Michigan Tobacco Settlement Finance Authority Proposal to Serve as Senior Manager for the Michigan Tobacco Settlement Finance Authority March 10, 2008 March 10, 2008 Mr. Thomas Letavis Director, Authority Finance Division Bureau of Bond Finance 430 W. Allegan Street Lansing, Michigan 48922 Dear Tom: On behalf of Citi, we are pleased to submit our proposal to serve as senior managing underwriter for the Michigan Tobacco Settlement Finance Authority’s (the “TSFA”) proposed 2008 tobacco bond transaction. As you know, Citi was integrally involved in the drafting of the TSFA’s original enabling legislation and served as co-senior manager on the TSFA’s inaugural financings in 2006 and on the TSFA’s 2007 financings. We believe that our efforts on both transactions are the best measure of the type of banking, marketing and transaction execution expertise Citi can bring to a TSFA transaction. Specifically, we are proud to be the firm that brought in an anchor order from major institution in support of the TSFA’s inaugural transaction. The proposal enclosed is meant to be concise and demonstrate Citi’s considerable expertise in the structure and marketing of tobacco securitizations. Highlights of our enclosed proposal to the TSFA include: • Tobacco Securitization Pioneer and More Experience Than Any Other Firm. Citi pioneered the tobacco bond market in 1999 as the book-running senior manager for the first 3 Master Settlement Agreement (“MSA”) securitization transactions completed and, through 2007, we have structured more tobacco securitizations than any other firm have senior manager 43 tobacco securitizations according to Securities Data Corporation. • Leading Market Maker in Tobacco Bonds. Citi is the leading market maker for tobacco securitization bonds. In every year since 2002 Citi has been responsible for over 30% of the secondary market trading activity in tobacco bonds. This is important for the TSFA because our market liquidity provides real-time market intelligence, creates capacity in high yield fund portfolios and results in more aggressive pricing. • Experience of Citi Professionals. Citi’s TSFA team includes our large and experienced tobacco group, as well as our Michigan coverage bankers. Citi’s tobacco team routinely works closely with rating agencies and institutional investors on new industry developments and rating criteria to optimize our clients’ tobacco securitization goals. Our professional resources also include a full-time tobacco securitization bond trader, Bernie Costello, a dedicated taxable tobacco and tobacco credit default swap trader, Andrew Goodwin, and a dedicated, award-winning municipal tobacco credit analyst, Chris Martin. No other firm has three professionals dedicated solely to tobacco marketing. Given these resources, investors come first to Citi for investment advice, market access, and trading execution. • Financial Strength of Citi. While much has been written in the financial press recently, Citi is financially sound -- we are well capitalized and extremely focused on the strength of our balance sheet. On a pro-forma basis at the end of last year, we exceeded our regulatory requirements and internal targets for capital levels. Additionally, in December and January, we took decisive steps including two separate rounds of financing, increasing capital by more than $30 billion -- a level that was stressed-tested against a number of economic downturn scenarios. The financing we secured is a vote of confidence in Citi. • Michigan Presence. Citi maintains a significant presence in Michigan with more than 5,769 employees working the State including 344 Financial Consultants in 16 sales offices. Our Michigan Financial Consultants maintain over 171,000 retail accounts with over $24.6 billion in assets. We are prepared to mobilize this sales force to maximize the distribution of the TSFA’s bonds to in-state retail investors. We appreciate this opportunity to propose as senior manager for the TSFA’s upcoming tobacco securitization. If you have any questions or require follow-up information, please do not hesitate to contact us. Sincerely, Thomas Green Managing Director Guy T. Logan Director Citigroup Global Markets, Inc. 390 Greenwich Street, New York, NY 10013 MICHIGAN TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority March 10, 2008 Proposal to Serve as Senior Managing Underwriter for the Michigan Tobacco Settlement Finance Authority Prepared By: Citigroup Global Markets Inc. March 10, 2008 TABLE OF CONTENTS Section A 1. CITI’s Tobacco Settlement Finance Authority Team......................................................................................................... 1 2. Firm’s Ownership Structure, Location, and Organization.................................................................................................. 2 3. Regulatory Investigations ................................................................................................................................................... 3 4. Potential Conflicts of Interest ............................................................................................................................................. 4 5. Firm Description and Recent Tobacco Experience ............................................................................................................ 5 6. Issuer References................................................................................................................................................................ 7 7. Act 226 Criteria .................................................................................................................................................................. 7 Section B 1. Discussion of Securitization Structure................................................................................................................................ 1 2. Rating Agency Strategy and Marketing Issues................................................................................................................... 4 3. Senior Managed Tobacco Underwriting Services .............................................................................................................. 7 4. Litigation and Other Market Disruption Protection............................................................................................................ 8 5. Current Market Factors....................................................................................................................................................... 10 6. Time Schedule .................................................................................................................................................................... 13 7. Proposed Underwriting Fees............................................................................................................................................... 14 8. Tobacco Securitizations Since 2005 ................................................................................................................................... 14 9. Additional Factors .............................................................................................................................................................. 14 Appendices A. Citi Team Resumes B. Tobacco Securitization Experience C. Case Studies D. Detailed Numerical Analyses MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority March 10, 2008 Section A – Page 1 1. CITI’S TOBACCO SETTLEMENT FINANCE AUTHORITY TEAM Citi has the most significant tobacco securitization effort in terms of capital and human resources, commitment to all aspects of tobacco bond underwriting, banking and sales and trading of any firm on Wall Street. Tom Green Citi’s commitment is exemplified not only by the number of professionals we have dedicated Citigroup Global Markets Inc. to tobacco securitization (over 22 currently) but also by the greatest commitment of capital 390 Greenwich St., 2nd Fl to tobacco securitizations in the primary and secondary markets. Citi pledges to provide the New York, NY 10013 highest level of banking services to the State of Michigan (“State”) and the Tobacco Phone: 212-723-4644 Settlement Finance Authority (the “TSFA”). On behalf of the TSFA, Citi has assembled a Fax: 212-723-8939 multi-disciplinary team that combines strong local financing expertise (e.g., Tom Coomes, Guy thomas.h.green@citi.com Logan, Robert Mellinger) with the knowledge and experience of industry-leading tobacco securitization bankers (e.g., Tom Green, Paul Creedon). Citi’s lead bankers will be supported by a team with substantial tax-exempt and taxable tobacco securitization experience in terms of underwriting, market making, structuring, document preparation and quantitative analysis. Primary Contact. Tom Green, Managing Director and Head of Citi’s Tobacco Securitization Group will be THE TSFA’s primary contact and will be handling the TSFA’s transaction on a day-to-day basis. Guy Logan will be the principal local coverage banker and the primary regional contact for the transaction. Provided in the chart below is a brief summary of Citi’s full TSFA team with a description of responsibilities and relevant experience. All Citi team members will be available to the TSFA on a priority basis and will be fully focused on meeting the TSFA’s transaction timing and financial goals. Brief resumes for the core members of our financing team are provided in Appendix A. Citi Tobacco Banking Title Responsibility Relevant Experience Tom Green Managing Director Paul Creedon Managing Director Shai Markowicz Director Mathilde McLean Assistant Vice Pres. Brittany Sharpton Analyst Head of Tobacco Securitization Group, Primary contact, involved in all aspects of transaction execution Co-Head, Tobacco Securitization Group, involved in all day-to-day responsibilities, documents, quantitative analysis, rating agencies Documents, quantitative analysis, transaction support Documents, quantitative analysis, transaction support Documents, presentations Tom Coomes Managing Director Michigan coverage, day-to-day contact Co-Head, Citi Midwest Region Guy Logan Director Michigan coverage, Primary contact Extensive MI experience, including 2006 MSBA financing and co-senior role in 2006 and 2007 MI TSFA restructuring Robert Mellinger Vice President Michigan coverage Local financing expertise, 2006 MSBA Peter Bartlett Managing Director Tobacco Underwriting/Trading Jay Wheatley Managing Director Tobacco Underwriting/Trading John Rice Managing Director Institutional Sales Marketing Doug Vissicchio Managing Director Head of Bond Trading Senior tobacco trader; 17 years Bernie Costello Director Tobacco Bond Trading Largest volume tobacco trader; 10 years Lead banker on 18 Citi tobacco deals, prior AG tobacco litigation experience Lead banker on 10 Citi tobacco deals Senior banker on 3 recent tobacco transactions Technical support on Citi tobacco transactions since 2007 Supported 4 tobacco transactions Michigan Coverage Sales & Trading Head of Municipal Capital Markets; 30 years Senior underwriter on all Citi tobacco deals; 21 years Coordinates Citi primary market of sales for all tobacco deals MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority March 10, 2008 Section A – Page 2 Maureen McCann Managing Director Tobacco CAB Trading Senior CAB trader; 25 years Andrew Goodwin Associate Tobacco Bond Trading Trades taxable tobacco bonds Ish McLaughlin Managing Director Taxable Asset-Backed Syndicate Terry Tracy Managing Director Retail Sales Marketing Coordinates underwriting of taxable tobacco bonds Marketing liaison on tobacco deals; 26 years Tobacco Structuring & Analytics Support Harold Bean Director Member, Citi Technical Review Committee, Analytical support, Provides analytical support on all Citi tobacco financing Rodolfo Riverol Director Modeling and quantitative structuring Analytics support for tobacco modeling Jed Drumm Associate Quantitative structuring, documents Primary analytical support for 13 Citi tobacco financings since 2005 Tobacco Credit Expertise Chris Martin Director Tobacco Credit Analysis Tobacco sector coverage since 1999 George Leung Director General Credit Analysis General credit and rating expertise, 20 years Citi Advantage ` The knowledge and experience of Citi’s team ensures THE TSFA the focus and creativity necessary for a successful transaction. 2. FIRM’S OWNERSHIP STRUCTURE, LOCATION, AND ORGANIZATION Global Consumer Group United States Cards United States Retail Distribution United States Consumer Lending Commercial Business Group International Cards International Consumer Finance International Retail Banking Women & Co. Assets: $407 bn Book Value per Share: $22.74 Net Income 1: S&P Rating: AA While much has been written in the financial press recently, Citi is financially sound - we are well capitalized and extremely focused on the strength of our balance sheet. On a pro-forma basis at the end of last year, we exceeded our regulatory requirements and internal targets for capital levels. Additionally, in December and January, we took decisive steps including two separate rounds of financing, increasing capital by more than $30 billion -- a level that was stressed-tested against a number of economic downturn scenarios. The financing we secured is a vote of confidence in Citi. Municipal Securities Division (MSD). Citi’s 540-person MSD consists of Municipal Origination, the Municipal Syndicate, Sales and Trading, and Citi Community Capital, and represents the largest investment of people and capital to the municipal market of any firm. Citi has been the #1 senior manager of negotiated municipal bonds for Institutional Clients Group Global Wealth Management Markets & Banking Global Banking Global Capital Markets Transaction Services Cit Alternative Investments Citi Private Bank Smith Barney Citi Investment Research $(9.8) mm - Market Cap: $145.7B Moody ’s Rating: Aa3 Total Capital: $274B Excess Net Capit al: $5.3B Fitch Rating: AA National Municipal Underwriting Rankings Long-Term Negotiated, 1997 – 2007 70 #1 60 Par Amount ($ Billions) Citi, a publicly traded company on the NYSE, is the largest financial services firm in the world with a balance sheet of $407 billion, which is stabilized by businesses that are diversified by products and geography. This stability is exemplified by Citi’s current credit ratings of Aa3/AA-/AA. Our corporate headquarters is located in New York, NY and is provided to the right. Today, Citi is the only financial services company in the U.S. to bring together banking, insurance, and investments under one umbrella with the most diverse array of products and the greatest distribution capacity of any financial firm in the world, encompassing over 300,000 employees. In Michigan alone, Citi maintains a workforce of 5,769 people. Overall, Citi has 200 million customer accounts in more than 100 countries across six continents. #1 #1 #1 #1 #1 50 #1 #1 40 #1 30 #1 #1 20 10 0 1997 1999 2001 2003 2005 2007 MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority March 10, 2008 Section A – Page 3 each of the last 11 years. Citi remains committed to the municipal market and we continue to be the market leader into 2008 in both primary market underwriting and secondary market trading of tax-exempt and taxable municipal bonds. The chart on the previous page demonstrates our market leadership since 1997. In February 2007, the Municipal Securities Division (MSD) of Citi acquired certain affordable housing related businesses, assets and personnel from Capmark Inc. As part of this acquisition, Citi acquired approximately 56 bankers, traders and administrative staff who have been integrated into MSD. In addition, Citi announced in August 2007, the merger of the Citibank Community Development business into MSD. This merger was completed as of December 2007 and involves the integration of approximately 113 new personnel into MSD. Among these will be approximately 60 bankers who specialize in affordable housing and real estate related municipal finance transactions. The Capmark and Citibank Community Development personnel have been combined into a new group within MSD called Citi Community Capital. Citi Advantage ` TSFA will have access to the vast resources of the world’s largest financial services firm. 3. REGULATORY INVESTIGATIONS From time to time Citigroup Global Markets Inc. ("Citi") and its employees are the subject of inquiries and investigations conducted by federal or state regulatory agencies. Citi routinely cooperates with such investigations. In addition, Citi 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 Inc., the parent company of Citi, 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 Citi. To the best of our knowledge, information and belief, we are not aware of any threatened or pending proceedings, investigations or litigation concerning Citi or Citigroup Inc. which could reasonably be expected to have a material adverse effect on Citi’s ability to perform the services contemplated by the Request for Proposal. Copies of Citigroup Inc.’s periodic reports are on file with the SEC. Citi’s Form BD is on file with the SEC and with each State. The following are summaries of certain pending material litigation and/or regulatory matters involving Citi: Reinvest Inquiry: Citigroup Global Markets Inc. has received subpoenas from the U.S. Department of Justice and the Securities and Exchange Commission regarding certain practices in the municipal reinvest and derivatives markets. We are cooperating with the authorities in this investigation. Auction Rate Securities Settlement: On May 31, 2006, the SEC announced that it had settled proceedings against 15 firms, including Citi, that participate in the auction rate securities market regarding their respective practices and procedures in this market. The SEC alleged in the proceedings that the firms had managed auctions for auction rate securities in which the firms participated in ways that were not adequately disclosed or that did not conform to disclosed auction practices and procedures between January 2003 and June 2004. As part of the settlement, Citi and seven other settling firms that participated in the auction securities market at a level similar to that of Citi each agreed to pay a civil money penalty of $1.5 million. In addition, like the other firms, Citi, without admitting or denying the SEC’s allegations, agreed to be censured, to cease and desist from violating certain provisions of the securities laws, to provide to customers written descriptions of its material auction practices and procedures, and to implement procedures reasonably designed to detect and prevent any failures by Citi to conduct the auction process in accordance with disclosed practices and procedures. Research: Since May 2002, Citi and certain executive officers and current and former employees have been named as defendants in numerous putative class action complaints and arbitration demands by purchasers of various securities alleging violations of federal securities laws for allegedly issuing research reports without a reasonable basis in fact and for allegedly failing to disclose conflicts of interest with companies in connection with published investment research. Almost all of these putative class actions are pending before a single judge in the U.S. District Court in NY for coordinated proceedings. Similar claims with respect to research have also been included in numerous cases pending against Citi and other broker/dealers in the IPO Allocation litigation disclosed below and in various other litigation. Citi has entered into settlement agreements with respect to several of these claims. At least one remains the subject of a class action in which Citi is appealing the class certification in the US Court of Appeals for the Second Circuit. On April 28, 2003, Citi and a number of other broker/dealers announced final agreements with the SEC, the NASD, the NYSE and the New York Attorney General (as lead state among the 50 states, the District of Columbia and Puerto Rico) to resolve on a civil basis all of their outstanding investigations into their research and IPO allocation and distribution practices. The NASD, NYSE and SEC settlements have become final. As required by the settlements, Citi has entered into separate settlement agreements with each MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority March 10, 2008 Section A – Page 4 state and various U.S. territories. Citi reached these final settlement agreements without admitting or denying any wrongdoing or liability. The settlements do not establish wrongdoing or liability for purposes of any other proceeding. Adelphia, Enron, Global Crossing, WorldCom: Citi and various of its affiliates, together with numerous other parties, are named as defendants in a number of lawsuits filed since 2002, including putative class actions, arising out of and relating to dealings with Adelphia Communications Corporation, Enron Corp., Global Crossing or WorldCom or their related securities. These lawsuits allege violations of certain federal and state securities laws, certain federal statutes (including the Bank Holding Company Act, ERISA and RICO), state unfair competition laws, and certain common law claims (including negligence, civil conspiracy, fraud and breach of fiduciary duty). During 2004 and 2005, Citi agreed to settle certain actions involving Enron, Global Crossing and WorldCom, including, without limitation, a $2.0 billion settlement of an Enron class action litigation in June 2005, and a $2.6 billion settlement of a WorldCom class action litigation in May 2004. Citi generally reached these settlements without admitting any wrongdoing or liability, and the agreements generally reflect that Citi denies that it or its subsidiaries committed any act or omission giving rise to any liability and/or violation of law. IPO Securities