while the Series 2001A bonds were sold on a federally taxable basis initially, Citigroup recommends the transaction counsel explore whether those bonds are nevertheless eligible in whole or in part for tax-exempt refunding. Citigroup has on occasion been able to tax?exempt refund prior borrowings that had initially been issued taxably. Whether this is permissible in the Authority?s case depends on the subsequent timing of spending of the 2001A bond proceeds and the actual purposes for which the proceeds were spent, once deposited in the Endowment For Iowa?s Health account. Third, the size of the escrow depends on a determination by transaction counsel as to which specific bonds need to be refunded taxably. Transaction counsel can either allocate these bonds throughout the structure pro-rata to each maturity) or allocate all of them to the earliest maturities. Citigroup will work with transaction counsel to achieve the most favorable possible allocation, resulting in the lowest escrow cost. Debt vs. Equity Test. Should the Authority pursue a financing structure that includes long-dated CABS, Citigroup also is keenly aware of the importance of working with transaction counsel to structure any CAB portions of the offering to satisfy counsel that the bonds constitute debt instruments eligible for tax-exempt treatment of accreted interest, rather than ?equity? resulting from the Authority?s permanent sale of essentially all present economic value in the State?s share of TSRs. Law ?rms vaiy consistently in the standards they apply to this determination. cutlgroupt TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 ?Page 13 6. 2.2 If the TSA seeks to maximize new money proceeds and is willing to extend the expected 11-1at11rity beyond the current planned of 202 7, what structure 1-vonld you recon-mend and how much additional new money proceeds could be generated? Are there (my trade-offs or risks that should be considered in this decision. Given the acceptance of the longer maturities and subordinated liens of zero-coupon bonds in the tobacco market, the Authority . Delivery Date 121112005 121112005 could increase upfront proceeds was,? 78.00% by subordinated CABS t0 TaxablcPar $141,210,000 $141,210,000 the Base Case current interest 71513551000 71513551000 . ax-+xempt mtta 3: 61,225,208 . 142,775,351 bonds The . amount Of Total Par 917,790,203 999,340,351 CABS Issued can be tallored to the (elovrremium (14,313,003) {14,013,003} desired year of ?nal planned Gross Proceeds $902,977,200 $984,527,343 . . . . Discount (3,638,941) (9,608,322) ammuzatl_ml' We Shoucuned two Debt Service Reserve (50,305,944) (58,805,944) cases to Illustrate this approach. Escrow Cost (677,310,743) (677,813,743) The Base Case Structure ReleaseofSerics 2001 Trapping 67,042.09? 62,042,091? . . . thPr-oceedstethe State 224,755,669 305,336,430 addmonal CABS {Hamming 2045 Final Rated Maturity 61112050 61112060 and 2050 (308113110 3) eXtendS the FinalPlannedAmonization 61112032 61112044 ?nal planned amortization to 2032, and increases the proceeds by $59 million compared to the Base Case. The Base Case structure w1th CABS maturrng 1n mamas 12,1,2095 2045, 2050, and 2060 (Scenario 4) 73mm 73.00% increases the leverage of the back? 1101111113111 228,711,645 315,646,487 end TSRs even further, extending (O?DWmn?ium (7307.162) (7,307,162) the ?nal planned amortization to r, B, 3231;141:393; 53:21:93: . . 11 erwrne 1scount 2044. The proceeds In case 216,483554 302,384,808 also increase, and are .now 6mm? 6,1,2060 apprommately $140 1111111 Planned Amman 51112031 61112043 greater than in the Base Case and $80 million greater than in Scenario 3. Unlike Scenario 2, which includes rated CABS, Scenarios 3 through 6 include non-rated CABS, which transfer the most back-end TSR risk from the State to the bondholders, albeit at a very high cost of capital the yield on the 2050 CAB is estimated at and on the 2060 CAB, Finally, we considered additional leverage of the back?end TSRs available to the Authority if the Authority wishes to keep the 2001 Bonds outstanding. We structured Scenarios 5 and 6 similarly to Scenario 2: these cases consist of subordinated CABS backed by residual TSRs as well as the TSRs that will become available after the senior lien Series 2001 Bonds are paid Scenario 5 assumes a ?nal rated maturity of 2050 and results in a ?nal planned maturity of 2031. Scenario 6 assumes a ?nal rated maturity of 2060 and results in a ?nal planned maturity of 2043. Please see the summary above, and refer back to our response to Question 6.2.1 for more discussion on the considerations for a long-dated CABS issuance without a refunding of the Series 2001 Bonds. Conclusion. The bene?ts and considerations of a refunding approach versus a subordinated CABS structure are summarized in the following table. Citigroup recommends that the State and the Authority decide on the most desirable ?nal planned amortization date for the Series 2005 Bonds. Depending on the escrow cost, estimated break-up fee on the Series 2001 GIC, the spread between current interest bond and CAB interest TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 ?