Issuers of tax-exempt debt face a unique set of circumstances when it comes to investing tax exempt debt proceeds. In addition to the primary goals of preserving safety and liquidity, and the secondary goal of achieving an attractive yield, they must also take into consideration a variety of restrictions on the types of investments that may be employed, and the federal tax limitations on the yield of those investments. In general, maximizing net, "after-rebate", earnings on tax-exempt bond proceeds within legal and otherwise prudent safety and liquidity parameters is an important component of minimizing net borrowing costs. Having focused exclusively on the municipal bond market for our 17-year history, BLX is sensitive to all of these goals and restrictions, and has designed its investment advisory services with them in mind.

Complimenting BLX's investment advisory services is our position as the largest and most widely experienced provider of arbitrage compliance services in the nation. Since 1989, BLX has prepared over 30,000 arbitrage rebate reports for over 13,017 distinct bond issues with a total initial principal amount of over $888 billion. Our portfolio of engagements represents the full spectrum of issue types and technical complexities, and each of our arbitrage rebate, yield restriction, and penalty-in-lieu of rebate reports is accompanied by an Orrick legal opinion. While other investment firms may find arbitrage compliance and the prospect of changing tax laws burdensome, we see such circumstances as opportunities to provide additional benefit to our clients. BLX offers a unique combination of arbitrage rebate, bond finance, and investment advisory expertise that has evolved to specifically address the needs of the public finance community. Our diverse but complimentary skills are essential to properly anticipating the "after-tax" effects of various investment strategies and products.

Our investment approach begins by developing a complete understanding of our client's established investment policies, indenture structures, procedures, guidelines and specific circumstances. Accordingly, this process enables us to identify each client's unique characteristics, constraints and objectives and establishes a framework for a comprehensive investment strategy. In connection with each investment strategy we propose, BLX's approach is to work with our clients to (i) identify all of the legal parameters set forth in relevant policies, statutes, or bond documents, (ii) incorporate relevant information such as sources and expected uses of proceeds, arbitrage yield, and existing arbitrage rebate liability (if any), and (iii) design an investment strategy that is ideally suited to the specific set of circumstances. This comprehensive approach results in a strategy that maximizes retainable "after-tax" earnings while minimizing credit and market risk, as well as minimizing the ongoing administrative burden on our client.

The evaluation of alternative investment strategies or structures (or features) begins with establishing the criteria by which those alternatives will be measured and the relative weighting assigned to each of those criteria by the client. Those primary objectives of safety of principal, liquidity, and then yield, are followed by some additional objectives, depending on the circumstances and market conditions. Such additional objectives often include:

• ensure, to the extent possible, that over the life of the bonds the investment return on all bond proceeds subject to the federal arbitrage rebate requirement is at least equal to the arbitrage yield on the bonds;
• minimize (or eliminate whenever possible) reinvestment rate risk upon maturity of one or more investment(s) prior to the time expenditures are required;
• minimize (or eliminate whenever possible) market price risk upon the sale of one of more investment(s) prior to its maturity date
• maximize flexibility for the issuer to terminate investments on the best terms possible;
• minimize the amount of ongoing time and effort investments will require from issuer staff; and
• simplify arbitrage rebate and/or yield restriction compliance.

Once these general objectives have been tailored to specific client circumstances, BLX identifies the various investment vehicles and strategies available to attain those objectives. In general, the three primary classes of financial products that we consider as candidates for the investment of bond proceeds include (1) pooled investment funds (e.g., commercial money market funds & and local government investment pools), (2) structured products (e.g., investment agreements & and forward delivery agreements), and (3) individual security portfolios (e.g., treasury & and agency bonds). Within each of these classes is a variety of instruments with differing risk profiles, mechanical characteristics, and ongoing administrative requirements which must be considered in the context of each client's specific circumstances.

BLX's primary tool in the investment evaluation process is comparative cash flow modeling. For example, all fixed-income investments can be represented by the cash flow they are expected to generate. For securities that (1) may mature prior to cash being needed or (2) bear a variable interest rate (e.g., money market funds), BLX either makes assumptions about future interest rates or provides sensitivity analyses to address what we consider to be the range of best case (optimistic) to worst case (conservative) possibilities. These cash flows are then compared on a present value, "after-tax" basis (i.e., net of earnings that would be rebated to the IRS). BLX provides narratives describing relative advantages and disadvantages of candidate strategies, including an explanation of the rationale underlying both assumptions and recommendations.

Governing all of BLX's services are procedures to ensure compliance with state codes and federal tax laws (including the "safe harbor" bidding rules and regulations) and a strict adherence to the highest level of ethical standards. BLX remains a wholly-owned subsidiary of Orrick, a relationship that (1) has always defined our culture as one of adherence to the highest standards of quality, ethics, and regulatory compliance and (2) affords preferential access to that firm's wealth of legal expertise and general public finance and tax experience.

Due in large part to our unique knowledge and understanding of the complex relationship between bond structures, investment alternatives, and Internal Revenue Code requirements, all of which must be considered to identify the optimal investment strategy for bond proceeds, BLX is uniquely qualified to assist issuers in evaluating, structuring, and implementing investment and derivative strategies for tax-exempt transactions. Our extensive knowledge of the available investment and derivative options, including our frequent involvement in designing new products for the public finance industry, assures our clients that all prudent strategies will be considered in order to optimize the economics of their transactions.

To learn more, please contact Mark Creger - Chief Investment officer at 213.612.2200 or email: mcreger@blxgroup.com