Litigation: In April 2002, consolidated amended complaints were filed against Citi and other investment banks named in numerous putative class actions alleging violations of certain federal securities laws with respect to the allocation of shares for certain initial public offerings and related aftermarket transactions and damage to investors caused by allegedly biased research analyst reports. In October 2004, the U.S. District Court certified a class in six focus cases in these actions, however Citi is not a defendant in any of these focus cases. In December 2006, the United States Court of Appeals for the Second Circuit reversed the District Court and held that the matter could not proceed as a class action. The plaintiffs filed a petition for rehearing on this matter which was denied in April 2007. Mutual Funds: Citi and certain of its affiliates have been named in several class action litigations arising out of alleged violations of federal securities laws and common law. The claims concern practices in connection with the sale of mutual funds, including allegations involving market timing, revenue sharing, incentive payments for the sale of proprietary funds, undisclosed breakpoint discounts for the sale of certain classes of funds, inappropriate share class recommendations and inappropriate fund investments. The plaintiffs in these litigations generally seek unspecified compensatory damages, recessionary damages, injunctive relief, costs and fees. Issues in the mutual fund industry continue to receive scrutiny by various government regulators and SROs. Citi continues to cooperate and respond to subpoenas and other requests for information regarding market timing and other mutual fund issues. Citi entered into a settlement in March 2005 with the SEC and NASD with respect to revenue sharing and sales of classes of funds. Wage & Hour Employment Actions: Numerous financial services firms, including Citi have been named in putative class actions alleging that certain present and former employees in California were entitled to overtime pay under state and federal laws; were subject to certain allegedly unlawful deductions under state law; or were entitled to reimbursement for employment-related expenses incurred by them. The first of these class actions, filed in the Fall of 2004, seeks damages and injunction relief on behalf of a putative class of California employees. Similar complaints have been subsequently filed against CGMI on behalf of certain statewide or nationwide putative classes in (i) the US District Courts for the Southern District of New York, the District of New Jersey, the Easter District of Pennsylvania; and (ii) the New Jersey Superior Court. Without admitting or denying any liability, CGMI has reached an agreement in principle, which is subject to court approval, to a nationwide settlement for up to approximately $98 million of various class actions asserting violations of state and federal laws relating to overtime and violations of various state laws relating to alleged unlawful payroll deductions. To the best of our knowledge, Citigroup Global Markets Inc. is in compliance with State of Michigan Executive Order 2003-1. Citigroup Global Markets Inc. has adopted policies and procedures that are reasonably designed to comply with, among other things, the principles set forth in the settlement between Merrill Lynch and the NY State Attorney General's Office dated May 21, 2002. 4. POTENTIAL CONFLICTS OF INTEREST Citi has in place certain procedures which minimize the likelihood that a conflict of interest would exist between the Michigan Tobacco Settlement Finance Authority and Citi. Among those procedures are requirements that third-party relationships be closely scrutinized and, where appropriate, disclosed to our clients. All such third-party relationships must be approved by Department management and, generally, are by written agreement. To the best of our knowledge, Citi does not believe that there are any conflicts or potential conflicts related to any of our relationships that would affect our services to the Michigan Tobacco Settlement Finance Authority under this RFP. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority March 10, 2008 Section A – Page 5 5. FIRM DESCRIPTION AND RECENT TOBACCO EXPERIENCE Citi is highly qualified to serve as senior managing underwriter for the TSFA proposed 2008 borrowing. Citi has more municipal finance experience and more tobacco securitization experience than any other firm. This, combined with an industry-leading team of bankers, sales and trading and credit professionals dedicated to tobacco securitization, offers TSFA banking services and transaction execution second to none. More importantly, however, Citi offers Senior Managed State-Level Tobacco Financing ($ mm) $397 TSFA the tobacco securitization markets strongest distribution resources to 2000 Puerto Rico 521 market the TSFA Bonds including the benefits of a National and Michigan 2001 District of Columbia 2001 Guam 25 distribution system, a sales force with knowledge and expertise in selling 2001 Iowa 644 tobacco securitization bonds and the largest secondary market trading effort in 2001 Virgin Islands 22 1,801 tobacco bonds. Provided below are highlights of Citi’s specific capabilities 2002 New Jersey 1,171 that we believe make Citi most qualified to serve THE TSFA as senior 2002 Puerto Rico 2003 New York 2,311 managing underwriter. 2003 California 2,572 Most Senior Book Managed Tobacco Transactions. Citi has senior managed 43 tobacco securitizations for a total of $20.4 billion* in par, more transactions than any other firm. We have served as a co-senior manager on 19 transactions totaling $26.9 billion and co-manager on 5 transactions totaling $2 billion. Of particular interest to the State, we are also a leader in state-level tobacco financings. Over 81% of our senior managed tobacco securitization bonds have been issued for state-level issuers. 2004 2005 2006 2006 2007 2006 2007 2007 2008 Total New Jersey (cigarette tax) Iowa Virgin Islands District of Columbia West Virginia Rhode Island Ohio Guam New York 1,461 609 7 248 911 197 5,500 37 441 $18,875 Citi Advantage ` Citi’s extensive experience in structuring and marketing state financings will enable us to structure and execute the TSFA’s financing successfully. Most Recent Tobacco Securitization Experience. Citi has served as senior manager on the last two tobacco securitizations priced (Buckeye and Guam), the last taxable tobacco securitization (West Virginia) and we are currently serving as senior manager for New York State’s $441 million refinancing of its outstanding Auction Rate tobacco settlement bonds (expected pricing week of 3/19/08). This recent and ongoing experience gives Citi direct and immediate knowledge of both tax-exempt and taxable tobacco bond market conditions as well as real-time information with regard to the tobacco disclosure for both MSA-related and tobacco industry litigation and consumption trends. As a result, Citi’s tobacco team has ready access to disclosure information that will significantly expedite the due diligence process for the TSFA and shorten the time line for completion of TSFA’s transaction. As we indicate in our response to Question B6, Citi believes that the TSFA’s transaction can be completed on an aggressive six week schedule, assuming Legislative approval. Of equal importance to TSFA, Citi’s recent experience demonstrates that we can successfully complete tobacco securitizations (both large and small) in today’s challenging and volatile market conditions. Other firms attempting to sell tobacco bonds have not met with the same success in recent months, leaving their client’s issues uncompleted and they have not shown a willingness to commit capital to support a tobacco bond sale. Citi has a demonstrated and continuing willingness to commit our capital to ensure the success of the TSFA’s 2008 bond sale and we are confident that no other firm has more up-to-date market intelligence for taxexempt or taxable tobacco securitizations. Citi Advantage ` Citi’s real-time market and disclosure knowledge ensures the TSFA accurate pricing information and a fasttrack transaction schedule. Deepest Tobacco Distribution Capabilities and Strongest Secondary Market Support. Citi is the highest-volume broker-dealer in the secondary market for tobacco securitizations; this dominance unquestionably strengthens our primary market distribution capabilities. Citi has traded over 30% of all unenhanced tobacco secondary market volume since 2002. During the tobacco market disruption that followed the March 2003 Price case decision (formerly known as Miles) and subsequent tobacco securitization bond rating downgrades, Citi provided unwavering support to the market and remained the largest market-maker in tobacco bonds, trading up to $325 million of tobacco bonds weekly. More recently, Citi continues to demonstrate strong secondary support for tobacco bonds during the current market dislocation. Since August 2007, Citi has traded nearly $3.6 billion of tobacco bonds in the * Includes 2008 New York State transaction, which is scheduled to price March 19, 2008 MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority March 10, 2008 Section A – Page 6 secondary market during a time when High Yield fund flows were often negative (see Question #B5). Citi’s secondary market activity resulted in aggressive pricing for both Buckeye and Guam in challenging markets. Investors know we provide secondary market liquidity in good times and bad, and they readily participate when we are the book-running senior manager for a new tobacco issuance. Citi Percentage of Secondary Market Institutional Trading Volume 2004 2005 2006 2007 5,709 9,131 9,913 12,687 Total - All Tobacco ($ mm) 3,133 2,789 3,184 5,344 Citi - All Tobacco ($ mm) 54.88% 30.54% 32.12% 42.12% Citi % - All Tobacco Source: MSRB, Citi Citi Advantage ` Citi’s secondary market dominance will help obtain aggressive pricing levels for the TSFA’s bonds, as investors know Citi will provide liquidity in the secondary market. Strongest Demonstrated Capital Commitment to Tobacco Issuers Citi has consistently demonstrated its commitment to the successful pricing of tobacco securitizations through the use of our balance sheet on behalf of our clients. Citi’s commitment of balance sheet on the recent Buckeye Tobacco Settlement Financing Authority’s (BTSFA or Buckeye) sale ensured the successful marketing and aggressive pricing of the bonds. Citi’s fulfillment of this commitment was clearly demonstrated in three ways; • • • Prior to pricing – in the 3 months prior to pricing BTSFA’s bonds, Citi committed $1 billion of capital to secondary market trading of tobacco bonds, providing liquidity to 25 accounts that were sellers, driving yields lower and creating substantial capacity for BTSFA’s bonds At pricing - by placing a $1 billion anchor pre-sale order in five key maturities and; Post pricing - by providing liquidity for investors. Citi traded over $700mm of BTSFA bonds after the transaction was freed to trade thereby preserving stability for BTSFA’s bonds. Preserving price stability ensured positive investor reception. We sincerely believe that, without Citi’s tobacco market leadership and, more importantly, commitment of capital, BTSFA’s tobacco financing’s cost of capital would have increased by 20 basis points or more and that, with Citi’s capital and pricing leadership, Ohio saved in excess of $100 million present value. Highest Professional and Financial Resource Commitment to Tobacco. Citi commits more professional and financial resources to the tobacco bond market than any other underwriter. This is evident in the three different investment “buckets” into which we inventory tobacco securitization bonds, detailed in the graphic below. We currently maintain the industry’s largest institutional tobacco trading inventory ranging from $300 million to $1 billion depending on market conditions. Together with our retail system and other holdings, Citi is the 5th largest holder of tobacco bonds. Our professional resources include a full-time tobacco securitization bond trader, Bernie Costello, a dedicated taxable tobacco and tobacco credit default swap (“CDS”) trader, Andrew Goodwin, and a dedicated, award-winning municipal tobacco credit analyst, Chris Martin*. No other firm has three professionals dedicated solely to tobacco marketing. Given these resources, investors come first to Citi for investment advice, market access, and trading execution. Citi’s Tobacco Securitization Bond Holdings Institutional Trading Desk $350 mm Proprietary Trading Desk Up to $100 mm Smith Barney Retail $585 mm Citi Advantage ` Citi has the commitment, the capital, and the resources to “push” the TSFA’s tobacco pricing and achieve aggressive levels. * Recognition includes Smith's Research and Ratings (All-Star Analysts, 1995-2005), (All America Fixed Income Research Team), and the National Federation of Municipal Analysts (Award of Excellence for Service to the Buyside Investor). MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority March 10, 2008 Section A – Page 7 Extensive National and Michigan Distribution Resources. Citi has a 22-member institutional sales force based in New York, Los Angeles, and Chicago and 6 regional municipal underwriting desks. These professionals market municipal bonds exclusively to more than 250 national accounts. We also have 74 middle-market institutional specialists marketing municipal bonds to over 2,000 smaller institutional accounts. Supplementing our institutional resources, Citi has 12,810 Smith Barney Financial Consultants in 626 offices nationwide. In the State alone, Citi employs a total of 1,211 employees, including 508 NASD Registered Representatives and 344 Financial Consultants in 16 sales offices, who manage over 171,000 retail accounts with more than $24.6 billion of in-state retail assets. With an additional 4,558 Primerica Financial Services representatives working in Michigan, there are 5,769 Citi professionals in the State. Advantage ` Given these distribution resources, Citi will insure the TSFA tobacco bonds are marketed to a broad group of institutional investors. Citi will also maximize Michigan and high net worth retail penetration. Closest Relationships with the Leading Institutional Investors. Since originating the tobacco securitization bond credit and defining the market in 1999, Citi has broadened the tax-exempt and taxable investor base with each subsequent tobacco securitization. Citi played a key role in educating investors about tobacco credits and providing liquidity for tobacco bonds (both taxable and tax-exempt) in the secondary market. These activities helped grow the number of institutional investors in tobacco bonds from 18 institutional investors in November 1999 to more than 120 institutional investors in tobacco bonds today. Citi Advantage ` Citi’s long-term relationships with the major holders of tobacco bonds allow us to identify anchor orders for the TSFA financing. Conclusion. Given our experience in the general municipal and tobacco securitization markets, we believe we are the best qualified to serve the TSFA as book-runner for its upcoming 2008 financing. We believe our experience and willingness to commit capital in support of Michigan will enable us to work with the TSFA’s finance team to develop the optimal debt structure and to execute the TSFA’s proposed transaction quickly and successfully. 6. ISSUER REFERENCES The references below are familiar with the scope and quality of service that Citi provides and have worked with the Citi bankers assigned to the TSFA. We encourage the TSFA to contact these individuals for confirmation of the service, negotiated municipal bond sales performance and professionalism the TSFA can expect from our team. Tobacco Securitization Tobacco Securitization Michigan Issuance Joe Martin Deputy Chief of Staff STATE OF WEST VIRGINIA Office of the Governor Building One, Room One State Capitol Complex 1900 Kanawha Blvd., East Charleston, WV 25305 (304) 558-3795 jmartin@wvgov.org Rosemary Booth Gallogly Executive Director/Budget Officer STATE OF RHODE ISLAND Department of Administration Budget Office One Capitol Hill Providence, RI 02908 (401) 222-6300 roseb@budget.state.ri.us Deborah Roberts Executive Director STATE BUILDING AUTHORITY Lewis Cass Bldg., 1st Floor 320 South Walnut P.O. Box 30026 Lansing, MI 48909 (517) 373-3806 robertsd1@michigan.gov 7. ACT 226 CRITERIA Citi does not meet the criteria of Act 226; however, Citi does have a significant Michigan presence. Citi employs a total of 1,359 employees in the State of Michigan including 508 NASD Registered Representatives and 344 Financial Consultants in 16 sales offices. Our Michigan Financial Consultants maintain over 171,000 retail accounts with over $24.6 billion in assets. With an additional 4,558 Primerica Financial Services representatives working in Michigan, Citi provides jobs for over 5,769 Michigan residents. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Serve as Senior Manager for the Tobacco Settlement Finance Authority Citi Employees in Michigan Global Consumer Bank 578 Global Wealth Management (Smith Barney/ 615 Private Bank) Global Investment Management 12 Corporate Center 6 Citi Total 1,211 Primerica Financial Services 4,558 Michigan Total 5,769 Michigan Smith Barney Offices Marquette Traverse City Bloomfield Hills Saginaw Grand Rapids Flint East Lansing Farmington Hills Battle Creek Clinton Township Troy Southfield Ann Arbor Detroit Kalamazoo Jackson March 10, 2008 Section A – Page 8 MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 1 SECTION B 1. DISCUSSION OF SECURITIZATION STRUCTURE All of the Citi securitization structures discussed below are designed to achieve the TSFA’s three goals of: 1. Refinancing the TSFA’s outstanding Series 2006 Floating Rate Turbo Term Bonds with tax-exempt tobacco bonds; 2. Generating between $60 - $75 million of new net proceeds to the State and; 3. Maintaining the TSR pledge on the 2006 transaction at 13.34% In addition, our recommended structures seek to provide the TSFA with the lowest cost transaction and maintain the flexibility of the 2006 transaction structure within the confines of the Series 2006 Indenture. Citi also provides the TSFA with alternative cases that provide net proceeds in excess of the targeted amounts. These alternative structures have certain trade offs that will need to be considered by the TSFA. Based on the analyses provided below, Citi is confident that the TSFA can achieve its goals in the current market under either a tax-exempt or combined taxable/tax-exempt structure and that Citi’s extensive ongoing capital commitment to the tobacco bond market and unrivalled banking and structuring team make Citi the best firm to achieve the TSFA’s goals. Recommendation of Optimal Structure and Key Take-Aways. Citi believes that two primary factors will drive the TSFA’s choice of an optimal 2008 bond structure; 1) the ability to allocate proceeds to tax-exempt uses and 2) the tailoring of bond maturities within multiple structuring constraints so as to maximize the amount of new proceeds generated by either a tax-exempt or combined tax-exempt and taxable structure. For the latter, the TSFA will need to weigh the utility of additional new net proceeds against the increased cost of generating those proceeds. As discussed below, increasing proceeds requires a final maturity of 40-years, thereby extending the TSR pledge for 2-years beyond the current final maturity. While the TSFA’s optimal structure will depend on factors #1 and #2 above, nonetheless, there are certain structuring features within both the tax-exempt and combined structure that can be optimized regardless of the TSFA’s choices. The following paragraphs discuss Citi’s recommendation on these structuring features. Approach to Optimal Structure. Citi’s analyses seek to optimize the structure of each scenario by amortizing the outstanding Series 2006 A taxable bonds first, whenever possible, and limiting the use of Subordinate CABs. In the current market, both taxexempt and taxable Subordinate CABs have a limited buyer base in which pricing power is held by one investor (see Question B5) and yields are high. The results of the analyses point to two considerations. First, the TSFA should try to reduce the size of its taxable borrowing as much as possible. Taxable tobacco bonds carry high yields, an issue that is compounded by the limited investor base. Second, additional proceeds require the issuance of Subordinate CABs which are also costly, require a debt extension and have a limited buyer base. The Existing Bonds and Structural Considerations. Because the Series 2008 Bonds will be issued using the same TSR pledge as the 2006 transaction (13.34%), they will be issued as additional bonds under the 2006 indenture. The 2006 indenture requires, among other things, that the issuance of refunding and additional bonds not extend the weighed average life (“WAL”) of the 2006 Bonds by more than one year and that the TSFA receive rating confirmation from S&P and Moody’s on the outstanding 2006 Bonds. The WAL test constrains the placement of the 2008 Bonds in the transaction’s term structure. The issuance of 2008 Subordinate CABs is not subject to this test as they are only payable after the 2006 Bonds are paid in full. 100% Tax-Exempt Structure. Citi explored several 100% tax-exempt scenarios for the TSFA, each of which generates net proceeds at the targeted levels. All scenarios utilize a term structure, include current interest turbo term bonds in 2038 and Subordinate CABs structured either for 40-year or 50-year final maturity, depending on whether net proceeds are maximized. The results and term structure are provided below. Key Structural Features. To lower overall cost, Citi recommends that the 2038 tax-exempt current