~Page I4 rates and other variables at the time of sale, and the State?s desired risk pro?le, Citigroup is prepared to structure and aggressively price either a refunding or a subordinated debt structure for the Authority. . 3 LeverageTl'Througlr .Refunili .i .5 -- I- i-Addition Thrift) Bene?ts Bene?ts A Developed and ?deep? market for investment grade current A Smaller initial par than a refunding issue; lower cost of interest bonds leads to high certainty regarding achievable issuance Intel's? rates Considerations A lower 005? Of capital compared to CABS Much higher cost of capital compared to the current interest A Par does not continue to accrete in stress scenarios; more bonds likely to pay Off by the ?96?th amortization date Fairiy ?thin? market, heavily reliant on few anchor buyers; A Can be structured to utilize less than 78% of TSRs, freeing- muCh less certainty as to achievabie interest rates up the remaining portion for depos? into the Endowment Par continues to accrete in stress scenarios; less likely to for Iowa?s Health Account pay off by the expected amortization date A Stimulates investor demand by taking investors out of Current cases summed to utilize moo/6 of projected Series 2001 bonds Considerations residuals; however, Debt vs. Equity test (see above) requires showing 5-10% of non?securitizecl residual value 7 Higher par amount than the CABS case; higher cost of to achieve tax-exempt Status issuance Statutory considerations To the extent that the State desires to transfer the tobacco risk associated with its remaining 22% of TSRs, Citigroup estimates that the structure similar to Scenario 4 executed with a pledge of 100% of TSRs will generate approximately $570 million in upfront proceeds. We realize that this scenario will require statutory and/or policy changes, but would like to note that we stand ready to execute a transaction of larger magnitude on the same tight schedule as any of scenarios presented above. 6.2.3 How many coummugers J?BCOH'itliel'id be included in the team? Given the potential large size of the Authority?s transaction, Citigroup recommends or 2 co?senior managers and 5 to 7 co-managers that have both retail and institutional distribution capabilities. The co- managers can include regional and small business underwriters in addition to large national underwriters. To further penetrate the Iowa retail market, Citigroup proposes that the Authority utilize a selling group in addition to a syndicate of co-managing underwriters. We recommend that the Authority invite any ?rm with a sales of?ce in Iowa to join the selling group. Citigroup would coordinate all activities with the underwriting team and selling group. 6.2.4 Provide a detailed the transaction Citigroup?s marketing plan for the Authority?s 2001 ?nancing generated strong demand from investors and resulted in the lowest spread to MMD for any unenhanced, non-specialty state tobacco issue. Citigroup will develop a customized tobacco marketing plan for the Authority?s bonds based on: (1) our extensive relationships with institutional investors seeking to purchase tobacco bonds, (2) our knowledge of retail demand for tobacco bonds, especially given that the Smith Barney retail system, in aggregate, is the 6th largest holder of tobacco bonds, and (3) current market interest rates and investor demand. As a primary market underwriter of tobacco bonds, and the largest secondary market maker of tobacco bonds, Citigroup is simply ?in the ?ow? of all major tobacco investment activity. Institutional buyers on every primary offering and in the secondary market turn to Citigroup for market knowledge, leadership, support, and capital. The TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 ?Page 15 following pages provide speci?c details on the marketing plan Citigroup has developed for the Authority?s offering. TOP HOLDERS OF UNENHANCED TOBACCO SECURITIZATION BONDS Oppemem Rochester Citigroup Detailed Marketing Plan: ey Components. 0 Citigroup will target speci?c institutional investors to conduct pre-sale market activities. 0 Citigroup will leverage its tobacco franchise as the dominant tobacco market maker to extract the best price lowest yield from these selected investors. Mrveen PMCD Caplal Research Frantdh Citigroup will utilize its retail network, already well- SMme . . atan versed 1n tobacco, to access retail demand, and Will seam work with its co-managers and selling group team to Dream Mammath further stimulate retail interest. 