interest term bonds be structured to amortize after the outstanding Series 2006 2034 taxable term bond is repaid. This is a departure from the Series 2006 structure that amortized the FRNs pro rata with the 2034 Bonds. The result is that more costly Series 2006 bonds are repaid approximately a year earlier than originally projected, thus shortening the WAL rather than extending it. This in turn reduces the overall cost of the program. However, the refunding of the FRNs does not by itself create enough capacity in the pledged TSRs to generate net proceeds up to the target levels and meet the indenture tests. Accordingly, Citi recommends that the balance of the MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 2 proceeds targets be met though the issuance of back-end Subordinate CABs. The results provided below demonstrate the cost of generating these additional net proceeds at or above target levels through the issuance of additional Subordinate CABs. Table 1: 100% Tax-Exempt Scenario 1 Scenario 2 100% Tax-Exempt, $60mm Net Proceeds 100% Tax-Exempt, $75mm Net Proceeds Scenario 3 100% Tax-Exempt, Maximize Net Proceeds, 50-Year Maturity $105,015,000 35,317,610 $140,332,610 $105,015,000 50,424,478 $155,439,478 $105,015,000 72,516,213 $177,531,213 $60,000,000 $75,000,000 $96,931,803 6/1/2048 6/1/2030 7.256% 6/1/2048 6/1/2032 7.439% 6/1/2058 6/1/2035 7.524% Series 2008 WAL (Years) Tax-Exempt Turbo CIB (2038 Final Maturity) Tax-Exempt Turbo CAB (2048 Final Maturity) Tax-Exempt Turbo CAB (2058 Final Maturity) 15.87 22.88 - 15.87 23.71 - 15.87 25.05 Series 2006 Change to WAL (Years) Taxable Turbo CIB (2034 Final Maturity) Taxable Turbo CIB (2046 Final Maturity) (0.58) 0.97 (0.58) 0.97 (0.58) 0.97 Rating (Fitch) Tax-Exempt Turbo CIB (2038 Final Maturity) Tax-Exempt Turbo CAB (2048 Final Maturity) Tax-Exempt Turbo CAB (2058 Final Maturity) BBB+ BBB- BBB+ BBB- BBB+ BBB- BBB BBB BBB BBB BBB BBB Bond Types Tax-Exempt Turbo CIB (2038 Final Maturity) Tax-Exempt Turbo CAB (2048 Final Maturity) Tax-Exempt Turbo CAB (2058 Final Maturity) Total Bonds Issued Net Proceeds Final Maturity Final Planned Amortization Cost of Capital Rating Confirmation (S&P) Taxable Turbo CIB (2034 Final Maturity) Taxable Turbo CIB (2046 Final Maturity) Conclusions and Options. If the TSFA can identify sufficient tax-exempt uses, maximum net proceeds of nearly $100 million can be achieved. However, generating such proceeds in the current market would require the issuance of $72 million of 50-year Subordinate tax-exempt CABs at an 8% yield. We have included this example for purposes of comparison as the authorizing legislation is considered and the TSFA moves toward a decision. In contrast to the maximum proceeds case, the lower $60 and $75 million net proceeds targets can be met with a 40-year structure and at a cost of capital up to 0.27% lower than the maximized case. For a detailed Sources and Uses of Funds, Term Structure, and Cash Flows see Appendix D. Combined Structure (Tax-Exempt/Taxable). It is Citi’s understanding that the State’s eligible tax-exempt projects will first be allocated to the refunding portion of the 2008 transaction and thereafter financed by 2008 new money proceeds. Additionally, the available projects are likely to be insufficient for a 100% tax-exempt transaction, but could provide for as much as $30 million of eligible projects over and above the refunding portion. For our combined structure, we highlight the results for two scenarios; a scenario in which $30 million of projects in addition to the refunding bonds are eligible for tax-exempt financing, as well as a scenario assuming that all 2008 bonds in addition to the refinancing will need to be taxable due to planned uses of proceeds. Key Structural Features. While Citi has been the book-running senior manager on the largest taxable tobacco bond deal ever sold (West Virginia tobacco in 2007), we recognize that the universe of taxable tobacco bond buyers is relatively limited and that these taxable tobacco investors prefer bonds with a WAL of 10-years or less. Therefore, Citi’s structural optimization attempted to keep the WAL on any taxable bonds as low as possible and still meet the indenture tests and minimize the use of Subordinate CABs. We partially achieve this goal in the fully taxable new money structure (Scenario # 4) by providing $26 million of short taxable bonds with a WAL of 3.5 years. The remainder of the taxable bonds in this scenario are Subordinated CABs ($42.2 million) with a yield of around 9%. Scenario #5 assumes that $30 million of the new money proceeds can be used on eligible tax-exempt projects. Again we optimize this structure by focusing taxable bond issuance as close to a 10-year WAL and in turbo term CIB maturities, thereby amortizing the most costly debt (both outstanding 2006 and 2008 bonds) first. We then amortize the $30 million of tax-exempt eligible MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 3 projects and the refinancing of the FRNs with back-loaded 2008 tax-exempt bonds. The optimized Scenario #5 has several interesting outcomes. First, no taxable Subordinate CAB issuance is required. It is replaced with tax-exempt new money and refunding bonds at much more cost effective interest rates. Additionally, while both are thin markets, the market for tax-exempt tobacco Subordinate CABs is more robust than that for taxable Subordinate CABs. Second, taxable debt is issued at 1.0% lower yields and a WAL of approximately eight years earlier than under Scenario #4. Lastly, Scenario #5’s optimized structure produces $75 million net proceeds to TSFA, more than $10 million greater than Scenario #4. Because Scenario # 5 back-loads the tax-exempt portion of the transaction, the WAL of the tax-exempt debt is lengthened. The TSFA will need to make sure that projects allocated to the tax-exempt structure meet the useful life tests under the tax code. Table 2: Combined Structure Scenario 4 Combined Structure 100% Taxable Net Proceeds Bond Types Taxable Turbo CIB (2018 Final Maturity) Taxable Turbo CIB (2036 Final Maturity) Tax-Exempt Turbo CIB (2038 Final Maturity) Taxable Turbo CAB (2048 Final Maturity) Tax-Exempt Turbo CAB (2048 Final Maturity) Total Bonds Issued Net Proceeds Final Maturity Final Planned Amortization Cost of Capital Series 2008 WAL (Years) Taxable Turbo CIB (2018 Final Maturity) Taxable Turbo CIB (2036 Final Maturity) Tax-Exempt Turbo CIB (2038 Final Maturity) Taxable Turbo CAB (2048 Final Maturity) Tax-Exempt Turbo CAB (2048 Final Maturity) Series 2006 Change to WAL (Years) Taxable Turbo CIB (2034 Final Maturity) Taxable Turbo CIB (2046 Final Maturity) Rating (Fitch) Taxable Turbo CIB (2018 Final Maturity) Taxable Turbo CIB (2036 Final Maturity) Tax-Exempt Turbo CIB (2038 Final Maturity) Taxable Turbo CAB (2048 Final Maturity) Tax-Exempt Turbo CAB (2048 Final Maturity) Rating Confirmation (S&P) Taxable Turbo CIB (2034 Final Maturity) Taxable Turbo CIB (2046 Final Maturity) Scenario 5 Combined Structure $30mm Tax-Exempt Net Proceeds $26,500,000 76,515,000 42,223,552 $145,238,552 $47,680,000 49,980,000 56,516,115 $154,176,115 $65,800,560 $75,546,439 6/1/2048 6/1/2032 7.642% 6/1/2048 6/1/2033 7.719% 3.52 16.04 23.81 - 15.83 16.04 24.08 0.37 0.98 (0.46) 0.99 BBB+ BBB+ BBB- BBB+ BBB+ BBB- BBB BBB BBB BBB Conclusions and Options. The TSFA’s net proceeds targets can be reached under the taxable debt scenarios. However, the limited buyer base and desire for specific WAL is a constraining factor. In addition to being costly, taxable debt structures that use CABs and WAL in excess 10-years have execution risks not present in tax-exempt scenarios. However, Scenario #5 is the most promising structure in that it generates targeted proceeds, eliminates the need for taxable Subordinated CABs and uses a more realistic allocation of project costs among taxable and tax-exempt uses. Based on our understanding of the State project allocation methodologies, Citi believes that Scenario #5 is the recommended optimal structure for any scenario where a portion of the new money net proceeds can be allocated to tax-exempt uses. Detailed numerical analysis can be found in Appendix D. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 4 Rating Agency Criteria and Stress Tests.. The financing scenarios provided above are structured to achieve investment grade only ratings. For the 2008 Bonds, Citi assumed a Fitch-only rating in order to provide additional leverage at cost effective prices. See our responses to Question B2 for more detail. The overall capital structure would result in rating confirmations from Moody’s and S&P on the 2006 bonds that remain outstanding. In addition, while we are not seeking ratings from Moody’s and S&P on the Series 2008 current interest turbo term bonds, the 2008 bonds are nonetheless structured to meet both agencies investment grade criteria. As such, the financing structures give TSFA maximum flexibility in determining its rating strategy with regard to agency. 2. RATING AGENCY STRATEGY AND MARKETING ISSUES The TSFA Rating Strategy. Developing the optimal rating strategy is one of the most important responsibilities of the TSFA’s senior manager. Citi has been at the forefront in implementing rating agency approaches for innovative tobacco financing plans for our clients. Our ability to develop and implement innovative financing structures and effective rating strategies for tobacco bond structures are a natural extension of our leadership in the tobacco bond market. The TSFA’s rating strategy will be driven by three considerations: • • • The outstanding ratings on the Series 2006 Bonds; The term structure, lien (senior and subordinate) and the mix of products (current interest or capital appreciation bonds) for the Series 2008 Bonds; Recent revisions to rating criteria, particularly by Fitch. Citi’s goal in developing and executing the optimal credit strategy for TSFA is to select the combination of rating agencies that will help the TSFA achieve its financings goals of having the: • • • Most cost effective refinancing of the Series 2006 Indexed Floating Rate Notes; Re-leverage the 2006 TSR pledge (13.34%) to generate maximum net proceeds at the lowest interest cost; Most marketable transaction structure. Outstanding Bond Rating Confirmations. The Series 2006 Bonds are currently rated by Moody’s (Baa3) and S&P (BBB). Under the Series 2006 Indenture, Refunding Bonds and Additional Bonds can be issued at the discretion of TSFA only if certain criteria are met including a Rating Confirmation on the Series 2006 bonds that remain outstanding after the issuance of the Refunding Bonds and Additional Bonds. As such, the TSFA will be required to get rating confirmations for the Series 2006A and Series 2006B Bonds from both Moody’s and S&P since the Citi proposed plan of finance structures a majority of the refunding and new money bonds under the definition of Refunding Bonds or Additional Bonds. Subordinate New Money Bonds. The subordinate CAB portion of the transaction would not be subject to satisfying the Additional Bonds test under the 2006 Indenture, as the outstanding Series 2006 Bonds will be “Fully Paid” prior to making payments. Selection of Rating Agencies. As senior book-running manager on more tobacco securitizations than any other firm, Citi has significant experience in working with S&P, Moody’s and Fitch in obtaining tobacco securitization credit ratings for our clients’ specialized needs. The rating agencies revise their rating criteria frequently to reflect changes in their evaluation of tobacco credit issues, and welcome a dialogue to challenge their rating criteria. Given this rating environment, Citi takes every opportunity to maintain a constant dialogue with each agency regarding the ever-changing tobacco securitization credit. Fitch Tobacco Bond Upgrade. On January 28, 2008, Fitch upgraded 237 tobacco settlement asset-backed bonds as a result of its upgrade of the corporate rating of the domestic tobacco industry. Fitch’s rating of the most senior tranches of tobacco settlement asset-backed bonds now has a maximum attainable rating of “BBB+” up from “BBB”. In addition, Fitch also revised its cash flow stresses to reflect its new rating view. As a result, the Fitch criteria not only result in a higher tobacco settlement bond rating ceiling but also increases the leverage possible for CABs to generate higher proceeds for the TSFA. Summary of Rating Agency Criteria. Currently, the rating agencies provide the following ceilings on the ratings for tobacco securitization bonds: Moody’s (“Baa3”), S&P (“BBB”) and Fitch (“BBB+”). In addition to rating limit differences, each agency has different rating criteria for tobacco CIBs and CABs. For example: • • Moody’s will rate only current interest bonds with a stated maturity of 45 years or less (Moody’s does not rate CABs); S&P will rate both current interest bonds and CABs out to 45 years, with a minimum rating of “BBB-”. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services • March 10, 2008 Section B – Page 5 Fitch will rate current interest bonds out to 40 years and CABs out to 50 years. In addition, Fitch will provide both investment grade and non-investment grade ratings for CABs, including ratings as low as “B” category. Recommendation. Based on Citi’s proposed tax-exempt and taxable structures (each of which utilizes a Current Interest Turbo Term bond and Subordinate Turbo Term CAB), the size of the proposed transaction ($150 million) and current market conditions, Citi would recommend that TSFA seeks a rating on the Series 2008 Bonds from Fitch only. Citi has priced several transactions in this size range with a Fitch-only rating. Citi’s experience is that Fitch meets with good market acceptance for tobacco bonds, is cost effective and provides additional leverage for the Subordinate CAB portion of the transaction. In addition, for any of the financing plans in Question B1, a Fitch rating will be required to achieve the net proceeds presented as these proceeds are a function of the permitted Fitch leverage. Using S&P to rate the 2008 Subordinate CABs will reduce proceeds from the maximum net proceeds cases. It should be noted that a $60 million net proceeds target does fit with S&P guidelines. As noted above, Moody’s does not rate CAB structures. Because Fitch did not rate the 2006 Bonds, they may insist on providing a rating on the Series 2006 bonds that remain outstanding. If Fitch choose this path, rating costs could be high ($240,000) compared to rating only the series 2008 bonds ($75,000). Compliance with the indenture will require rating confirmation on the remaining 2006 Bonds from Moody’s and S&P. Generally, rating confirmation fees range from $10,000 to $25,000. However, because we are not asking for a rating on the new bonds, those fees could be at or above the high end of the range. From a bond cash flow stress test perspective, all scenarios presented in our plan of finance pass Moody’s, S&P and Fitch investment grade criteria for the current interest turbo term bonds. Only the $60 million net proceeds analysis passes both Fitch and S&P. All other structures require a Fitch rating. Therefore, our plan of finance provides maximum flexibility to the TSFA with regard to rating strategy and responding to changes in market conditions and rating criteria. As senior manager, Citi will explore all options and combinations of ratings and make a clear recommendation to the TSFA. Should the TSFA wish to explore options other than the Fitch-only structure above, Citi’s proposed plan of finance could accommodate such changes without significant proceeds repercussions. Accelerated Rating Process. Citi understands it is the TSFA’s objective to execute its proposed 2008 transaction as soon as legislation is approved. Citi would push rating agencies for a rapid rating process and would anticipate that they could complete preliminary ratings for mailing the preliminary offering circular in one week from documentation and cash flow submissions. The proposed schedule, detailed in our answer to Question B6, accommodates the agencies’ timing needs. A one week rating turn around may appear aggressive, however, Citi has achieved such a time table on the two most recent tobacco bond transactions for which we have served as Senior Manager, Guam, and Buckeye Tobacco Settlement Finance Authority. Additionally, the current schedule on the New York Tobacco Settlement Finance Corporation ($450mm) for which Citi is serving as senior managing underwriter, calls for a one week rating process in order meet New York’s accelerated schedule. Both S&P and Fitch have agreed to meet our aggressive timeframe. The case study, provided below, detailing Citi’s successful rating strategy as book-running senior manager for the State of Rhode Island’s tobacco bonds illustrates our expertise. Case Study – State of Rhode Island. In early 2007, Citi had been in discussions with S&P about increasing the term of their rating criteria to greater than 40 years. On May 17, 2007, S&P issued new rating criteria but choose to remain silent on the maximum term. Immediately after the release of the criteria, Citi modeled an S&P case to determine how the new criteria would impact leverage for a tobacco securitization for the State of Rhode Island. Citi worked within the new criteria to develop the optimal rating strategy for Rhode Island’s “back-end” or all CAB transaction. Before incorporating S&P’s revised criteria, Citi believed Rhode Island would achieve the greatest leverage by securing a Fitch-only rating on its proposed issuance. However, in discussions with S&P after the release of the criteria, Citi determined that Rhode Island should seek an S&P rating. This permitted an increase in the BBB CAB size, decreasing the cost of capital and increasing investor demand for the issuance. The BBB CAB was issued with a 45-year maturity; representing the first time S&P has rated a 45-year CAB. Citi proposes a similar comprehensive analysis of criteria from each agency to develop the optimal rating strategy to achieve the TSFA’s financing goals. Marketing TSFA’s 2008 Bonds Issues. Today’s market for unenhanced tobacco securitization bonds is significantly different from the market during the summer of 2007. As our response to Question 5 indicates, the current market for tobacco bonds is characterized by the following factors: • • Debt market dislocation due to sub-prime and mortgage-backed securities crisis has caused a general flight to quality as investors seek safe havens and re-price risk; All tax-exempt interest rates have widened versus the MMD index as result of liquidity concerns; the tax-exempt market has bifurcated into high grade credits and high yield credits (i.e. tobacco bonds) with significant spread differential between the two groups; MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services • • • • • • March 10, 2008 Section B – Page 6 High Yield fund cash flows have been erratic; after positive fund flows in January and February, funds flow seem poised to turn negative again; Tax-exempt tobacco CABs have a thin investor base with a single buyer (Rochester/Oppenheimer) having pricing leverage; The Taxable tobacco bond market also is dominated by a one major taxable buyer (PIMCO) dictating pricing and capacity; Improved tobacco litigation environment; Increased retail demand for tobacco bonds; Manageable tobacco bond forward calendar. Despite the current market dislocations, tobacco bond transactions have been successfully marketed and sold with Citi serving as senior manager as evidenced by the successful pricing of Buckeye Tobacco Settlement Financing Authority and Guam Economic Development Authority. Both transactions were completed during a period of market tumult but accomplished the issuer’s goals through the implementation of a Citi designed marketing strategy. Citi believes that the TSFA-specific strategy we present below, based on our direct and recent experience in this market, will result in a successful transaction that meets the TSFA’s goals despite current market conditions. Components of Citi’s Proposed Marketing Strategy for the 2008 Bonds. The TSFA’s marketing plan needs to reflect not only the challenging high yield market conditions but also the parameters of the TSFA’s transaction. These parameters include the mix of tobacco securitization products, term structure and overall size of the TSFA’s transaction. More specifically, separate and targeted marketing approaches will be required for tax-exempt subordinated CABs and taxable tobacco bonds. The Citi designed marketing strategy provided below will ensure that the TSFA’s 2008 Bonds are sold at the most aggressive yields achievable in the current market. Pre-Marketing Campaign and Establishing Pricing Date. Creating a focused marketing program targeting existing holders of both the TSFA’s tobacco bonds specifically and tobacco bonds generally is the key to building investor interest in the transaction. The program should include the following elements: • • • • • An appropriately sized syndicate with communication among all underwriters to ensure full participation; Early distribution of transaction structure so that the syndicate’s sales force can begin dialogue with investors; Internet Road Show and investor conference call; One-on-one investor meetings for taxable and subordinated CABs; One or Two-day retail only order period. Hard Pricing Date. While the forward calendar for tobacco bond issuance remains manageable (see below), Citi believes that it would be advantageous in the current high yield market volatility for the TSFA to establish a “hard” pricing date. Citi continues to recommend that issuers of all sizes place “a stake in the ground” and establish a target week for the pricing of bonds. Ideally, the target pricing date would be established within days of selecting a transaction team. By establishing a “hard” pricing