60mm Sachs As set Manager-rm! [s thousands) Tax-Exempt Institutional Marketing. Recently, the tobacco market has experienced signi?cant demand from institutional investors who are searching for yield. Given that investor demand has exceeded primary market new issue supply over the past two years, recent tobacco transactions have been signi?cantly oversubscribed. This demand originates predominantly from high yield and total return investors who are experiencing large in?ows of investment capital. To take advantage of this investment demand, Citigroup proposes a speci?c targeted marketing program. Sewer: Trams-1 ann'at. emcee: shares a Home: The table below lists: existing holders of the Authority?s Series 2001 Bonds, current top high yield funds, and top holders of tobacco bonds. Citigroup would target its preusale marketing activities to this combined set of institutional investors. For the Series 2005 refunding bonds, our initial marketing target would be the existing holders of the Series 2001 Bonds. The Series 2001 bondholders will experience an economic gain from the defeasance of the Series 2001 Bonds. Given this potential gain and their need to reinvest these funds, current Series 2001 investors will be primary marketing targets. In addition to these holders, Citigroup would also target key high yield funds and our proprietary list of current tobacco buyers. The high yield funds, as previously discussed, are strong candidates due to signi?cant cash in?ows that must be invested. Citigroup?s proprietary buyer list is composed of accounts with whom we have established relationships from prior primary and secondary market business, and who have historically invested in tobacco bonds to gain higher investment yields. Goldman Sachs Asset Oppenheimer?mcllestcr Nuveen Fidelity PIMCO Stamper Capital Capital Re MFS Investment Management Guardian Van Kampen .P. Morgan investment Van Kampen Franklin Vanguard Goldman Sachs American Express Financial Oppenheimer Rochester Nuveen Putnam American Funds MFS Investment T. Rowe Price Susquehanna Blaekrock Merrill Vanguard Federated Fidelity Smith Barney Asset MorgaufBanc One Standish Bernsteianlliance Cedar Ridge (hedge fund) Saybrook (hedge fund) Camulos Cap. (hedge fund) To reach these institutions and educate them on the credit and ?nancial structure of the transaction, Citigroup would undertake the following preusale activities: (1) distribute the POS a minimum of one week prior to the pricing date; (2) post an institutional investor ?Internet Roadshow? one week prior to pricing; and (3) schedule an institutional investor conference call three days prior to pricing. One?on-one investor meetings would be offered to all investors, but given the performance of recent offerings in the current market, we do not expect that a traveling ?roadshow? will be required. Citigroup will coordinate the TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 16 activities of the underwriting team to canvass investor interest in the 2005 Bonds and determine the most appropriate interest rate levels. Taxable Institutional Marketing. Citigroup would conduct a similar approach to target selected taxable investors. The adjacent table lists: top holders of the taxable Series . Nationwide AIG 2001A Bonds, and top holders of taxable tobacco bonds. Unitedmfe Our marketlng focus agaln first target ex1stmg holders Orion Capital . - - - Pioneer Capital Re and subsequently all existing tobacco holders. In addltion to Catholic Citigmup ma111ng the POS and implementmg the Internet roadshows, Wells Capital Nationwide I - - - - - Tri-State Consumer Insurance Oppenheimcr?lochester?t pie-sale activrtles focus on 1nvestor conference calls, Century Surety Group PIMCO srnce there have been few recent taxable primary market St?t? investment Associates Pioneer St. Paul of fenngs. Standish Investor in taxable series of NY Counties Tobacco Trust IV Retail Marketing. Retail investment in tax-exempt tobacco bonds has grown steadily over the last three years as retail investors have learned more about the tobacco credit and have increasingly searched, like institutions, for higher-yielding investments. Citigroup sold more than $430 million to retail investors in a 2002 New Jersey tobacco offering 24% of the issue. With over $530 million of tobacco bonds in retail accounts, Citigroup?s Smith Barney system is the 6th largest holder of tobacco debt. Citigroup?s retail network has been educated about the tobacco credit through past tobacco offerings, and we would look to market the Authority?s new bonds to any retail customers who have an appetite for tobacco bonds, while also ensuring that they are comfortable with the tobacco credit. To further bolster retail distribution, we also recommend that the Authority use: coumanagers with strong retail distribution systems and a selling group composed of Iowa-based firms. To maximize tax-exempt retail investment, Citigroup recommends the following pre-sale activities: (1) have each underwriter conduct retail-focused conference calls to educate brokers; (2) require each underwriter to distribute retail sales memoranda to educate brokers; (3) distribute the POS to retail investors one week before pricing; and (4) conduct a retail pre-order period prior to institutional pricing. While Citigroup will notify our retail system of the availability of any taxable Series 2005 Bonds, we do not expect material retail demand for this component. 