date, the TSFA will be signaling to other issuers and investors its intention to enter the market at that time. By establishing a firm date and defined pre-marketing schedule, investors can better plan and focus their efforts on the TSFA at the appropriate time. In addition, other tobacco issuers will seek to avoid pricing at the same time as the TSFA in order to avoid supply concentration issues. Targeted Sales Effort for Tax-Exempt CABs and Taxable Bonds. Because both tax-exempt CABs and taxable tobacco bonds have a limited buyer base with pricing leverage over issuers, an important part of the TSFA’s marketing plan will be a focused effort on these buyers. As senior manager, Citi would begin informal discussions with these investors weeks in advance of the formal marketing period. This focused effort and early discussions with the primary investors in each product will provide valuable insight into pricing levels and structuring alternatives. Specifically, Citi would recommend one-on-one meetings or conference calls with Oppenheimer/Rochester Fund (the largest holder of tobacco CABs) and with the dominant buyer of taxable tobacco bonds. The Importance Strong Secondary Market Tobacco Presence. The institutional buyers of tobacco bonds set prices not only based on the market conditions at the time of pricing but also on their ability to sell bonds in the secondary market. In other words, institutions are buying tobacco bonds for yield and trading opportunities. Therefore, the price the TSFA receives in the primary market is reliant in part on the liquidity investors will have access to from the TSFA’s senior managing underwriter. As we note in our response to Question A5, Citi is the market maker for tobacco securitization bonds and, as a result, the most active secondary market trader of such bonds. Bond Swaps and Preparing Investor Portfolios. Citi’s significant commitment to the tobacco bond secondary market is of particular importance to the TSFA in the current volatile market environment. With weekly high yield fund flows erratic since MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 7 August 2007 and often negative for more than a month at a time (see Question B5), tobacco investors, lack new resources or have reduced resources to invest in new tobacco bond transactions. As senior manager, Citi would utilize its secondary market tobacco bond-trading commitment to create capacity for the TSFA’s bonds through bond swaps. In a bond swap, Citi purchases existing tobacco bonds from high yield fund portfolios at aggressive interest rate levels with the anticipation of placing the TSFA’s bonds with those same investors. Citi’s utilization of bond swaps provides two benefits to the TSFA: 1) lower yields are established through aggressive market pricing and 2) capacity for the TSFA’s bonds is created in a challenging market. The magnitude and benefits of Citi’s secondary market commitment to tobacco trading were clearly demonstrated on the Buckeye tobacco transaction which priced on October 23, 2007. In the midst of the challenging market preceding the pricing of the Buckeye bonds, Citi committed $1 billion of capital to the secondary market trading of tobacco bonds. This provided liquidity to more than 25 accounts that were sellers of tobacco bonds in advance of the Buckeye transaction thereby creating significant capacity for the Buckeye bonds and driving yields lower in the weeks prior to pricing. Transaction Size and Forward Calendar are Positives. Provided below is Citi’s estimate of the forward calendar for tobacco bond issues for the first half of 2008. Volume is manageable and the size of any one individual transaction is well within the constraints of the current market. Additionally, the TSFA’s transaction size (approximately $150mm) should receive good demand from investors (both tax-exempt and taxable) and is well within the capacity of the current market. Issuer New York State Iowa Pennsylvania Wisconsin California County Pool Total Estimated Size ($ mm) $445 200 500 1,500 80 $2,725 Restructuring/ New Money Restructing New Money New Money Restructing/NM New Money Taxable/ Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Sale Date March 19 TBD TBD TBD TBD Status Transaction in Process Legislation Needed Legislation Passed Subject to Market Legislation Passed 3. SENIOR MANAGED TOBACCO UNDERWRITING SERVICES Provided below is a brief discussion of Citi’s senior managed tobacco securitization experience. A complete list of the transaction on which we have served as senior and co-senior manager since 2005 is included in Appendix B. The numbers demonstrate that Citi is a leading provider of underwriting services to issuers like the TSFA and has served as senior manager on more tobacco securitization transactions than any other firm in the industry. This is important for the TSFA because it indicates that Citi has a breadth of senior managing underwriter experience with regard to structuring, innovating and marketing tobacco bonds to achieve a variety of issuer goals. More important than the sheer volume of transactions for which we have served as senior manager, Citi has worked with issuers to develop financing structures meeting needs identical to the TSFA’s – refinancing existing tobacco bonds and providing new money proceeds by re-leveraging pledged TSRs. As such, described below are specific transactions demonstrating Citi’s ability to create a market for and implement innovative structures on behalf of issuers like the TSFA. A Leader in Tobacco Securitization. Citi created the tobacco securitization bond market in 1999 with the first issuance for the City of New York. Since that time, we have senior managed more tobacco financings than any other firm – a total of 44 financings worth $20.4 billion in par. Over 77% of our senior managed tobacco securitization issuance has been for state-level issuers (totaling $15.8 billion). In addition, Citi has served as co-senior manager for $26.9 billion in tobacco bonds and comanager for $2 billion in tobacco bonds. In all, Citi has participated in bringing 90% of all tobacco securitization bond transactions to the market. History of Tobacco Securitization Innovation. The hallmark of Citi’s tobacco securitization experience has been innovation. This innovation is the by-product of developing structures to meet the specific financing needs of issuers. In conjunction with product development, Citi has successfully marketed these new tobacco securitization structures to a wide range of tobacco industry investors and, as such, has significantly expanded the investor base for tobacco bonds. Provided below is a list of Citi structuring and marketing firsts. • • • • • • • 1st tobacco securitization 1st tobacco refunding 1st endowment reprogramming 1st tobacco Convertible CAB issuance 1st state-appropriation enhanced tobacco bonds 1st residual-to-turbo restructuring 1st restructuring after 2003 Price case decision • • • • • 1st to structure senior/subordinate bonds with same maturity 1st “BBB” rated turbo CAB 1st “B” rated CAB 1st implementation of Additional Bonds Test allowing for additional bonds other than refunding bonds 1st tobacco securitization Credit Default Swap MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 8 Unmatched CAB and Convertible CAB (“CCAB”) Experience. Of particular interest to Michigan, Citi implemented the first tobacco Convertible CAB transaction in 1999 for Westchester County (NY) Senior Managed CABs and Convertible CABs ($ mm) $104 and has since developed tobacco structures that have involved back-loading 1999 Westchester County (NY) 6 principal in order to structure around near-term revenue constraints and other 2001 Ulster County (NY) 2001 Guam 7 specific funding needs. Since 1999, Citi has senior managed over $1 billion 2001 Virgin Islands 6 in CABs, including 7 subordinate CAB transactions totaling $764 million of 2005 NY Counties Tob Trust IV 39 199 par for 71% of the market issuance to date. The following table details our 2005 NY Counties Tob Trust V 2005 Iowa 196 tobacco securitization CAB experience. 2005 Virginia 196 Almeda County (CA) (co-sr) Development of CCABs to Mitigate NPM Adjustment Risk. In 2005, Citi 2006 2006 Los Angeles County (CA) developed and marketed a transaction for the State of Iowa that included the 2006 Stainslaus County (CA) first use of convertible capital appreciation bonds (“CCABs”). The CCAB 2006 Virgin Islands structure permitted tobacco bond interest to accrete until the near-term 2006 California Statewide Fin Auth 2006 District of Columbia conversion (December, 2007) when the bonds convert to traditional current 2007 Santa Clara County (CA) interest bonds. This structure permitted Iowa to manage near-term NPM 2007 Rhode Island 2007 Marin County (CA) Adjustment risk, to mitigate investor NPM concerns, and to preserve its TSR 2007 West Virginia pledge target at 78%. Iowa was the first transaction to include CCABs to 2007 Ohio mitigate near-term NPM Adjustment risk specifically, and since then, Citi has 2007 Guam Total senior managed $582 million of Convertible CABs. It should also be noted that this Citi innovation was quickly copied by other bankers and is now a market standard. 68 320 42 7 62 248 102 197 14 65 565 3 $2,446 Additional Leverage through Simultaneous Maturities. Another feature of the Iowa 2005 transaction was the introduction of a simultaneous maturity structure, which permitted maximum leverage of TSRs by structuring all tranches of debt (BBB, BBB-, BB, non-investment grade) with a common 2046 final maturity but continuing with a continuous priority amortization structure. Previously, transactions required increasingly longer and higher cost maturities for subordinated tranches. The simultaneous maturity structure has been widely imitated in the market by other bankers. Taxable Tobacco Securitization Experience. Citi has senior managed more than $3.0 billion of taxable tobacco securitization bonds in 11 financings, including $1.2 billion as senior book-running manager. Most recently, Citi served as senior managing underwriter for the largest taxable tobacco transaction to date – $911.1 million for the State of West Virginia. Like Michigan, the West Virginia transaction achieved a specific proceeds target. In addition, West Virginia was seeking an investment gradeonly structure. In spite of volatile and challenging market conditions during the week of pricing, the bonds were successfully sold. Citi committed $83 million of capital to the transaction in order to ensure that the State of West Virginia achieved its goals. Additional Relevant Transaction Experience. To offer the TSFA additional information on how Citi’s experience can help the TSFA structure and market its proposed bonds, Citi has selected seven transactions that are directly relevant to the TSFA’s planned sale/securitization of tobacco settlement revenues. These cases illustrate both the technical expertise of the team and the superior structuring/pricing of Citi. Brief summaries of these transactions are provided in Appendix C. Secondary Tobacco Market Leadership. Citi has a substantial commitment of professional and financial resources to tobacco securitization finance. No other underwriter commits more capital to the tobacco bond market than Citi. Over the last four years, Citi has traded over 30% of all unenhanced tobacco securitization secondary market volume, which equates to over $12.2 billion. We communicate daily with large and small tobacco bond investors, providing information and analysis of tobacco structures and credit developments, and offering bids for their bonds in any market. Citi maintains a strong research presence and is recognized by institutional investors as an expert in tobacco bond structuring and the legal challenges of the tobacco industry. Advantage ` Citi’s senior managing underwriting experience demonstrates our significant commitment to and knowledge of the tobacco securitization market, as well as our consistent track record of innovation. 4. LITIGATION AND OTHER MARKET DISRUPTION PROTECTION As long as tobacco bonds are subject to litigation risk, the possibility of an adverse court decision and a subsequent rating downgrade of the bonds preventing the closing of the transaction can never be completely eliminated. Citi proposes a fourpronged strategy to help protect the TSFA from litigation and other market disruption risks associated with the historically volatile tobacco bond market. This strategy includes: • Shortening the transaction execution schedule from kick-off to pricing, • Shortening the time between transaction pricing and closing, MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services • • March 10, 2008 Section B – Page 9 Continuing Citi's market-leading commitment to both the primary and secondary tobacco bond markets to maintain and enhance market liquidity for the TSFA's transaction, and Being willing to underwrite and/or provide bids on a large part of the transaction, if necessary. Deal Timing. Citi has a tremendous record of closing tobacco bond issues rapidly after the bonds are priced, minimizing the risk that intervening tobacco industry and MSA-related litigation disrupts an issue from closing. We always advise our clients pricing high-yield transactions, especially transactions involving litigation risk, to minimize the time that passes between signing the Bond Purchase Agreement (BPA) and closing the transaction. Some examples of Citi's short closes for senior managed tobacco securitizations are provided. Specifically, Citi recommends Calendar Days BPA Signing Closing signing the BPA on a Thursday Transaction between BPA Date Date during the first three weeks of a Signing and Closing month and closing the bonds the Los Angeles County (CA), Series 2006 2/8/2006 5 days 2/3/2006 following Wednesday. Citi is Westchester County (NY), Series 2005 6/10/2005 6/15/2005 5 days executing this exact strategy for the 9/25/2003 9/30/2003 5 days State of New York, which is pricing California, Series 2003B March 19, 2008 and closing New York, Series 2003A 6/12/2003 6/19/2003 7 days Wednesday March 26, 2008. We Puerto Rico, Series 2002 10/4/2002 10/10/2002 6 days presented this timing strategy first Rhode Island, Series 2007 6/21/2007 6/27/2007 6 days to the Commonwealth of Virginia Ohio (Buckeye), Series 2007 10/24/2007 10/29/2007 5 days prior to the Commonwealth's Guam, Series 2007 12/7/2007 12/13/2007 6 days tobacco securitization in May 2005 New York, Series 2007 TBD TBD 5-6 days because its previously planned securitization in early 2003, underwritten by another firm, was forced to unwind due to fallout from the negative Price case decision. During the underwriter selection process for its 2005 transaction, the Commonwealth of Virginia expressed strong concerns as to how to minimize its exposure to litigation and event risk. Citi proposed an aggressive closing calendar to Treasurer Jody Wagner at Virginia's tobacco securitization oral interview, and the final underwriter of the bonds in fact adopted this closing schedule. Balance Sheet Commitment of Senior Manager During and After the Pricing. Selecting a senior manager who will take down the bonds at the proposed yields, rather than allow the price to deteriorate, also minimizes the TSFA’s exposure to tobacco event risk. As we discussed in question B3, Citi's capital commitment to tobacco bonds is unparalleled. Our firm sustained the market in tobacco bonds at the height of the Price litigation, as we remained bullish on tobacco credits. In June 2007, notwithstanding sharp bond market sell-offs world-wide, Citi underwrote an $83 million balance of taxable tobacco securitization bonds for the State of West Virginia to maintain yields at aggressive levels and to meet West Virginia’s statutory minimum proceeds target of $800 million. As an investment bank, we are the largest holder of tobacco bonds with a daily inventory averaging $350 million in 2006 and in excess of $385 million in 2007. Unlike other investment banks that would reduce the price or unwind the transaction in the face of negative litigation developments, our interests are aligned with those of the issuer, as re-pricing the issuer's bonds at a lower point would simultaneously re-price and reduce the value of our own substantial tobacco holdings. Citi has demonstrated using our capital to meet our client’s goals, and the TSFA will receive the same commitment. 5. CURRENT MARKET FACTORS Tobacco Market Drivers. The factors influencing the tobacco securitization market and, therefore, the pricing of tobacco securitization both tax-exempt and taxable, fall into two broad categories: 1) tobacco bond credit fundamentals and 2) general market conditions for high yield bonds. The graphic to the right illustrates the credit and Master Settlement Agreement specific factors that shape investor’s evaluation of the credit and determine the magnitude of the “tobacco premium”, or the spread between yields on tobacco securitization bonds and market benchmarks. Several of these factors are discussed in greater detail below. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 10 The Market for Tax-Exempt Tobacco Bonds. The Factors Affecting the Tobacco Securitization Market fixed income markets have exhibited dramatic volatility and uncertainty as a result of the collapse of the subGeneral Supply General Supply and and Demand Demand for for prime mortgage sector in the summer of 2007. The Interest High Interest Rate Rate High Yield Yield Bonds Bonds Environment fallout has resulted in a re-pricing of risk, the downgrade (including tobacco) Environment (including tobacco) of certain bond insurers and most recently the collapse of the auction rate market. The resultant flight to quality has bifurcated the market into high grade and high yield Litigation Litigation Challenges Challenges Tobacco credits (i.e. tobacco bonds) with credit spreads between Tobacco Non-Participating Non-Participating (e.g. (e.g. to to Master Master Settlement Settlement Securitization Manufacturer Securitization Manufacturer (NPM) (NPM) the two widening sharply (see chart below). Tobacco Agreement, Agreement, Adjustment Bond Adjustment Risk Risk Bond Yields Yields tobacco companies) tobacco companies) bonds have followed this trend and experienced significantly credit spread widening. In addition, the high yield market (BBB category and below) has experienced overall negative fund flows since August Bankruptcy Bankruptcy or or Uncertainty Decreased Uncertainty of of Decreased Market Market 2007. Prior to that time, high yield fund flows had been Future Consumption Share of Participating Future Consumption Share of Participating consecutively positive since the beginning of 2006. Manufacturers Manufacturers While fund flows have picked up again in the first two months of 2008, we are once again seeing a decline in inflows (see chart below). Nonetheless, tobacco securitization bond transactions are being successfully complete to meet issuer goals, including the Buckeye Tobacco Settlement Financing Authority’s $5.5 billion transaction for which Citi served as joint book-running manager and Guam Economic Development Authority also senior managed by Citi. Some transactions away from Citi have struggled and remain stalled due to increased tobacco interest costs. 