6.2.5 I'Vhy simtdd yom'?rm be seiecred as senior bankerjbr the TSA transaction? li?imf are the key ofyonr?rm and perisomtei {hat distinguish you??om other investment bunking?r?ms? Citigroup was proud to serve as book?running senior manager for the Authority?s Series 2001 tobacco ?nancing. We delivered a successful and aggressive pricing for the Authority in 2001, and we have since maintained our record of tobacco structuring innovation and aggressive pricing. We believe we are again the best-quali?ed ?rm to serve as the Authority?s senior manager for the following key reasons: 0 Continued Service to the Authority: Our team will begin its work already familiar with key members of staff and Iowa-speci?c legal and tax issues. Since the 2001 financing, we have continued to keep the Authority informed of market developments and structuring opportunities. We were the ?rst to come forward with the restructuring idea that the Authority is currently contemplating, and have the resources and the tobacco financing expertise to secure the best and most timely execution for the Authority. 0 Continuity of Transaction Team: Citigroup?s entire 2001 TSA banking team, including Jim Haddon, Tom Green, Ray Kljajic, and Nora Ostrovskaya, will again be fully dedicated to the Authority in 2005. TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 we Page I 7 Working with a banking team already familiar with the Authority and its ?nancing legal concerns will work towards ensuring the quickest and smoothest execution for the 2005 transaction. 0 Leader in Tobacco Structuring and Pricing: We have a track record of continuous innovation for our tobacco securitization clients. We pioneered the ?rst securitization in 1999, and have since brought to the market the ?rst tobacco-backed Capital Appreciation Bonds, the first tobacco securitization refunding, the most recent deal with a taxable component, and the first residual-to-turbo restructuring experience that is all directly relevant to the Authority?s planned 2005 offering. We have a record of fast execution and successful pricing in challenging environments, and we are eager to bring the Authority?s ?nancing to market on an aggressive schedule. 0 Leading Commitment and Presence in the Tobacco Market: Institutional buyers on every primary offering and in the secondary market turn to Citigroup for market knowledge, leadership, support, and capital. Our inventory of tobacco securitization bonds, averaging approximately $200 million, is the largest in the industry. We have provided bids for tobacco bonds in the most adverse markets. Among investment banks, our tobacco franchise is unmatched. (Please see our investor reference provided On page 7.) I 6.2.6 Suggest a fimeir'ne jbryom' recon-Intended transaction from appoinmzem to closing. If assigned as the Authority?s senior manager, we believe we can execute a tobacco ?nancing for the Authority within the 7-week timeframe detailed below. 6. 3 Firms seeking to be (re-managers must answer thefollowing: 6.3.1 What are the key yam-?rm brings 10 the banking (earn? 6. 3.2 Do you have any snggestionsfor err-rimming the e?ectiveness ofthe banking term-2? Please see our responses to Questions 6.2.5, 6.2.3, and 6.2.4 above. TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 Page 18 6. 4 Please provide a detailed description and breakdown of your proposed fees as senior banker for the tobacco trat-tsactionjbr each structure in 6.2.1 and 6.2.2 ofthis RFP. 6. 4.1 Delineate thefollowing cost components as applicable: Placement Fee, .S'tructuring Fee, Management Fee, Takedoi-vn, Expenses (?provide detailed budget), Ut-zderwriters (Disclosure) give indication of likely fees based on your experience with other transactions. 6. 