20-Year Interest Rates and Credit Spreads High Yield Fund Flows 600 6.25% 180 500 400 160 5.75% 300 140 Yield (%) 120 4.75% 100 80 4.25% 60 100 0 -100 -200 -300 -400 3.75% 40 3.25% 1/2/07 200 Credit Spread (basis points) 5.25% 2/18/07 4/6/07 5/23/07 A AA Bloomberg G.O. 7/9/07 8/25/07 10/11/07 BBB- Bloomberg Rev 11/27/07 1/13/08 20 2/29/08 -500 -600 1/3/07 3/14/07 5/23/07 8/1/07 10/10/07 12/19/07 AA A vs. BBB- Spread Taxable Tobacco Securitization Market. Similar to the tax-exempt markets, the world-wide fixed income markets have sold off considerably as a result of the sub prime market. Furthermore, the re-pricing of risk has negatively impacted taxable tobacco credit spreads even more so than the tax-exempt market. The largest and most recent taxable tobacco transaction successfully completed was for the State of West Virginia ($911 million) in June 2007 on which Citi served as senior manager. The 2047 West Virginia current interest bond priced at a yield of 7.47% for a 10-year average life or 2.25% over the 10-year Treasury. As noted at right, West Virginia’s bonds are now trading at 7.94%, this is a spread to Treasury of 4.62% bps, well above initial offering yields. Likewise, the TSFA’s bonds have traded off initial offering spreads with the last recorded trade on 12/20/07 at a 7.93%. Taxable Tobacco Yield Comparisons 10.00% 7.93% 7.47% 6.71% +440 bps 10-yr 6.00% 7.94% 7.88% 8.00% +225 bps 10-yr +462 bps 10-yr +201 bps 10-yr 6.06% 7.25% 7.31% +512 bps 2-yr +326 bps 10-yr +388 bps 10-yr +204 bps 2-yr 4.00% 2.00% 0.00% Virginia 2046 West Virginia 2047 Original Yield New York County 2011 Recent Trade Yield Michigan 2048 2/27/08 MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 11 Tobacco Settlement Specific Factors As discussed above, there are tobacco industry and MSA specific credit fundamentals that also affect the market for tobacco bonds. In the past year, there has been an improved perception of the tobacco bond credit and well as a more favorable litigation environment. As such, tobacco bond credit fundamentals remain positive. Provided below are highlights of the areas of investor focus. Non Participating Manufacturers (“NPM”) Adjustment Risk. The contingent NPM adjustment under the MSA can potentially decrease TSR payments in future years. To date, portions of Participating Manufacturers (“PM”) payments in 2006 and 2007 have been set aside due to claimed 2003 and 2004 NPM adjustment disputes, based on the Brattle Group’s determinations that the MSA was a “significant factor” leading to market disadvantages and contributing to the Market Share Loss for calendar years 2003 and 2004. On February 7, 2008, the PMs reported that the Brattle Group had found the MSA to be a “significant factor” contributing to a Market Share Loss. The finding would result in a calendar year 2005 NPM Adjustment and a potential reduction in TSR payments if the State is found to have not been “diligently” enforced its Model Statute. As of the date of this RFP approximately $1.4 billion of 2003 and 2004 TSR payments have been deposited to the Disputed Payments Account. These payments were either withheld or set aside in the Disputed Payments Account, which amounts are subject to legal dispute and not currently available to the states. Bankruptcy or Decreased Market Share of PMs. For the time being, the financial status and market share of the PMs seems to be stable. Recently, the rating agencies have reconsidered their review of the tobacco companies’ financial status, and as a result, have raised their ratings on the tobacco companies, concluding that the tobacco companies are less likely to seek bankruptcy protection or otherwise default in any way on their MSA obligations. Uncertainty of Future Consumption. For future consumption projections, the market relies on projections by econometric consulting firms such as Global Insight. Since the MSA was executed in 1998, investors’ concerns over consumption risk have been increasingly allayed as the domestic cigarette consumption forecasts of Global Insight have generally been in line with (and even slightly under estimated) national consumption in recent years. Nonetheless, a decline in the overall domestic consumption of cigarettes beyond the levels forecasted is still weighed by investors purchasing tobacco bonds, since such a decline would have a material adverse effect on the payments by PMs under the MSA and the amounts available to pay bondholders. Litigation Risk. The current investor perception of the tobacco litigation environment is generally positive. The Price case was resolved positively for the tobacco industry in December 2005. The Florida Engle case is no longer a material threat to the industry. Investors do remain concerned about the Freedom Holdings and Grand River cases, which challenge on several antitrust and restraint-of-trade grounds the MSA, qualifying/model statutes, and complementary legislation passed by various states, including the State of Michigan. However, recent pricings suggest tobacco investors have generally been comfortable with the litigation risks associated with Freedom Holdings and Grand River. The TSFA Marketing Plan While there are many external influences on the tobacco market as described above, the structure of the TSFA’s 2007 Bonds will also drive the marketing strategy for the Bonds. Tax-exempt and taxable, current interest, capital appreciation and convertible capital appreciation bonds are each sought by different investors. Citi will tailor our marketing strategy to the specific securities chosen by the TSFA. Our combination of unrivalled institutional marketing strength and in-state retail networks makes Citi suited to successfully market any finance plan selected by the TSFA. To maximize investor demand, we believe a defined marketing strategy to reach all retail and institutional tobacco bond buyer segments, including buyers of current interest, convertible CAB, subordinate CAB bonds, existing holders of the 2006 Bonds and investors who are active in both the tax-exempt and taxable bond markets is essential. Pre-marketing activities will include: • Internet road show describing deal structure and security, • Investor conference calls, • One-on-one investor meetings, • Investor discussions regarding pricing levels, and • Multiple syndicate calls to discuss pre-marketing results and pricing. Citi’s focused pre-marketing and consistent underwriting communication have been key to achieving the best pricing for our clients. Based on the structures recommended in our response to question B1, we outline below our specific marketing plans and some of the investors we will target in each market. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 12 Tax-Exempt Current Interest Bonds. Citi has identified potential demand for the TSFA’s tax-exempt current interest bonds among six major investor categories, as shown in the following table. Targeted Demand: Tax-Exempt Michigan Series 2007 CIBs 1. Current TSFA Bond Holders Aegon USA Aetna BCBS of MI & MN Hartford Invst. Mgmt. Loomis, Sayles Occidental Standish Mellon 2. High Yield Funds 3. National Bond Funds 4. Retail Investors Cedar Ridge Colonial Eaton Vance Franklin Goldman Sachs AM Nuveen Rochester Van Kampen Blackrock Columbia Fidelity Dreyfus Riversource Cap Re Putnam T. Rowe MFS Scudder Dreyfus Lord Abbt. Evergreen Vanguard Direct retail Managed money Bank trust dept 5. Arbitrage Accounts & TOBs Citi Prop Merrill Prop Morgan Stanley Prop Susquehanna 6. Hedge Funds 1861 Camulos Capital TOB Capital 7. Money Managers Standish UBS Asset Mgmt JP Morgan Smith Barney Smith Barney In addition to the above targeted institutional investors, it is important Retail Offices Retail Offices FCs FCs to focus on retail whose ownership of tobacco bonds has grown 14 Jackson 9 significantly over the last three years. Thus, retail investors are a key Ann Arbor Battle Creek 6 Kalamazoo 14 target for the TSFA’s tax-exempt current interest bonds. Citi has one 44 Marquette 7 of the largest retail brokerage systems of any full-service securities Bloomfield Hills Clinton Township 6 Saginaw 21 firm with over 11,800 Financial Consultants in 510 offices, including Detroit 7 Southfield 54 344 Financial Consultants in 16 Michigan offices. This network East Lansing 20 Traverse City 15 gives us the ability to distribute the TSFA’s bonds to over 5.7 million Farmington Hills 43 Troy 37 retail customer accounts nationwide containing over $998 billion in Flint 19 assets, $97.8 billion (10%) of which are direct holdings of tax-exempt Grand Rapids 28 Total 344 bonds. In Michigan alone, we have over 176,000 accounts with holdings of more than $1.9 billion in municipal bonds. We plan to implement a targeted retail branch investor/broker education campaign for the TSFA’s tax-exempt current interest bonds. Before the TSFA pricing, members of Citi’s Credit Analytics Group will brief local Smith Barney regional offices on the TSFA’s tobacco deal In addition to local Michigan retail clients, Citi will target our high net-worth investors across the country. Citi’s Fixed-Income High-Net-Worth program is the largest on Wall Street with access to over 37,000 separate high-net-worth portfolios with assets totaling over $105 billion, 60% of which are invested in tax-exempt municipal bonds. Subordinate CABs. Subordinate tobacco securitizations are back-loaded structures designed to allow issuers greater cash flow in the earlier years or to wrap around existing obligations. Usually, these subordinate Recent CAB Tobacco Investors structures are implemented with the use of CABs. Please see our response to BlackRock Question B3 for Citi’s subordinate tobacco CAB experience. As the most Capital experienced underwriter of subordinate CABs, Citi has a keen understanding of the market’s buyers. While dominated by institutional investors, the market for tobacco Dreyfus CABs has the potential for interest from sophisticated retail clients. Eaton Vance Forward Management Currently, there is a limited market for subordinate tobacco CABs. In the last three tobacco securitizations, Oppenheimer/Rochester has been the only investor Franklin Advisors purchasing subordinate CABs. Citigroup proposes to diversify the subordinate Goldman Sachs Asset Mgmt CAB investor base by aggressively pre-marketing the TSFA’s structure to previous Morgan Stanley participants and holders of these securities. We believe this focused pre-marketing Rochester / Oppenheimer effort will be important to increasing penetration into for this structure. In the table at right, we list our current market assessment of potential tobacco CAB investors for the TSFA’s financing. Because of the limited market, failing to appropriately pre-market in connection with a subordinate tobacco CAB issue could have significant negative consequences as demonstrated by Fresno County’s, CA experience. Fresno County brought a $39 million subordinate tobacco CAB transaction to market in April 2006 and concentrated its full marketing effort on a single investor (Rochester/Oppenheimer). By getting no other accounts interested in the transaction during the pre-marketing period, Fresno’s senior manager afforded Rochester significant pricing power and was forced to accept a bid 50 basis points higher in yield than was received on Stanislaus County’s, CA non-rated CABs (priced by Citi) that sold two weeks earlier under nearly identical market conditions. Taxable Bonds. Currently, the market for taxable tobacco securitization bonds is extremely thin and is limited to one prominent buyer. As such, the sale of tobacco bonds will need to target interested investors and approach them individually with regard to rate and structure. Given the TSFA’s manageable $40 to $60 million taxable component, Citi believes a market can be established MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 13 for the successful sale of the bonds. Specifically, we believe investment grade fixed income buyers could be attracted to the spread levels on investment grade tobacco securitization bonds and that high yield fixed income buyers will value the credit of tobacco securitization bonds versus highly-levered non-investment grade corporate debt or tobacco manufacturer debt. While this buyer base could become purchasers of taxable tobacco bonds, it will require a thorough investor education effort. Citi has extensive experience educating first-time buyers of taxable tobacco bonds, including on our recent transaction for West Virginia where we sold bonds to over 20 institutional investors. Our ability to bring in first time investors was demonstrated on THE TSFA’s 2006 taxable tobacco offering, Citi (as co-senior manager) was solely responsible for bringing in a $100 million order from ING, a first-time tobacco securitization investor. This anchor order solidified the book and allowed Michigan to achieve attractive pricing overall. Without the ING order, a re-pricing at higher yields would have been required. Full Commitment to the TSFA’s Issuance. As a top tobacco investor and leading underwriter of tobacco bonds, Citi has a deep knowledge base of all primary and secondary market investors and can identify potential “anchor” orders for a new primary market offering. 6. TIME SCHEDULE Provided below is a draft schedule for the TSFA’s proposed transaction. Based on existing documentation and Citi’s real-time knowledge due to our active tobacco market financing, Citi is confident that TSFA can easily achieve the referenced first of August 2008 closing and would recommend a faster schedule. The schedule Citi provides below is aggressive but achievable and reflects Citi’s desire to minimize the TSFA’s exposure to event risk. As our recent experience with accelerated schedules for the New York Tobacco Settlement Financing Corporation shows, Citi is prepared to execute the schedule provided below upon legislative approval and we believe that financial closing can be achieved six weeks from closing. Michigan Tobacco Settlement Financing Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Preliminary Financing Timetable Week Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Task Kick-off Conference Call Distribute 1st Draft of Supplement Bond Indenture Distribute 1st Draft of Preliminary Offering Circular (“POC”) Review Bond Structure with TSFA Engage Consumption Consultant & Verification Agent Meeting to Review Preliminary Structure & Bond Documents (P&S Agreement, POC, Distribute Revised Drafts of Bond Documents, POC, Consumption Report & Opinions Refine Bond Structure with TSFA Meeting to review revised Bond Documents, POC, Consumption Report & Opinions Distribution of Revised Bond Documents & Opinions & Draft Internet Roadshow Meeting/Conference Call to Review Bond Documents (Indenture, P&S Agreement, POC, Distribute Credit Materials to Rating Agencies Discussions with Rating Agencies Finalize Bond Structure with TSFA Finalize Bond Documents & Opinions & Internet Roadshow Due Diligence Call with Consumption Consultant & Co-Managers Rating Agency Due Diligence Calls with Attorney General & Tobacco Enforcement Staff Receive Ratings Finalize POC Print & Mail POC Begin Marketing Bonds Investor Presentations - Internet Road Show - Investor Meetings/Conference Calls Complete Marketing of Bonds Price Bonds Sign Bond Purchase Agreement Finalize OC Print & Mail OC Distribute Bond Documents & Opinions for Execution Pre-closing Closing Responsibility All Bond Counsel Underwriter's Counsel TSFA, Citi, Financial Advisor TSFA, Citi, Financial Advisor All Bond Counsel, Underwriter's Counsel, Global Insight TSFA, Citi, Financial Advisor All Bond Counsel, Underwriter's Counsel, Citi All Citi TSFA, Citi, Financial Advisor TSFA, Citi, Financial Advisor Bond Counsel, Underwriter's Counsel, TSFA All TSFA, Citi TSFA Underwriter's Counsel Underwriter's Counsel Citi TSFA, Citi TSFA, Citi TSFA, Citi Citi Citi TSFA, Citi Underwriter's Counsel Underwriter's Counsel Underwriter's Counsel All All MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 14 7. PROPOSED UNDERWRITING FEES Citi is confident that we can offer the TSFA the lowest all-in cost for its proposed tobacco financing, combining the lowest yields with competitive underwriting fees that support the TSFA’s syndicate’s marketing and sales effort. We provide fees, takedowns and pricing for 100% tax-exempt scenarios as well a combined tax-exempt/taxable structure. For each fee quote we assume a transaction size of $150 million. Our proposed fees reflect aggressive takedowns for taxable and tax-exempt bonds and no management or structuring fee. We do not foresee the inclusion of special counsel on this transaction. We do not wish our proposed fees to be the sole deciding factor in our selection, and we are fully prepared to negotiate with the TSFA and the State to determine a mutually agreeable underwriter’s discount. 100% Tax-Exempt Proposed Underwriter's Discount Item $/1,000 Average Takedown: Structuring Fee: Management Fee: Expenses: Total Gross Spread $3.00 0.00 0.00 0.91 $3.91 Total Item $450,000 $0 $0 $136,699 $586,699 Average Takedown: Structuring Fee: Management Fee: Expenses: Total Gross Spread Information by Maturity Total $3.70 0.00 0.00 0.91 $4.61 $555,000 $0 $0 $136,699 $691,699 Yield 8.000% 6.500% 8.000% $/1,000 $5.00 3.00 3.00 Information by Maturity Coupon 2038 Turbo CIB 2048 Turbo CAB Combined Structure Proposed Underwriter's Discount (Assumes Scenario #5 Structure)* $/1,000 6.250% 0.000% Yield 6.500% 8.000% $/1,000 3.00 3.00 2036 Taxable CIB 2038 Tax-Exempt CIB 2048 Tax-Exempt CAB Coupon 8.000% 6.250% 0.000% * Takedown for Taxable CABs, if implemented, will be $5.0/1,000 Breakdown of Underwriter's Expenses (F=Fixed / V=Variable) $/1000 Underwriter’s Counsel (F): Net Roadshow (F): Travel / Out of Pocket / Pre-Marketing (F): Day Loan (V): Dalcomp (V): CUSIP (V): BMA (V): Total Underwriter’s Expenses $0.667 0.033 0.067 0.030 0.078 0.002 0.035 $0.911 Value $ 100,000 5,000 10,000 4,500 11,700 249 5,250 $136,699 8. TOBACCO SECURITIZATIONS SINCE 2005 Citi has been the senior book-running manager on 15 separate transactions since 2006, totaling $8 billion. Since 2006, Citi has also been a co-senior manager on 12 separate transactions, totaling $13 billion. Details on these transactions, including Citi’s team members for each transaction, are in the table in Appendix B. 9. ADDITIONAL FACTORS Product Innovation and Market Tested Structures. The TSFA and Citi both have strong backgrounds in tobacco structuring and product innovation. The TSFA successfully completed the first and only transaction to use FRNs in a tobacco securitization transaction. Citi has a history of innovations including the first tobacco securitization transaction ever and use of Credit Default Swaps to increase the buyer base of tobacco bonds, to name just a few. As the TSFA’s senior manager, Citi will explore all options and structures. However, in the current volatile debt markets it has been our experience that investors respond best to MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Section B – Page 15 investment grade market-tested tobacco structures like current interest turbo term bonds, convertible CABs and turbo term CABs. As our plan of finance indicates, Citi recommends these market-tested structures for the TSFA’s Series 2008 offering. Citi’s Substantial Structuring Experience Invaluable. We believe Citi offers the TSFA the most creative and informed securitization structuring advice designed to meet the TSFA’s specific and varied objectives at the lowest possible cost. We have an unrivalled track record of successful structuring innovation on behalf of State and county tobacco bond issuers, including several innovations of direct benefit to Michigan’s planned 2007 securitization. These Citi innovations include the sale of the first convertible CAB tobacco bond (Iowa), the first “simultaneous maturity” to take advantage of different rating stress levels within a same maturity (Iowa), the first 45-year CAB rated by S&P (Rhode Island) and several uses of deferred TSR pledges designed to enhance early year TSR cash flows for budget relief, while still raising an issuer’s targeted net proceeds amount (Los Angeles County, Westchester, District of Columbia). We look forward to the opportunity to apply this structuring creativity on behalf of the TSFA in its planned 2008 tobacco bond issuance. Ready to Get Started. As noted previously, Citi has served as senior manager on the last two tobacco securitizations and we are currently serving as senior manager to the State of New York on their restructuring/refunding of outstanding Auction Rate tobacco securitization bonds. The New York transaction is schedule to close on March 26, 2008. Because of the recent and live tobacco transactions on which we are serving, the Citi tobacco team is immersed daily in tobacco bond pricing, financial modeling and disclosure. This immediate knowledge base will allow the Citi team to “hit the ground running” for the TSFA’s transaction. This has significant value for the TSFA not only because Citi will bring the most real-time experience to the TSFA’s transaction but also because we will be in position to accelerate the TSFA transaction schedule, as we have New York’s. In short, Citi is Ready to Get Started. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix A – Page 1 APPENDIX A: CITI TEAM RESUMES (SUPPLEMENT TO SECTION A, QUESTION 1) Citi’s lead tobacco banker for the TSFA’s financing will be Tom Green, Managing Director and Head of the Tobacco Securitization Group. Tom will work with Paul Creedon, Managing Director and Co-Head of the Tobacco Securitization Group, and Shai Markowicz, Director, to formulate a plan of finance for the TSFA’s offering. Tom and Paul are the senior bankers on Citi’s tobacco finance team and together have worked on all of Citi’s recent senior managed tobacco securitizations. Quantitative and analytical support will be provided by Harold Bean, Director, Jed Drumm, Associate, Mathilde McLean, Assistant Vice President, and Jeremy Chambers, Associate, all members of Citi’s Tobacco Securitization Group and based in our New York office. Tom Coomes, Managing Director, Guy Logan, Director, and Rob Mellinger, Vice President have responsibility for the firm’s public finance activities in the State of Michigan. They will work closely with the tobacco team to provide day-to-day banking coverage for the TSFA. The marketing and pricing of the TSFA’s tobacco bonds will be coordinated by Peter Bartlett, Managing Director and Manager of Municipal Capital Markets and Jay Wheatley, Managing Director and Manager of the Municipal Underwriting Syndicate have served as lead underwriter for all Citi tobacco financings. Doug Vissicchio, Managing Director, Bernie Costello, Managing Director, Maureen McCann, Managing Director, and Ish McLaughlin, Managing Director each specializes in following and trading a different portion of the tobacco market; each will lend their expertise to the underwriting effort for the TSFA’s bonds. Tobacco Banking Michigan Coverage Principal Bankers and Day-to-Day Contacts Tom Green Paul Creedon Tom Coomes Guy Logan Managing Director Tobacco Securitization Group Managing Director Michigan Public Finance Director Michigan Public Finance • Senior banker on 10 Citi tobacco deals • 19 years of public finance experience • 14 years of public finance experience Shai Markowicz Mathilde Mclean Robert Mellinger Director Tobacco Securitization Group Assistant Vice President Tobacco Securitization Group Vice President Michigan Public Finance • Senior banker on 3 tobacco deals • Senior banker on 5 tobacco deals • 9 years of public finance experience Managing Director Tobacco Securitization Group • Senior tobacco banker since 1999; previous state AG tobacco litigation experience; 18 years in municipal finance Tobacco Marketing, Underwriting, and Credit Expertise Tobacco Analytics Peter Bartlett Harold Bean Director • Senior banker on 5 tobacco deals; Analytical support for all Citi tobacco financings Rodolfo Riverol Director • Analytical and transaction support for Citi Managing Director Manager of Municipal Capital Markets tobacco modeling • Senior underwriter on all Citi tobacco financings since 1999; 28 years in municipal finance Jed Drumm Jeremy Chambers Associate Doug Vissicchio Associate Managing Director Head of Bond Trading • Primary analytical and transaction support for all Citi senior managed tobacco financings since November 2005 Jay Wheatley John Rice Managing Director Manager of the Municipal Syndicate Managing Director Head of Institutional Sales Marketing • Senior underwriter on all Citi tobacco financings; 20 years in municipal finance Bernie Costello • Quantitative analysis and documentation support for Citi tobacco financings • 35% of total tobacco market trading over past 3 years; largest volume trader Director Senior Tobacco Securitization Trader Maureen McCann • Senior tobacco trader; 17 years • Largest volume tobacco trader; 10 years • Senior CAB trader; 25 years Ish McLaughlin Terry Tracy Managing Director Manager of Asset-Backed Syndicate • Taxable tobacco trading expertise; 13 years in taxable fixed income trading Managing Director Retail Sales Marketing • Marketing liaison on tobacco deals; 26 yeras Managing Director Tobacco CAB Trading Andrew Goodwin Associate Taxable Tobacco and Tobacco Credit Default Swap Trading • Led industry’s first tobacco securitization Credit Default Swap (CDS) trade Tobacco Banking Thomas Green Managing Director, Tobacco Securitization Group New York and Boston (212) 723-4644 and (617) 346-9253 Mr. Green has 18 years of experience in municipal finance and currently specializes in infrastructure finance. He has served as a senior banker on multiple tobacco securitizations dating to 1999, including among many others two taxable/tax-exempt financings for the State of Iowa, a highly successful 2007 back-end CAB tobacco deal for the State of Rhode Island, the record-setting Buckeye tobacco bond sale in October 2007 and the pending March 2008 New York State tobacco deal that will set a tobacco MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix A – Page 2 bond market record for speed to market from date of hire. From 1992 to 1997, Mr. Green served as First Assistant Attorney General of Massachusetts, where he supervised the 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. Mr. Green’s litigation and tobacco bond structuring experiences have both given him a keen understanding of MSA-related issues. Mr. Green holds a B.A. in Government from Harvard College and M.B.A. and J.D. degrees from Harvard Business School and Harvard Law School, respectively. Paul Creedon Managing Director, Tobacco Securitization Group New York (212) 723-5589 Mr. Creedon has worked with municipal issuers for 22 years and has experience based in both credit analysis, transaction structuring and banking. Mr. Creedon’s banking practice is focused on state level issuer’s revenue streams. Mr. Creedon’s clients include the State of New Jersey, Commonwealth of Pennsylvania, Commonwealth of Kentucky and the State of West Virginia. Mr. Creedon began serving as senior banker for tobacco securitization beginning 2002 and has focused on the structuring, rating and marketing of Tobacco Securitization Bonds since that time. Mr. Creedon’s recent Tobacco Securitization experience includes work with the States of New Jersey, West Virginia, Rhode Island and the Government of Guam. Additionally, Mr. Creedon has served in a quantitative and structuring capacity for several California county tobacco securitizations including Marin and Riverside. Most recently, Mr. Creedon acted as day-to-day banker for the landmark $5.5 billion Buckeye Tobacco Settlement Financing Authority transaction, the largest tobacco securitization ever completed and the second largest tax-exempt financing ever. Prior to joining Citi, Mr. Creedon was a municipal credit analyst at Moody's Investors Service, where he worked with municipalities, state governments and agencies throughout the nation. Mr. Creedon's worked in Moody's State Ratings Group and provided ratings for state-level issuers around the country. Mr. Creedon's responsibility at Citi also includes membership on the firm's Municipal Commitment Committee. Mr. Creedon received his B.A. in Economics from Villanova University and his M.B.A. from New York University’s Stern School of Business. Shai Markowicz Director, Tobacco Securitization Group New York (212) 723-5135 Mr. Markowicz is a Director in Citi’s Tobacco Securitization Group. Prior to joining Citi, Mr. Markowicz worked for a national investment banking firm. He has ten years of experience in the public finance industry structuring and executing a wide range of financings including tobacco securitizations, public/private partnerships, and project finance transactions. His clients include Buckeye Tobacco Settlement Financing Authority, Guam Economic Development Authority, the State of Ohio Public Facilities Commission, Nassau County, and the State of New York. Mr. Markowicz graduated magna cum laude from the State University of New York at Albany with a B.S. in Business Administration. Mathilde McLean Assistant Vice President, Tobacco Securitization Group New York (212) 723-5634 Ms. McLean has recently joined Citi after spending more than four years at Public Financial Management (PFM). Since joining the firm, she has provided qualitative support for tobacco securitizations, including Marin County, West Virginia and Rhode Island. At PFM, Ms. McLean structured new money and refunding issues for state revolving funds, pooled loan programs and other municipal clients, including New York State Environmental Facilities Authority, Virginia Resources Authority, Kansas Development Finance Authority, Shelby County, and the Metropolitan Government of Nashville and Davidson County. She also compiled cash flow analyses and monitored coverage ratios for state revolving funds. Ms. McLean graduated from Dartmouth College with an A.B. in Government and is a Chartered Financial Analyst charterholder. Brittany Sharpton Analyst, Tobacco Securitization Group New York (212) 723-4093 Ms. Sharpton joined Citi’s Public Finance Department in July 2007 and has since supported 4 tobacco financings. Her responsibilities include assisting in the preparation of bond financings and providing quantitative and qualitative support to the Tobacco Securitization Group. Ms. Sharpton graduated from the Wharton School of the University of Pennsylvania with a B.S. in Economics. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix A – Page 3 Michigan Coverage Tom Coomes Managing Director and Co-Head of the Midwest Region Chicago (312) 876-3562 Mr. Coomes has covered Michigan and other Midwest issuers for 20 years. He has experience in the areas of general obligation, water and sewer, education, health care, toll roads, airports, mass transit, sports facilities, convention centers, pooled loans and state appropriation-backed bonds. Mr. Coomes’ senior managed experience includes financings for issuers such as the State of Michigan, State Building Authority of Michigan, Michigan Municipal Bond Authority, Michigan Strategic Fund, City of Grand Rapids, County of Kent, Michigan State University, Grand Valley State University, State of Illinois, Commonwealth of Kentucky, State of Wisconsin, Indiana Finance Authority, City of Chicago and other issuers throughout the Midwest. Mr. Coomes earned a B.A. from Albion College and an MBA from Northwestern University’s Kellogg Graduate School of Management. Chicago (404) 842-2465 Guy Logan Director Mr. Logan is responsible for delivering investment banking services to municipal issuers throughout the country and possesses extensive experience in structuring and implementing complex capital structures. Mr. Logan has managed transactions for a wide variety of credit structures that include: revenue, tax-backed, water and sewer revenue bonds, certificates of participation/lease purchase transactions, general obligation, higher education revenue, hospital revenue, limited tax revenue and contractual obligation bond structures. Some of the issuers Mr. Logan has worked with recently include the State of Michigan, Michigan State Building Authority, State of Mississippi, City of Atlanta, City of Detroit, City of New Orleans, City of Birmingham and Fulton County, Georgia. Prior to joining Citi, Mr. Logan worked as an analyst at Moody’s Investors Service in New York City where he analyzed over $2 billion in municipal bonds. Mr. Logan attended Union College in Schenectady, New York, where he earned his B.A. in Economics and his M.B.A. Chicago (312) 876-3555 Robert Mellinger Vice President Mr. Mellinger joined Citi in 2002. Mr. Mellinger has over nine years public finance experience working with clients in the Midwest such as the Michigan Municipal Bond Authority, the Michigan State Building Authority, the State of Michigan, the Indiana Finance Authority (SRF), the Indiana Bond Bank, the City of Milwaukee, the City of Chicago, and the Chicago Park District. Prior to joining Citi, Mr. Mellinger spent three years working in public finance at another Wall Street firm. He began his public finance career as an Analyst at a Midwest-based investment-banking firm, which included providing analytical and transaction support for numerous Michigan K-12 school district financings. Mr. Mellinger holds a B.S. degree in Finance from Indiana University. Tobacco Structuring Harold Bean Director, Tobacco Securitization Group New York (212) 723-5790 Mr. Bean has served as financial advisor or senior manager (lead banker and sole quantitative banker) for over $9 billion of financings. Mr. Bean’s experience includes creating more than a half a dozen new credits for issuers such as the New York MTA, Chicago Transit Authority and Arizona Department of Transportation and numerous workouts and restructurings for clients such as the NYU Hospitals Center, Harris County Toll Road Authority and New York MTA. He currently specializes in difficult situations, derivatives, tenders, credit products and new product development. Prior to joining Citi in August of 2004, Mr. Bean was a Senior Vice President at First Albany. Prior to that he was an Executive Director in the Corporate Finance Department of Warburg Dillon Read, where he specialized in capital structure issues and mergers and acquisitions. He began his tenure at Dillon Read as a Senior Vice President in their Municipal Finance Department from 1992 until that firm left the municipal industry in 1997. Mr. Bean started his career in public finance at Dean Witter Reynolds (San Francisco) in 1985 as a quantitative specialist for single-family housing and advance refunding bond issues. Mr. Bean received an M.B.A. in finance from the State University of New York at Albany and a B.S. in cinema from Ithaca College. Rodolfo Riverol Director, Tobacco Securitization Group New York (212) 723-5578 Mr. Riverol joined Citi's Quantitative Structuring two years ago from another investment bank. Prior to becoming a banker, he worked at Public Resources Advisory Group, a financial advisory firm. While there, he worked with many states and local MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix A – Page 4 governments in the Northeast, including Connecticut, New Hampshire, the New Hampshire Turnpike, New York State and New York City. He was responsible for structuring and verifying pricing of many financial products, including bonds, swaps and swaptions. Here at Citi, he has primary analytical responsibilities for all senior-managed New York City financings. He also works with revenue-constrained clients to help minimize their debt service and has concentrated on a firm-wide implementation of various interest rate models to evaluate call options and identify refunding candidates. Mr. Riverol graduated with a bachelors of arts in mathematics from New York University, and was a PhD candidate in number theory at Rutgers University. New York (212) 723-9694 Jed Drumm Associate, Tobacco Securitization Group Joining Citi in 2005, Mr. Drumm focuses full-time on tobacco securitization financial analysis. Mr. Drumm has worked on quantitative analyses for the District of Columbia, the Virgin Islands, West Virginia, Guam, Rhode Island, California, New York, New Jersey, and others. He also provided primary structuring and analytical support on the securitizations for the City of San Diego (taxable), Santa Clara County, Los Angeles County, Stanislaus County, and the California Statewide Financing Authority county pool. He graduated from Princeton University with a degree in Economics. New York (212) 723-9298 Jeremy Chambers Associate, Quantitative Structuring Group Mr. Chambers has been a member of the Citi municipal finance team since July 2004, focusing heavily on quantitative modeling. He has experience modeling a variety of projects from different areas of traditional municipal finance, including tobacco securitizations and public-private partnership financings. Mr. Chambers has structured tobacco analyses for the states of Ohio, Illinois, Michigan, and Rhode Island. Mr. Chambers graduated from the Massachusetts Institute of Technology in 2004 with a degree in Engineering. Marketing and Underwriting Los Angeles Peter Bartlett Managing Director, Head of Municipal Capital Markets (213) 486-8832 Mr. Bartlett is responsible for all municipal sales and trading operations, including responsibility for the largest bond funds and institutional tobacco investors. Mr. Bartlett has been with Citi for 20 years, beginning his career at Citi as a municipal note trader in New York. In 1978, he moved to the California desk as Citi's trader and underwriter. Mr. Bartlett is one of Citi's top-producing institutional salespersons and is known industry-wide for his breadth of knowledge of municipal securities. He is a graduate of Princeton University. Jay Wheatley Managing Director, Head of Municipal Underwriting New York (212) 723-7093 Mr. Wheatley has spent over 21 years in the municipal bond department at Citi. He is the head of the national syndicate desk, pricing negotiated transactions for issuers across the country including the State. Recently he was lead underwriter for the State of Ohio Public Facilities Commission Higher Education Series 2006B transaction. He has a trading background and continues to serve as co-head of institutional sales and trading. Mr. Wheatley has traded the bonds of all major issuers, including the Authority’s bonds. He is a graduate of Williams College. John Rice Managing Director, Head of Institutional Sales New York (212) 723-5715 John Rice has spent the last 21 years at Citigroup and has been the national sales manager since 1997. His responsibilities include: 1) managing the sales force and assignment and oversight of institutional account relationships; 2) development of institutional client business with trading and syndicate; and 3) coordination between institutional sales, Citi’s Public Finance Department and issuers. Mr. Rice graduated from The University of Connecticut in 1980 with a Bachelor of Arts degree. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services Doug Vissicchio Managing Director, Head of Bond Trading March 10, 2008 Appendix A – Page 5 New York (212) 723-7087 Mr. Vissicchio is Co-Head of Municipal Trading and Head of High Yield Trading, which encompasses tobacco bond trading. He has traded municipal bonds at Citi for the past 12 years. Mr. Vissicchio began his career as an investment banker in the public finance department of Merrill Lynch, and first joined Citi as a corporate bond trader. Mr. Vissicchio received a M.B.A. degree from Duke University Fuqua School of Business and is a graduate of Emory University. Bernie Costello Managing Director New York (212) 723-7087 Mr. Costello is the head of all tobacco bond trading and manages Citi’s trading inventory of tobacco bonds. Mr. Costello began his career at Citi trading MBS for 4 years before being accepted to the Associate sales/trading training program in 2000. In 2001, he joined the municipal bond department and has since traded a variety of different sectors. Currently, his responsibilities include tobacco bonds and long-term, high-grade securities. Mr. Costello graduated from Villanova. Maureen McCann Managing Director New York (212) 723-7087 Ms. McCann is responsible for Citi’s zero coupon bond trading effort. She has been with Citi for 25 years. Ms. McCann began her career in the retail branch system and joined the Municipal Bond Department in 1986 as a research analyst. She has been trading zero coupon bonds and convertible bonds for the past 18 years and is known through out the industry for her in-depth knowledge of the sector. Additionally, Ms. McCann is the Chair for our division-wide Diversity Committee. The Committee represents over 600 colleagues throughout the division and is committed to fostering a culture where the best people want to work and have the opportunity to excel. Ms. McCann graduated from Ithaca College with a B.S. Degree in Psychology and Business. New York Ish McLaughlin Managing Director, Manager of Corporate Investment Grade Syndicate (212) 723-6171 Mr. McLaughlin will be responsible for coordinating the marketing and underwriting of the TSFA’s taxable tobacco securitization bonds if a taxable structure is chosen. At Citi, Mr. McLaughlin heads the Corporate Investment Grade Syndicate (Fixed Income Division) and is responsible for the execution of all North American investment grade debt, both corporate and asset-backed. His tobacco-related underwriting experience includes $1.5 billion of senior unsecured notes for Altria (2003) and $500 million of secured notes for Reynolds American (2005) — the largest corporate tobacco debt offerings in the recent market. He was also actively involved in the marketing of taxable tobacco bonds to corporate fixed income investors during the State of Iowa’s November 2005 tobacco securitization. Mr. McLaughlin joined Citi’s Fixed Income syndicate desk in 1994. Terry Tracy Managing Director, Head of Retail Sales New York (212) 723-7119 Mr. Tracy is a Managing Director and Product Manager for Municipal Bonds. He is also responsible for the Municipal High-Net Worth Program. Mr. Tracy began his career at EF Hutton in 1981 as a sales liaison in the municipal bond department. He moved to Shearson in 1987 where he managed the municipal sales and marketing desk. In 1993 he joined Smith Barney and became a Managing Director and National Retail Sales and Marketing Manager in 1998. His responsibilities included managing a staff of 38 Municipal Bond Professionals located on 6 regional municipal bond trading desks throughout the country. This group assists Financial Advisors and their clients in creating and maintaining a portfolio of tax free municipal bonds. These professionals concentrate on municipal bond credits within their respective part of the country and provide advice, market expertise and insight to investors residing in those areas. Mr. Tracy’s current role involves developing new strategies and investment products for the individual investor. Terry received a B.S. in Economics from the University of New Hampshire in 1980. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services Andrew Goodwin Associate March 10, 2008 Appendix A – Page 6 New York (212) 723-7087 Mr. Goodwin trades high-yield and taxable municipal bonds, including taxable tobacco bonds for Citi. He joined the firm in 2004 and worked in securitized and structured products for a year prior to joining the municipal securities division. In 2006, Mr. Goodwin was accepted into the Associate program. He graduated from Colgate University with a B.A. in Economics. Chris Martin Director, Municipal Credit Analytics New York (212) 723-7249 Mr. Martin has over 20 years experience as a credit analyst in the municipal bond market of which the last 12 years spent as a senior analyst for Citi. Chris has been the lead analyst covering tobacco securitizations for Citi since the firm senior managed the market’s inaugural transaction for New York City in 1999. Mr. Martin created and maintains a proprietary tobacco bond database and cash flow model used daily by Citi’s sales and trading operation and is the primary Citi contact for investors. He has played a pivotal role in marketing to and educating institutional investors during each of the firm's senior managed tobacco securitizations. He has won numerous awards over the years including being named to Institutional Investors annual All America Fixed-Income Research Team, the National Federation of Municipal Analysts Annual Award for Excellence, and Smith’s Institutional All-Star Bond Analyst Team each year of the last 12 years, including the 2006 First Team Award in the Special Revenue Category for analysis of the tobacco bond sector. Before joining Citi in 1995, Mr. Martin was at Moody's Investors Service where he was Vice President/Manager and Rating Committee Chairman of Moody's Asset-Backed Ratings Group. Mr. Martin received a B.S. in Business Administration in Marketing from Montclair State University. George Leung Director, Municipal Credit Analytics New York (212) 723-5138 Mr. Leung directs all credit and rating work for Citi's Public Finance banking efforts utilizing extensive rating agency background. Mr. Leung has worked on a broad variety of credits including the first tobacco securitizations that Citi introduced to the market November 1999 for TSASC, Inc, pension obligation bonds, states and municipalities in our marketplace. Prior to joining Citi in 1999, Mr. Leung had 20 years of rating agency experience at Moody's Investors Service and was the senior chairperson for its public finance rating committee. Mr. Leung was the lead analyst for the State of Michigan and in charge of all state and high profile ratings in the U.S. as well as all sub-sovereign credit outside the U.S. Mr. Leung is a trustee of the Citizens Budget Commission New York, member of the Municipal Analysts Group of New York and formerly worked at the Federal Reserve Bank of Boston's Urban Finance Group. Mr. Leung received his BA in Economic and Urban Planning at Rutgers and his Masters in City Planning at the Massachusetts Institutive of Technology. STATE OF MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix B – Page 1 APPENDIX B: TOBACCO SECURITIZATION EXPERIENCE (SUPPLEMENT TO SECTION B, QUESTION 8) Citi's Tobacco Securitization Experience Citi's Senior Managed Book-Running Tobacco Securitization Experience Issuer CCTSA (Los Angeles County, CA) Sale Date 2/2/2006 Total Par Amount ($) 319,827,107 3/22/2006 42,153,611 TSFC (United States Virgin Islands) 4/6/2006 7,290,009 CSFA (California County Pool, CA) 4/6/2006 61,750,538 City of San Diego, CA 6/15/2006 105,400,000 District of Columbia TSFC 8/16/2006 248,264,046 SVTSA (Santa Clara County, CA) 1/12/2007 102,030,012 CCTSA (Marin County, CA) 5/31/2007 49,870,081 CCTSA (Stanislaus County, CA) TSFC (State of West Virginia) 6/14/2007 911,141,503 Series 2006A 2006B 2006C Tax Status Tax-Exempt Tax-Exempt Tax-Exempt 2006A 2006B 2006C 2006D 2006A 2006B 2006C 2006D 2006A 2006B 2006C 2006D 2006 Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Taxable 2006A 2006B 2006C 2006D 2007A 2007B 2007C 2007D 2007A 2007B 2007C 2007D 2007E 2007F 2007A 2007B Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Taxable Taxable CIBs Initial Par Amounts (by Series) Convertible CABs 294,163,254 CABs 13,586,213 12,077,640 20,965,835 2,827,547 9,446,325 8,913,905 $ 4,764,710 512,471 867,690 1,145,138 25,566,107 18,913,518 6,466,114 10,804,800 $ 105,400,000 Assigned Personnel Green, Hughes, Crowley, Drumm Green, Gomez, Drumm Green, Fluehr Womack, Drumm Green Hughes, Gomez, Drumm Green, Press, Mukai, Drumm 145,481,196 14,251,650 55,868,400 32,662,800 68,560,741 4,407,580 20,160,692 8,901,000 35,365,000 6,154,095 2,337,139 2,237,592 1,913,225 1,863,030 845,810,000 65,331,503 Green, Womack, Drumm Green, Hughes, Carlson, Drumm Green, Gomez, Creedon Drumm, McLean Green, Creedon, Drumm, McLean (continued on next page) STATE OF MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix B – Page 2 Citi's Senior Managed Book-Running Tobacco Securitization Experience (continued) Issuer TSFC (State of Rhode Island) Inland Empire TSA (Riverside County, CA) TSFA (State of Ohio) Guam Economic Dev Auth Total: Sale Date 6/21/2007 Total Par Amount ($) 197,175,742 8/8/2007 294,084,291 10/24/2007 12/7/2007 13 issues Note: Securities Data Company accounts for certain subseries as separate transactions 5,531,594,541 36,982,077 $7,907,563,558 Series 2007A 2007B 2007C Tax Status Tax-Exempt Tax-Exempt Tax-Exempt 2007A 2007B 2007C-1 2007C-2 2007D 2007E 2007A-1 2007A-2 2007A-3 2007B 2007C 2007A 2007A 2007B Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt CIBs Initial Par Amounts (by Series) Convertible CABs CABs 176,974,413 17,336,218 2,695,112 87,650,000 53,757,703 53,541,801 29,652,581 23,457,164 18,948,552 211,350,000 4,726,045,000 Green Creedon, Drumm McLean Green, Crowley Creedon, McLean Drumm Green, Creedon Markowicz McLean, Drumm 274,751,138 191,265,480 128,182,923 17,505,000 16,070,000 3,407,077 $6,011,620,000 Assigned Personnel $628,826,190 $1,239,870,879 Green, Creedon Markowicz, Drumm STATE OF MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix B – Page 3 Citi's Co-Managed Tobacco Securitization Experience Issuer Sale Date 2/1/2006 Total Par Amount ($) 67,858,509 TSASC (New York City, NY) 2/2/2006 1,353,510,000 NCTSC (Nassau County, NY) 3/30/2006 CCTSA (Alameda County, CA) MTSFA (State of Michigan) NTSC (State of Alaska) TSFC (State of New Jersey) GSTSC (State of California) TSFC (Commonwealth of Virginia) MTSFA (State of Michigan) Total: 5/11/2006 8/10/2006 1/23/2007 3/8/2007 4/26/2007 5/11/2006 $431,034,246 490,500,589 411,987,860 3,622,208,082 4,446,826,391 1,149,273,283 522,991,697 9 issues $12,496,190,656 CIBs Initial Par Amounts (by Series) Convertible CABs Series 2006A 2006B 2006C Tax-Exempt Tax-Exempt Tax-Exempt 2006-1 Tax-Exempt 2006A-1 2006A-2 2006A-3 2006B 2006C 2006D 2006E 2006A 2006B 2006C Taxable Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Taxable Taxable Taxable 2006A 2006B 2006C Tax-Exempt Tax-Exempt Tax-Exempt 399,885,000 2007-1A 2007-1B 2007-1C Tax-Exempt Tax-Exempt Tax-Exempt 3,436,225,000 2007A-1 2007A-2 2007B 2007C 2007A 2007B-1 2007B-2 2007C 2006A 2006B 2006C Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Taxable Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt 3,707,130,000 2007D Tax-Exempt CABs 38,683,877 12,790,902 16,383,730 $1,353,510,000 Assigned Personnel Green Gomez, Carlson, Drumm Green, Livingstone Drumm 42,645,000 Green, Tomson, Bartlett, Drumm $37,905,610 291,540,000 $10,670,013 9,867,332 37,604,291 802,000 363,115,000 72,620,000 54,765,589 Green, Logan, Drumm 8,668,052 3,434,808 Green, Fluehr, Rattigan, Drumm 126,198,000 59,785,082 389,192,591 271,957,065 78,546,735 682,650,000 335,625,000 Green, Egan, Creedon, Drumm Green, Hughes, Mukai, Andrade, Drumm Green, Drumm, McLean 26,807,890 77,104,422 480,125,000 35,649,948 7,216,749 27,085,971 $11,165,070,000 $453,906,091 $877,214,565 Green, Logan, Drumm MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix C – Page 1 APPENDIX C: CASE STUDIES (SUPPLEMENT TO SECTION B, QUESTION 3) Case Study #1: State of Ohio – $5.5 billion Series 2007 Bonds Citi served as Joint Book-Running Senior Manager to Buckeye Tobacco Settlement Financing Authority’s (“BTSFA”) Tobacco Settlement Asset-Backed Bonds, Series 2007, which priced on October 23, 2007 and closed on October 29, 2007. BTSFA’s purchase of tobacco settlement revenues from the State of Ohio resulted in the largest tobacco bond issue ever sold. Citi used the depth of knowledge of its tobacco banking team, our unrivalled capital commitment capability and extensive U.S. retail and global institutional municipal sales force to ensure the successful marketing and aggressive pricing of BTSFA’s bonds. The following paragraphs summarize the key aspects of the Buckeye transaction. Funding State-wide School Construction and 20-Year Property Tax Relief for Seniors– Through the innovative use of tobacco bond financing, in combination with budgetary reprogramming techniques, the new administration of Ohio Governor Strickland, working closely with Ohio Treasurer Cordray, achieved two top program priorities. First, K-12 (and some higher education) school construction throughout Ohio will be funded from the $5.05 billion of net proceeds received by the State from the BTSFA’s bond sale. Second, General Fund revenues not needed for school construction will be utilized for a property tax relief program for senior citizens throughout Ohio. The tax relief program includes a 20-year property-tax cut implemented through an expanded “homestead exemption” for senior and disabled homeowners. The Strickland administration estimates the tax relief will save 566,000 people an average of around $400 per year. Importance of Intensive Pre-marketing Campaign for Tobacco Bonds. Market commentators in August and September suggested that the Ohio transaction could not be sold due to difficult market conditions and the large issue size. Citi was assigned by Ohio to be the primary architect of BTSFA’s successful marketing plan. In the end, the entire transaction was successfully sold and the Buckeye’s $1.384 billion long 2047 5.875% current interest turbo term bond priced at a 6.07% yield, 18 basis points (0.18%) lower in yield than the much smaller bond of the same maturity and comparable average life sold by another State tobacco issuer in mid-August. On BTSFA’s behalf, Citi targeted a diverse range of investors through the use of a tailored transaction structure and targeted marketing techniques. Throughout the 7 weeks prior to pricing, we worked to identify potential buyer capacity by investor segment and developed specific strategies to tap each category. Working cooperatively with the entire underwriting syndicate, we implemented a marketing plan that included: o o o o o o o o Frequent and specific communication with BTSFA’s full underwriting team; Early distribution of transaction structure and syndicate rules through weekly update calls; Retail broker meeting and conference call in Columbus, OH; A three city (Chicago, New York and Boston) institutional investor road show; An Electronic Road Show for both retail and institutional investors; One-on-one meetings with select institutional investors; A highly successful print advertising campaign targeted at national and Ohio retail; and A two-day retail order period that netted $464 million in retail orders Citi also implemented a Citi-based international road show in Europe and Asia that resulted in the first ever tobacco bond orders from foreign investors, totaling $100mm from 2 Hong Kong institutions. We also coordinated a Citi-based retail financial advisor road show consisting of 11 Ohio cities and attended by 151 Smith Barney financial advisors that generated $76 million individual high-net-worth orders, the largest amount of “individual” retail orders produced by a BTSFA syndicate member. Citi’s marketing efforts with crossover/non-traditional tobacco investors resulted in 2 first time buyers with orders totaling $220mm. Large Pre-Sale Capital Commitment by Citi. As we pledged to Ohio as early as July, Citi used its tobacco market knowledge and capital to generate investor demand in order to provide BTSFA with the lowest interest cost. Citi used its balance sheet heavily on behalf of BTSFA and fulfilled its commitment to BTSFA in three ways; 1) Pre-Pricing – in the 3 months prior to pricing BTSFA’s bonds, Citi committed $1bn of capital to secondary market trading of tobacco bonds, providing liquidity to 25 accounts that were sellers, driving yields lower and creating substantial capacity for BTSFA’s bonds. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix C – Page 2 2) At Pricing – Citi, placed a $1bn anchor pre-sale order in key maturities as provided below: $250mm $200mm $150mm $200mm $200mm 5 1/8 of 2024 5 7/8 of 2030 5 3/4 of 2034 6 1/2 of 2047 5 7/8 of 2047 Citi’s pricing leadership resulted in increased order size from other investors and, therefore, enabled the BTSFA to continue to push price and lower yields. 3) Post Pricing – Citi traded over $700mm of BTSFA bonds in the first 3 days after the transaction was freed to trade, preserving stability for BTSFA’s bonds and helping support the market for future issuers of tobacco bonds. Final Buckeye Pricing and Structure. At final pricing, an unprecedented 122 institutional investors placed orders for the BTSFA’s offering, together with the approximately $464 million in retail orders. With the pricing oversubscribed, BTSFA was able to decrease yields on the bonds by as much as 12 bps in some maturities from October 19th (the first day of retail pricing) to the institutional final pricing on October 23rd. The successful pricing allowed the State of Ohio to achieve its goal of $5.05 billion in net proceeds at a much lower capital than anticipated in prior months. We believe our performance on the Buckeye transaction demonstrates the depth of Citi’s tobacco securitization structuring expertise, our unmatched marketing and distribution capabilities and Citi’s willingness and ability to put substantial amounts of capital to work to achieve aggressive execution for our clients. Case Study #2: State of Rhode Island – $197 million Series 2007 Bonds - Priced June, 21, 2007 On June 21, 2007 Citi, as senior manager, will priced $197 million in Capital Appreciation Bonds for Rhode Island. Unlike other subordinate CAB transactions where the goal of the issuer is to maximize new money proceeds, the Tobacco Settlement Financing Corporation targeted $195 million in net proceeds. In addition, the transaction needed to close by June 30, 2007 so that the proceeds could be used in the 2007 budget. Within the limits of this proceeds target, Citi sought to provide this level of net proceeds to the issuer at the lowest interest cost possible. A few weeks before the Corporation mailed the POC, S&P released new rating criteria for tobacco current interest and capital appreciation bonds. Citi quickly analyzed the new criteria and applied it to the Corporation’s CAB structure. The new criteria allow the issuance of a larger amount of investment-grade bonds, lowering the interest cost on the transaction. For Rhode Island, Citi has been able to quickly react to changes in rating agency stresses and apply the new criteria to the benefit of the TSFC. Case Study #3: State of West Virginia – $911 million Taxable Current Interest Bonds and CABs – Priced June 14, 2007 On June 14, 2007 Citi, as senior manager, priced $911 million in taxable bonds for West Virginia. Despite a challenging general taxable market environment, where yields on the 10-year Treasury rose 25 bps in only two weeks, Citi maintained control of the market to price the current interest bonds at a historically low spread. In addition, Citi successfully marketed taxable CABs that came at attractive levels, despite having the longest weighted average life (“WAL”) and the lowest rating of any taxable tobacco bond. The State of West Virginia had set a minimum net proceeds level of $800 million, so both including taxable tobacco CABs and maintaining the absolute yield on the current interest bonds in the face of rising Treasury yields were integral to the successful execution of the transaction. Case Study #4: Marin County, CA – $49 million Current Interest Bonds, Convertible CABs and CABs – Priced May 31, 2007 Citi, as sole manager, priced approximately $50 million in tobacco bonds for the Golden Gate Tobacco Funding Corporation on May 31, 2007. The Series 2007 Bonds refunded the Series 2002 Bonds, as well as provided new money proceeds for Marin County. The County had a specific target of new money proceeds to be generated by the transaction, and to that end, Citi maximized the leverage of the County’s TSRs, as well as maintained price in the face of rising interest rates. In order to guarantee the client a minimum of net proceeds, Citi was prepared to purchase all of the bonds at historically aggressive spreads prior to the completion of bond documents. This purchase would transfer interest rate risk from the client to Citi, as at that point the transaction was still two weeks away from pricing. Although the client ultimately decided to proceed with a traditional premarketing and pricing schedule, Citi proved our willingness to commit capital and ensure a seamless execution for our clients. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix C – Page 3 Case Study #5: Santa Clara County, CA – $102 million Back-Loaded Asset-Backed Bonds – Priced January 11, 2007 The County had looked repeatedly at securitizing its TSRs since the signing of the MSA in 1998. However, it was the combination of a very strong bond market in 2006, a large project need, and recent advances in structuring flexibility that ultimately drove the decision to execute the transaction. In initiating the transaction, the County’s goal was to fund the initial capital outlay for the Valley Medical Center seismic compliance capital program. Estimated at a cost of $1.2 billion over the next 15 years, the program is necessary to bring the hospital into compliance with SB1953. Currently, the County receives approximately $18 million per year in TSRs, which fund a number of health-related initiatives. The majority of these funds, approximately $12 million per year, are utilized to reimburse the general fund for debt service payments on outstanding lease revenue bonds issued initially to construct the County’s medical center. Thus, in structuring the transaction, it was important to provide the County with current income to cover the outstanding lease revenue obligations through FY2025. To enable such cash flow, the County decided to securitize its “back-end” TSRs starting in FY2026, so that the County’s General Fund will continue to receive all TSRs through FY2025, while still providing upfront proceeds today. The County’s financing team discussed the proposed structure with all three rating agencies, but selected Fitch as the sole credit rating provider reflecting Fitch’s acceptance of the most favorable structure for the County. The final structure included six series capital appreciation bond maturities, including tranches at the BBB (5.625 – 6.70%), BBB- (5.85%), BB (6.30%) and B (6.85%) credit rating levels. The single B tranche represents the first time a single B rated series of capital appreciation bonds have been sold as part of a tobacco securitization transaction, and it allowed the County to generate additional proceeds over the historical use of a non-rated final tranche. The transaction was well received by the market, with several large, non-traditional buyers of tobacco CABs entering orders on the transaction. The large interest in many of the tranches allowed a re-pricing to lower yields on several of the maturities. In summary, Santa Clara County sold $102 million of Tobacco Settlement Asset-Backed Bonds through the Silicon Valley Tobacco Securitization Authority in a transaction that generated $100.0 million in net proceeds to the County at an all-in cost of 6.07%. Through the combination of a well-structured transaction, pricing execution and a positive market tone, the County was able to generate over $100 million in net proceeds from the transaction, while retaining its annual TSR stream for the next 18 years. Pricing Comparison: "BBB" Rated CABs 6.750% 4.600% 6.500% 6.500% 4.400% 6.250% 6.250% CAB Yield 6.250% 6.250% 6.125% 6.000% 5.750% 4.200% 5.900% 5.830% 5.800% 5.625% 5.750% 5.500% 5.250% MMD MMD +138 bp +132 bp MMD +202 bp MMD +177 bp 4/5/2006 4/6/2006 MMD MMD +176 bp +134 bp MMD +192 bp 5.680% 4.000% 5.700% 5.670% 5.650% 3.800% MMD +161 bp MMD +194 bp MMD +155 bp 4/11/2006 5/19/2006 5/25/2006 8/10/2006 8/16/2006 1/11/2007 1/11/2007 1/11/2007 1/24/2007 3/7/2007 4/26/2007 MMD +173 bp MMD +174 bp MMD Yield 6.250% MMD +156 bp MMD +163 bp MMD +150 bp 5.000% 3.600% 3.400% 3/22/2006 3/30/2006 Stanislaus County Nassau County Fresno County Virgin Islands California Statewide Placer County San Diego County Alaska District of Columbia Santa Clara Santa Clara Santa Clara New Jersey California Virginia 19.2 yr WAL 23.6 yr WAL 19.5 yr WAL 13.1 yr WAL 20.2 yr WAL 8.8 yr WAL 24.3 yr WAL 22.4 yr WAL 17.8 yr WAL 21.8 yr WAL 25.6 yr WAL 27.7 yr WAL 22.1 yr WAL 23.7 yr WAL 22.5 yr WAL Citi Bear Stearns UBS Citi Citi Lehman Bear Stearns Bear Stearns Citi Citi Citi Citi Bear Stearns Bear Stearns Bear Stearns Case Study #6: District of Columbia – $248 million TSR-Backed CABs – Priced August 16, 2006 The Series 2006 CABs were structured to be subordinate to the District’s previously issued Series 2001 Tobacco Settlement AssetBacked Bonds ($494 million of the Series 2001 Bonds remained outstanding at the time of the Series 2006 issuance). The Series 2001 Bonds were structured as a residual transaction, in which any TSRs not needed in each year to pay Series 2001 Bondholders or fund various expenses, reserves and other Series 2001 accounts would be transferred to the holder of the Residual Bond, free and clear of the lien of the 2001 Indenture. The Series 2006 Bonds are secured by amounts payable under the Residual Bond on and after April 1, 2015 (the “Residual Pledged TSRs”). Any TSRs received after all Series 2001 and Series 2006 Bonds are repaid will flow to the holder of the newly created Remainder Certificate. MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services March 10, 2008 Appendix C – Page 4 The Series 2006 transaction was a complicated structure due to the nature of the Residual Pledged TSRs as security. Nonetheless, the District achieved investment grade ratings on 64%, or nearly $160 million, of its subordinated CABs. The District’s Series 2006 transaction was the largest issuance of subordinated CABs to date; however, despite the large size, the District’s CABs priced attractively, with the non-rated 2055 maturity pricing at a 7.25% yield. The $145 million “BBB” rated tranche in the District’s transaction was by far the largest tranche of “BBB” rated CABs issued to date in any transaction. However, at a 6.25% yield, it priced in line with “BBB” rated CABs in recent financings. The $14 million “BBB-” tranche in the District’s transaction was relatively small and priced in line with other recent, similarly sized “BBB-” CABs, at a 6.375% yield. Despite the substantial initial par amounts of the District’s “BB” rated and non-rated tranches ($56 million and $33 million, respectively), the District achieved very attractive pricing for those sub-series compared to other 2006 CAB transactions, due in part to aggressive marketing that expanded the participating investor base in those tranches. The bonds were placed with 11 different institutional investors. Case Study #7: State of Iowa - $831 million TSR Restructuring – Priced November 17, 2005 The State of Iowa’s bonds refunded the State’s previously issued Series 2001 Tobacco Settlement Asset-Backed Bonds and were secured by the same pledge of 78% of the State’s tobacco settlement revenues (TSRs) as the Series 2001 Bonds. The first restructuring of a state tobacco deal to come to market, Iowa’s Series 2005 Bonds included a $223 million taxable tranche to accommodate use of proceeds issues. Despite this tranche being one of the largest taxable tobacco issuances at the time, Citi successfully priced the bonds at a spread of only 200 basis points to the comparable Treasury yield. In addition to aggressive pricing results, Citi developed several structuring innovations for Iowa’s financing: Convertible CABs. To address the risk that TSRs received might be significantly reduced in near-term due to disputes by NonParticipating Manufacturers (NPMs) under the Master Settlement Agreement (MSA), Citi incorporated an innovative Convertible Capital Appreciation Bond (CAB) into the structure. Interest on Iowa’s Convertible CAB (2034 rated maturity) was set to accrete until the December 1, 2007 conversion date, whereupon the bond will convert to a conventional current interest bond. Due to its conversion feature, this bond carries a slightly higher yield than a current interest bond of comparable