4.2 Please state the basic assumptions used in developing these prices and any variables that might affect your quote, include a detailed budget for any and all underwriting expenses oftbe transaction. The price per bond {joer 3 1,000) cost will befixed and can only be changed at the discretion of the Treasurer. Citigroup is con?dent it can offer the Authority the lowest all-in cost for its proposed ?nancing, combining the lowest interest rates with competitive underwriting fees that support the management team?s marketing and sales effort. The table below details our proposed fees and expenses for the Authority?s transaction. We are con?dent in our ability to work with the Authority and its ?nancial advisor to select a counsel that has demonstrated experience in the areas Of importance and has a willingness to work cooperatively with the entire ?nancing team under a competitive fee arrangement (all-in $250,000). Finally, we believe our fee proposal represents fair and comparable compensation based on prior tobacco deals. However, we do not want our proposed fees to be the deciding factor in our selection, and we are fully prepared to negotiate with the Authority to determine a mutually agreeable underwriter?s discount. (I) (2) $131,000 $81,000 Structuring Fee 0.555 0.518 Average Takedown 6.000 8 6.100 Expenses 8 0.462 8 0.440 Total: 7.016 7.058 Expense Breakdown: Travel 8 0.012 0.011 Notes: Syndication Dalnet 8 0.078 8 0.078 Based on the Base Case Refunding structure in Freight Communications 0.006 0.005 6.2.1 ($856,565,000 CIBs par at $6.00lbond). Underwriters? Counsel 8 0.292 0.272 Based on Scenario 3 in 6.2.2 ($856,565,000 Day Loan/F ed Funds 8 0.030 8 0.030 par at $6.00/bond; $61,225,208 CABS par at Other (please specify) Both scenarios assume: CUSIP 0.001 0.001 $475,000 total structuring fee EMA 0.035 8 0.035 $250,000 totai underwriter?s counsel fee Internet Roadshow 0.009 8 0.008 $7,500 Internet Roadshow expenses Sub?Total Expenses: 0.462 0.440 $10,000 all-in travel expenses $5,000 freight communications expenses cutlgroupt TOBACCO SETTLEMENT AUTHORITY: Proposal to Serve as Senior Manager Sept. 13, 2005 ?~Page 19 6.5 Please indicate syndication rides and designation poiicies the! you think appropriate for the transaction. Please note that banker compensation and all syndication and designation rules and policies are subject to the approve} ofilre Treasurer. Citigroup proposes the following syndicate rules and designation policy: 0 Order Priority: (1) Iowa retail (2) Out-of-State Retail (3) All Institutional orders Net Designated (4) Member/ Stock orders 0 Designation Policy: Citigroup would recommend that a minimum of four firms must be designated on every institutional order, with no manager receiving more than 60% of one designation. We are willing to develop a different arrangement if so preferred by the Authority and its ?nancial advisor. Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. Prior to entering into any transaction contemplated hereby (3 ?Transaction?) you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks), as well as the legal, tax and accounting characterizations and consequences of any such Transaction. In this regard, by accepting this presentation, you acknowledge that we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, there may be 1e gal, tax or accounting risks associated with any Transaction, you should receive (and rely on) separate and quali?ed legal, tax and accounting advice and you should apprise senior management in your organization as to such legal, tax and accounting advice (and any risks associated with any Transaction) and our disclaimer as to these matters. We are required to obtain, verify and record certain infonnation that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number. We may also request corporate formation documents, or other forms of identification, to verify information provided. Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your infomtation and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof and are subject to change without any notice. We andfor our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time. 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Although this material may contain publicly available information about Smith Barney equity research or Citigroup corporate bond research, Citigroup policies prohibit from participating in any efforts to solicit investment banking business; accordingly, research may not have any conununications with companies for the purpose of soliciting investment banking business. MoreOver, Citigroup policy prohibits research from participating in road show meetings; (ii) prohibits investment banking personnel from having any i into company-speci?c research coverage decisions and from directing research to engage in marketing or selling efforts to investors with respect to an investment banking transaction; prohibits employees from offering, directly or indirectly, a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (iv) prohibits from being compensated for specific or views contained in research reports. So as to reduce the potential for con?icts of interest, as well as to reduce any appearance of conflicts of interest, Citigroup has enacted policies and procedures designed to limit cotmnunications between its investment banking and research personnel to speci?cally prescribed circumstances. (9 2004 Citi group Global Markets Inc. Member SIPC. 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