maturity. However, because interest starts paying currently after only a few years, the yield is lower than it would be for a conventional CAB. The Convertible CAB therefore gives Iowa the protection of a debt service “cushion” in the first few years at an attractive interest cost. The popularity of this structure among investors was evident as the Iowa Convertible CAB was multiple times oversubscribed during the order period. Citi was the first to bring the Convertible CAB structure to the market to specifically address near-term NPM Adjustment and litigation risk, and senior managers of subsequent tobacco securitizations quickly emulated this approach. Simultaneous Maturities. To maximize leverage of Iowa’s TSRs while staying within a 2046 final maturity, Citi marketed a tiered bond structure where “BBB” rated, “BBB-” rated, and non-rated bonds were each structured with the same legal maturity of 2046, while amortizing in the following priority: (1) “BBB” rated current interest bonds, (2) “BBB-” rated CABs, and (3) nonrated CABs. In previous deals, bonds with increasing degrees of subordination had only been structured with progressively longer legal maturities. Citi’s innovation of simultaneous maturities for tiered bonds has since become a market standard. STATE OF MICHIGAN, TOBACCO SETTLEMENT FINANCE AUTHORITY Proposal to Provide Tobacco Securitization Investment Banking and Financial Services APPENDIX D: DETAILED NUMERICAL ANALYSES March 10, 2008 Appendix D – Page 1 Capital Structure Pre-2008 Issuance (Before 6/1/2008 Turbo Redemptions) Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 No Restructuring of Series 2006 Bonds Capital Structure Pre-2008 Issuance (Before 6/1/2008 Turbo Redemptions) Maturity Date 6/1/2008 6/1/2034 6/1/2034 6/1/2046 Par/ Initial Par Amount 363,115,000 72,620,000 54,765,589 $490,500,589 Prepared by Citigroup Global Markets - Preliminary, Subject to Change Coupon Yield 7.309% 0.000% 8.500% Bond Type Taxable Turbo CIB Taxable FRN Taxable Turbo CAB WAL (Years) 10.75 10.75 17.96 Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2006 Planned Amortization: No Restructuring of Series 2006 Bonds Year Aggregate Allocation* Series 2006A&B Taxable Turbo CIB Series 2006C Taxable Turbo CIB Aggregate Turbo Redemptions Interest Total Debt Service 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 $45,165,370 45,700,200 46,187,876 46,698,137 47,198,529 47,687,732 48,155,919 48,611,953 49,158,089 49,698,470 52,402,982 52,939,460 53,460,884 54,030,579 92,383,200 53,198,011 53,838,007 54,538,942 55,247,507 $13,255,000 14,830,000 16,480,000 18,280,000 20,210,000 22,280,000 24,485,000 26,845,000 29,485,000 32,320,000 37,625,000 41,080,000 44,795,000 48,840,000 44,925,000 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 0 0 45,790,059 53,197,397 53,837,456 54,538,566 35,387,000 $13,255,000 14,830,000 16,480,000 18,280,000 20,210,000 22,280,000 24,485,000 26,845,000 29,485,000 32,320,000 37,625,000 41,080,000 44,795,000 48,840,000 90,715,059 53,197,397 53,837,456 54,538,566 35,387,000 $31,910,351 30,867,070 29,704,261 28,413,199 26,983,862 25,405,856 23,669,159 21,762,634 19,670,690 17,375,325 14,777,610 11,854,532 8,665,297 5,187,819 1,667,653 0 0 0 0 $45,165,351 45,697,070 46,184,261 46,693,199 47,193,862 47,685,856 48,154,159 48,607,634 49,155,690 49,695,325 52,402,610 52,934,532 53,460,297 54,027,819 92,382,711 53,197,397 53,837,456 54,538,566 35,387,000 996,301,847 435,735,000 242,750,478 678,485,478 297,915,316 976,400,794 *Aggregate Allocation includes TSRs plus earnings on TSRs and Debt Service Reserve less Operating Expenses plus release of Debt Service Reserve in 2022 plus Capitalized Interest. TSR projections are based on 2007 Global Insight Base Case Cigarette Consumption Forecast and other Structuring Assumptions. Prepared by Citigroup Global Markets - Preliminary, Subject to Change Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario Summary as of 3/10/2008 Scenario 1 Scenario 2 Scenario 3 100% Tax-Exempt, $60mm Net Proceeds 100% Tax-Exempt, $75mm Net Proceeds 100% Tax-Exempt, Maximize Net Proceeds, 50-Year Maturity Delivery Date % of TSRs Pledged Current Interest Bond Subordinate Capital Appreciation Bonds Aggregate Initial Par (OID)/Premium 6/1/2008 13.34% $105,015,000 35,317,610 $140,332,610 (3,446,592) 6/1/2008 13.34% $105,015,000 50,424,478 $155,439,478 (3,446,592) 6/1/2008 13.34% $105,015,000 72,516,213 $177,531,213 (3,446,592) Gross Proceeds COI and Underwriter's Discount Liquidity Reserve Account Escrow Cost Operating Expenses Total Net Proceeds Final Maturity Final Planned Amortization Cost of Capital Rating (Fitch) $136,886,018 (979,963) (75,906,055) $60,000,000 6/1/2048 6/1/2030 7.256% BBB- $151,992,886 (1,086,831) (75,906,055) $75,000,000 6/1/2048 6/1/2032 7.439% BBB- $174,084,621 (1,246,763) (75,906,055) $96,931,803 6/1/2058 6/1/2035 7.524% BBB- Prepared by Citigroup Global Markets - Preliminary, Subject to Change Scenario 1 100% Tax-Exempt, 5560111111 Net Proceeds Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 1 100% Tax-Exempt, $60mm Net Proceeds Capital Structure Post 2008 Issuance (Before 6/1/2008 Turbo Redemptions) Maturity Date 6/1/2008 6/1/2034 6/1/2038 6/1/2046 6/1/2048 Par/ Initial Par Amount 363,115,000 105,015,000 54,765,589 35,317,610 Coupon Yield 7.309% 6.250% 0.000% 0.000% 6.500% 8.500% 8.000% $558,213,199 Prepared by Citigroup Global Markets - Preliminary, Subject to Change Price 96.72 4.34 Bond Type Taxable Turbo CIB Tax-Exempt Turbo CIB Taxable Turbo CAB Tax-Exempt Turbo CAB WAL (Years) 10.17 15.87 18.93 22.88 Rating (S&P/ Moody's/ Fitch) BBB/ Baa3/ NR BBB/ NR/ BBB+ BBB/ NR/ NR NR/ NR/ BBB- Series Series 2006A Series 2008A Series 2006C Series 2008B Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 1 Planned Amortization: 100% Tax-Exempt, $60mm Net Proceeds Year Aggregate Allocation* Series 2006A Taxable Turbo CIB Series 2008A Tax-Exempt Turbo CIB Series 2006C Taxable Turbo CAB 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 $45,713,474 46,200,016 46,714,138 47,211,360 47,704,384 48,175,396 48,635,451 49,177,262 49,720,685 52,429,515 52,967,889 53,489,597 54,065,153 92,392,367 53,207,908 53,847,795 54,549,650 55,258,632 55,984,187 56,721,910 57,479,626 58,246,122 $14,335,000 15,925,000 17,670,000 19,525,000 21,520,000 23,640,000 25,915,000 28,445,000 31,165,000 36,345,000 39,660,000 43,215,000 28,600,000 0 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 18,395,000 86,620,000 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 0 3,065,012 53,207,715 53,847,068 54,549,012 55,257,834 43,148,413 0 0 0 1,179,892,515 345,960,000 105,015,000 263,075,054 Series 2008B Tax-Exempt Aggregate Turbo Turbo CAB Redemptions $0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12,835,753 56,720,892 57,479,066 53,608,855 180,644,566 $14,335,000 15,925,000 17,670,000 19,525,000 21,520,000 23,640,000 25,915,000 28,445,000 31,165,000 36,345,000 39,660,000 43,215,000 46,995,000 89,685,012 53,207,715 53,847,068 54,549,012 55,257,834 55,984,166 56,720,892 57,479,066 53,608,855 894,694,620 Interest Total Debt Service $31,377,310 30,270,727 29,042,632 27,682,610 26,181,890 24,530,604 22,718,886 20,731,386 18,551,842 16,083,593 13,304,528 10,274,582 7,067,843 2,706,875 0 0 0 0 0 0 0 0 $45,712,310 46,195,727 46,712,632 47,207,610 47,701,890 48,170,604 48,633,886 49,176,386 49,716,842 52,428,593 52,964,528 53,489,582 54,062,843 92,391,887 53,207,715 53,847,068 54,549,012 55,257,834 55,984,166 56,720,892 57,479,066 53,608,855 280,525,308 1,175,219,929 *Aggregate Allocation includes TSRs plus earnings on TSRs and Debt Service Reserve less Operating Expenses plus release of Debt Service Reserve in 2022. TSR projections are based on 2007 Global Insight Base Case Cigarette Consumption Forecast and other Structuring Assumptions. Prepared by Citigroup Global Markets - Preliminary, Subject to Change Scenario 2 100% Tax-Exempt, 5575111111 Net Proceeds Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 2 100% Tax-Exempt, $75mm Net Proceeds Capital Structure Post 2008 Issuance (Before 6/1/2008 Turbo Redemptions) Maturity Date 6/1/2008 6/1/2034 6/1/2038 6/1/2046 6/1/2048 Par/ Initial Par Amount 363,115,000 105,015,000 54,765,589 50,424,478 Coupon Yield 7.309% 6.250% 0.000% 0.000% 6.500% 8.500% 8.000% $573,320,067 Prepared by Citigroup Global Markets - Preliminary, Subject to Change Price 96.72 4.34 Bond Type Taxable Turbo CIB Tax-Exempt Turbo CIB Taxable Turbo CAB Tax-Exempt Turbo CAB WAL (Years) 10.17 15.87 18.93 23.71 Rating (S&P/ Moody's/ Fitch) BBB/ Baa3/ NR BBB/ NR/ BBB+ BBB/ NR/ NR NR/ NR/ BBB- Series Series 2006A Series 2008A Series 2006C Series 2008B Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 2 Planned Amortization: 100% Tax-Exempt, $75mm Net Proceeds Year Aggregate Allocation* 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 $45,713,474 46,200,016 46,714,138 47,211,360 47,704,384 48,175,396 48,635,451 49,177,262 49,720,685 52,429,515 52,967,889 53,489,597 54,065,153 92,392,367 53,207,908 53,847,795 54,549,650 55,258,632 55,984,187 56,721,910 57,479,626 58,246,132 59,023,654 59,785,779 1,298,701,959 Series 2006A Series 2008A TaxTaxable Exempt Turbo Turbo CIB CIB $14,335,000 15,925,000 17,670,000 19,525,000 21,520,000 23,640,000 25,915,000 28,445,000 31,165,000 36,345,000 39,660,000 43,215,000 28,600,000 0 0 0 0 0 0 0 0 0 0 0 345,960,000 $0 0 0 0 0 0 0 0 0 0 0 0 18,395,000 86,620,000 0 0 0 0 0 0 0 0 0 0 105,015,000 Series 2006C Series 2008B TaxTaxable Exempt Turbo Aggregate Turbo Turbo CAB CAB Redemptions $0 0 0 0 0 0 0 0 0 0 0 0 0 3,065,012 53,207,715 53,847,068 54,549,012 55,257,834 43,148,413 0 0 0 0 0 263,075,054 $0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12,835,753 56,720,892 57,479,066 58,245,705 59,023,340 30,004,363 274,309,119 $14,335,000 15,925,000 17,670,000 19,525,000 21,520,000 23,640,000 25,915,000 28,445,000 31,165,000 36,345,000 39,660,000 43,215,000 46,995,000 89,685,012 53,207,715 53,847,068 54,549,012 55,257,834 55,984,166 56,720,892 57,479,066 58,245,705 59,023,340 30,004,363 988,359,173 Interest Total Debt Service $31,377,310 30,270,727 29,042,632 27,682,610 26,181,890 24,530,604 22,718,886 20,731,386 18,551,842 16,083,593 13,304,528 10,274,582 7,067,843 2,706,875 0 0 0 0 0 0 0 0 0 0 $45,712,310 46,195,727 46,712,632 47,207,610 47,701,890 48,170,604 48,633,886 49,176,386 49,716,842 52,428,593 52,964,528 53,489,582 54,062,843 92,391,887 53,207,715 53,847,068 54,549,012 55,257,834 55,984,166 56,720,892 57,479,066 58,245,705 59,023,340 30,004,363 280,525,308 1,268,884,482 *Aggregate Allocation includes TSRs plus earnings on TSRs and Debt Service Reserve less Operating Expenses plus release of Debt Service Reserve in 2022. TSR projections are based on 2007 Global Insight Base Case Cigarette Consumption Forecast and other Structuring Assumptions. Prepared by Citigroup Global Markets - Preliminary, Subject to Change Scenario 3 100% Tax-Exempt, Maximize Net Proceeds, SO-Year Maturity Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 3 100% Tax-Exempt, Maximize Net Proceeds, 50-Year Maturity Capital Structure Post 2008 Issuance (Before 6/1/2008 Turbo Redemptions) Maturity Date 6/1/2008 6/1/2034 6/1/2038 6/1/2046 6/1/2058 Par/ Initial Par Amount 363,115,000 105,015,000 54,765,589 72,516,213 Coupon Yield 7.309% 6.250% 0.000% 0.000% 6.500% 8.500% 8.000% $595,411,802 Prepared by Citigroup Global Markets - Preliminary, Subject to Change Price 96.72 1.98 Bond Type Taxable Turbo CIB Tax-Exempt Turbo CIB Taxable Turbo CAB Tax-Exempt Turbo CAB WAL (Years) 10.17 15.87 18.93 25.05 Rating (S&P/ Moody's/ Fitch) BBB/ Baa3/ NR BBB/ NR/ BBB+ BBB/ NR/ NR NR/ NR/ BBB- Series Series 2006A Series 2008A Series 2006C Series 2008B Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 3 Planned Amortization: 100% Tax-Exempt, Maximize Net Proceeds, 50-Year Maturity Year Aggregate Allocation* Series 2006A Taxable Turbo CIB Series 2008A Tax-Exempt Turbo CIB Series 2006C Taxable Turbo CAB 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 $45,713,474 46,200,016 46,714,138 47,211,360 47,704,384 48,175,396 48,635,451 49,177,262 49,720,685 52,429,515 52,967,889 53,489,597 54,065,153 92,392,367 53,207,908 53,847,795 54,549,650 55,258,632 55,984,187 56,721,887 57,478,635 58,245,691 59,023,463 59,785,733 60,575,400 61,374,163 62,174,093 $14,335,000 15,925,000 17,670,000 19,525,000 21,520,000 23,640,000 25,915,000 28,445,000 31,165,000 36,345,000 39,660,000 43,215,000 28,600,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 18,395,000 86,620,000 0 0 0 0 0 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 0 3,065,012 53,207,715 53,847,068 54,549,012 55,257,834 43,148,413 0 0 0 0 0 0 0 0 1,482,823,922 345,960,000 105,015,000 263,075,054 Series 2008B Tax-Exempt Aggregate Turbo Turbo CAB Redemptions $0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12,835,753 56,721,827 57,478,501 58,245,448 59,023,200 59,785,461 60,574,951 61,373,661 8,685,647 434,724,449 $14,335,000 15,925,000 17,670,000 19,525,000 21,520,000 23,640,000 25,915,000 28,445,000 31,165,000 36,345,000 39,660,000 43,215,000 46,995,000 89,685,012 53,207,715 53,847,068 54,549,012 55,257,834 55,984,166 56,721,827 57,478,501 58,245,448 59,023,200 59,785,461 60,574,951 61,373,661 8,685,647 1,148,774,503 Interest Total Debt Service $31,377,310 30,270,727 29,042,632 27,682,610 26,181,890 24,530,604 22,718,886 20,731,386 18,551,842 16,083,593 13,304,528 10,274,582 7,067,843 2,706,875 0 0 0 0 0 0 0 0 0 0 0 0 0 $45,712,310 46,195,727 46,712,632 47,207,610 47,701,890 48,170,604 48,633,886 49,176,386 49,716,842 52,428,593 52,964,528 53,489,582 54,062,843 92,391,887 53,207,715 53,847,068 54,549,012 55,257,834 55,984,166 56,721,827 57,478,501 58,245,448 59,023,200 59,785,461 60,574,951 61,373,661 8,685,647 280,525,308 1,429,299,812 *Aggregate Allocation includes TSRs plus earnings on TSRs and Debt Service Reserve less Operating Expenses plus release of Debt Service Reserve in 2022. TSR projections are based on 2007 Global Insight Base Case Cigarette Consumption Forecast and other Structuring Assumptions. Prepared by Citigroup Global Markets - Preliminary, Subject to Change Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario Summary as of 3/10/2008 Scenario 4 Scenario 5 Combined Structure 100% Taxable Net Proceeds Combined Structure $30mm Tax-Exempt Net Proceeds Delivery Date % of TSRs Pledged Current Interest Bonds Subordinate Capital Appreciation Bonds Aggregate Initial Par (OID)/Premium 6/1/2008 13.34% $103,015,000 42,223,552 $145,238,552 (2,511,222) 6/1/2008 13.34% $97,660,000 56,516,115 $154,176,115 (1,640,344) Gross Proceeds COI and Underwriter's Discount Liquidity Reserve Account Escrow Cost Operating Expenses Total Net Proceeds Final Maturity Final Planned Amortization Cost of Capital Rating $142,727,329 (1,020,714) (75,906,055) $65,800,560 6/1/2048 6/1/2032 7.642% BBB- $152,535,771 (1,083,277) (75,906,055) $75,546,439 6/1/2048 6/1/2033 7.719% BBB- Prepared by Citigroup Global Markets - Preliminary, Subject to Change Scenario 4 Combined Structure - 100% Taxable Net Proceeds Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 4 Combined Structure - 100% Taxable Net Proceeds Capital Structure Post 2008 Issuance (Before 6/1/2008 Turbo Redemptions) Maturity Date 6/1/2008 6/1/2018 6/1/2034 6/1/2038 6/1/2046 6/1/2048 Par/ Initial Par Amount 26,500,000 363,115,000 76,515,000 54,765,589 42,223,552 Coupon Yield 6.000% 7.309% 6.250% 0.000% 0.000% 6.000% 6.500% 8.500% 9.000% $563,119,141 Prepared by Citigroup Global Markets - Preliminary, Subject to Change Price 100.00 96.72 2.96 Bond Type Taxable Turbo CIB Taxable Turbo CIB Tax-Exempt Turbo CIB Taxable Turbo CAB Taxable Turbo CAB WAL (Years) 3.52 11.12 16.04 18.94 23.81 Rating (S&P/ Moody's/ Fitch) BBB/ NR/ BBB+ BBB/ Baa3/ NR BBB/ NR/ BBB+ BBB/ NR/ NR NR/ NR/ BBB- Series Series 2008A Series 2006A Series 2008B Series 2006C Series 2008C Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 4 Planned Amortization: Combined Structure - 100% Taxable Net Proceeds Year Aggregate Allocation* Series 2008A Taxable Turbo CIB Series 2006A Taxable Turbo CIB Series 2008B Tax-Exempt Turbo CIB Series 2006C Taxable Turbo CAB 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 $45,713,115 46,201,595 46,716,254 47,212,236 47,707,457 48,177,865 48,633,594 49,182,014 49,726,162 52,433,940 52,973,287 53,491,416 54,070,499 92,391,307 53,207,973 53,847,863 54,549,722 55,258,707 55,984,280 56,722,571 57,478,742 58,246,537 59,023,586 59,786,057 $14,445,000 12,055,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $0 3,800,000 17,515,000 19,355,000 21,340,000 23,450,000 25,700,000 28,220,000 30,925,000 36,085,000 39,385,000 42,910,000 46,770,000 10,505,000 0 0 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 0 76,515,000 0 0 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 0 2,595,767 53,207,715 53,847,068 54,549,012 55,257,834 43,859,927 0 0 0 0 0 1,298,736,779 26,500,000 345,960,000 76,515,000 263,317,323 Series 2008C Taxable Aggregate Turbo Turbo CAB Redemptions $0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12,123,667 56,722,425 57,477,785 58,246,182 59,023,001 41,093,879 284,686,940 $14,445,000 15,855,000 17,515,000 19,355,000 21,340,000 23,450,000 25,700,000 28,220,000 30,925,000 36,085,000 39,385,000 42,910,000 46,770,000 89,615,767 53,207,715 53,847,068 54,549,012 55,257,834 55,983,595 56,722,425 57,477,785 58,246,182 59,023,001 41,093,879 996,979,263 Interest Total Debt Service $31,267,354 30,342,163 29,201,008 27,852,863 26,365,116 24,727,535 22,930,252 20,958,832 18,796,281 16,346,305 13,586,974 10,578,042 7,299,224 2,774,999 0 0 0 0 0 0 0 0 0 0 $45,712,354 46,197,163 46,716,008 47,207,863 47,705,116 48,177,535 48,630,252 49,178,832 49,721,281 52,431,305 52,971,974 53,488,042 54,069,224 92,390,766 53,207,715 53,847,068 54,549,012 55,257,834 55,983,595 56,722,425 57,477,785 58,246,182 59,023,001 41,093,879 283,026,949 *Aggregate Allocation includes TSRs plus earnings on TSRs and Debt Service Reserve less Operating Expenses plus release of Debt Service Reserve in 2022. TSR projections are based on 2007 Global Insight Base Case Cigarette Consumption Forecast and other Structuring Assumptions. Prepared by Citigroup Global Markets - Preliminary, Subject to Change 1,280,006,212 Scenario 5 Combined Structure - 5530111111 Tax-Exempt Net Proceeds Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 5 Combined Structure - $30mm Tax-Exempt Net Proceeds Capital Structure Post 2008 Issuance (Before 6/1/2008 Turbo Redemptions) Maturity Date 6/1/2008 6/1/2034 6/1/2036 6/1/2038 6/1/2046 6/1/2048 Par/ Initial Par Amount 363,115,000 47,680,000 49,980,000 54,765,589 56,516,115 Coupon Yield 7.309% 8.000% 6.250% 0.000% 0.000% 8.000% 6.500% 8.500% 8.000% $572,056,704 Prepared by Citigroup Global Markets - Preliminary, Subject to Change Price 100.00 96.72 4.34 Bond Type Taxable Turbo CIB Taxable Turbo CIB Tax-Exempt Turbo CIB Taxable Turbo CAB Tax-Exempt Turbo CAB WAL (Years) 10.29 15.83 16.04 18.95 24.08 Rating (S&P/ Moody's/ Fitch) BBB/ Baa3/ NR BBB/ NR/ BBB+ BBB/ NR/ BBB+ BBB/ NR/ NR NR/ NR/ BBB- Series Series 2006A Series 2008A Series 2008B Series 2006C Series 2008C Michigan Tobacco Settlement Finance Authority Tobacco Settlement Asset-Backed Bonds, Series 2008 Scenario 5 Planned Amortization: Combined Structure - $30mm Tax-Exempt Net Proceeds Year Aggregate Allocation* Series 2006A Taxable Turbo CIB Series 2008A Taxable Turbo CIB Series 2008B Tax-Exempt Turbo CIB Series 2006C Taxable Turbo CAB 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 $45,718,540 46,206,637 46,718,318 47,217,454 47,709,251 48,183,517 48,643,178 49,188,663 49,731,099 52,436,434 52,980,543 53,497,527 54,076,354 92,392,304 53,208,099 53,847,975 54,549,020 55,258,860 55,983,455 56,722,033 57,478,690 58,246,331 59,023,863 59,786,019 60,576,194 $13,950,000 15,515,000 17,225,000 19,050,000 21,005,000 23,090,000 25,320,000 27,810,000 30,485,000 35,605,000 38,875,000 42,360,000 35,670,000 0 0 0 0 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 10,540,000 37,140,000 0 0 0 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 0 49,980,000 0 0 0 0 0 0 0 0 0 0 0 $0 0 0 0 0 0 0 0 0 0 0 0 0 2,224,168 53,207,715 53,847,869 54,548,142 55,258,781 44,422,353 0 0 0 0 0 0 1,359,380,358 393,640,000 97,660,000 313,489,026 579,448,603 Series 2008C Tax-Exempt Aggregate Turbo Turbo CAB Redemptions $0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11,560,940 56,721,934 57,477,939 58,245,705 59,023,340 59,784,962 13,124,757 315,939,576 $13,950,000 15,515,000 17,225,000 19,050,000 21,005,000 23,090,000 25,320,000 27,810,000 30,485,000 35,605,000 38,875,000 42,360,000 46,210,000 89,344,168 53,207,715 53,847,869 54,548,142 55,258,781 55,983,293 56,721,934 57,477,939 58,245,705 59,023,340 59,784,962 13,124,757 1,311,891,276 Interest Total Debt Service $31,766,275 30,688,928 29,491,897 28,165,496 26,700,955 25,088,772 23,318,715 21,376,349 19,244,861 16,828,323 14,105,355 11,135,161 7,864,110 3,047,475 0 0 0 0 0 0 0 0 0 0 0 $45,716,275 46,203,928 46,716,897 47,215,496 47,705,955 48,178,772 48,638,715 49,186,349 49,729,861 52,433,323 52,980,355 53,495,161 54,074,110 92,391,643 53,207,715 53,847,869 54,548,142 55,258,781 55,983,293 56,721,934 57,477,939 58,245,705 59,023,340 59,784,962 13,124,757 1,600,713,949 *Aggregate Allocation includes TSRs plus earnings on TSRs and Debt Service Reserve less Operating Expenses plus release of Debt Service Reserve in 2022. TSR projections are based on 2007 Global Insight Base Case Cigarette Consumption Forecast and other Structuring Assumptions. Prepared by Citigroup Global Markets - Preliminary, Subject to Change 1,311,891,287 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. This presentation is not a commitment to lend, syndicate a financing, underwrite or purchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential the existence of and proposed terms for any transaction contemplated hereby (a “Transaction”). 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