3.01 - fac discussion

8/7/2019 3.01 - FAC Discussion

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DPS 2011 Certificates of ParticipationTransaction Overview

February 14, 2011


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Table of Contents

I. Transaction ContextII. Proposed 2011 Refinancing: Issues and OptionsIII. Development of the 2011 Plan of FinanceAppendix A: Comparison of Risk ProfilesAppendix B: Transaction ParticipantsAppendix C: Annual Lease Payment ProfileAppendix D: Current Municipal Market EnvironmentAppendix E: Glossary


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I. Transaction Context


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DPS Pension Funding Overview

DPS defined benefit pension obligation constitutes the largest ongoing liability of the District, and is critical to attracting andretaining teachers

On an annual basis, DPS funded the Denver Public Schools Retirement System (DPSRS), including the normalcontribution assumed each year, plus an amount necessary to fund the Unfunded Actuarial Accrued Liability (UAAL) atan interest rate of 8.50% based upon the assumed investment return of the plan.

Annual gains and losses in the invested DPSRS assets impact this annual funding cost over time, and either increase ordecrease the funding requirement

Since 1997, Certificates of Participation (COPs or Certificates) have been issued for pension funding purposes to manage

and reduce the DPSRS funding cost Issuance of COPs for pension funding has enabled DPS to reduce its annual UAAL funding cost by reducing the interest

cost applicable to UAAL funding to below the 8.50% actuarial hurdle rate

The COPS have been issued as both fixed rate and synthetic fixed rate obligations

Synthetic fixed rate obligations have been utilized to achieve lower funding costs than the long-term fixed rate taxablemarkets, which can be relatively illiquid for municipal issuers

2008 COPs issued to fully fund the then-UAAL of DSPRS

The COPs have been issued through the Denver School Facilities Leasing Corporation (the Leasing Corp) using a lease

structure, as follows:

DPS assets (buildings) were transferred to and leased back from the Leasing Corp

Pursuant to the lease, DPS pays rent to the Leasing Corp through annual appropriations

The Leasing Corp passes along the annual appropriations to the Trustee to pay periodic interest and principal costs onthe COPs


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Issuance of the 2008 COPs

In April 2008, $750mm of COPs were issued to provide a number of anticipated benefits to DPS:

Fully fund the then-current UAAL, enabling a merger with PERA and improving DPS ability to retain and attract staff

Reduce annual pension expenses by replacing the then-unfunded liability which was accruing at an actuarially required8.50% interest rate with the COPs interest cost, which was anticipated at the time to be approximately 6.00%

Provide cashflow relief by refunding and restructuring some of the outstanding 1997, 2005A and 2005B COPs

The 2008 COPs were structured as taxable synthetic-fixed rate obligations

Synthetic fixed rate obligations are created by coupling variable rate demand obligations (VRDOs) with interest rateswaps

The interest rate on the taxable VRDOs is reset weekly and generally sets around the LIBOR index

This variable rate is swapped to a fixed rate through an interest rate swap to create a synthetic fixed rate

DPS pays its three swap counterparties a fixed rate of 4.859% and receives 100% of LIBOR

Assured Guaranty Municipal (AGM) insures the principal and interest payments on the Certificates

Dexia provides liquidity on the VRDOs through a standby facility that expires in April 2011

2008 COP Structure

Existing SwapCounterparties

4.859% FixedRate

LIBOR

Variable Rate:~ LIBOR

+/- Trading Spread+ Support Costs

Dexia and AGLiquidity/Credit

Support

2008A & BPCOPs


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Economics of the 2008 COPs

The turmoil in the world capital markets significantly affected the performance of the 2008 COPs At the time of the 2008 transaction, the synthetically fixed structure had an expected interest cost of

approximately 6.00%, including ongoing fees

The underwriters of the 2008 Certificates estimated that a traditional fixed rate transaction would have carriedan interest rate of approximately 7.25% at the time

Subsequent to entering into the 2008 transaction in April 2008:

Ongoing cost of Dexia liquidity facility increased from 37.5bp to 67.5bp when AGM (FSA at the time) wasdowngraded by Moodys to Aa3 from AAA

Interest cost on VRDOs increased above its anticipated trading levels beginning with the market collapse inSeptember 2008 through June 2009

To date, interest expense as a result of the 2008 transaction has been approximately $30mn below the costrelative to paying interest on the UAAL to the pension plan

Performance of 2008 Synthetic Fixed COPs Since Inception

-

2.0

4.0

6.0

8.0

10.0

12.0 Swap Rate Liquidity and Bank InterestRemarketing Fees Variable Basis

Pension Plan Interest Cost on UAAL

Estimated Cost ofIssuing Fixed RateCOPs in Apr il 2008

Source: Denver Public Schools


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Economics of the 2008 COPs(Continued)

Breakdown of Average Annual Costs (%)

FY 07-08 FY 08-09 FY 09-10 FY 10-11 Total to Date

Swap Payments 4.859% 4.859% 4.859% 4.859% 4.859%

Liquidity Fee/ Bank Interest 1.618% .0729% 0.709% 1.055%

Remarketing Fee .0980% 0.096% 0.097% 0.091%

VRDO spread above LIBOR 0.410% 1.965% 0.416% 0.156% 0.948%Total Actual Cost (%) 5.272% 8.540% 6.101% 5.821% 6.953%

Breakdown of Average Annual Costs ($)

FY 07-08 FY 08-09 FY 09-10 FY 10-11 Total to Date

Swap Payments $5,263,917 $36,341,721 $36,442,500 $18,221,250 $96,268,938

Liquidity Fee/ Bank Interest 12,667,802 5,470,059 1,358,960 19,496,821

Remarketing Fee 734,736 720,000 136,960 1,590,855

VRDO spread above LIBOR 516,757 14,737,082 3,121,958 585,628 18,961,425

Total Actual Cost ($) 5,780,674 64,480,082 45,754,518 20,301,947 136,318,038

Cost at 7.25% Fixed Rate 9,062,500 54,375,000 54,375,000 27,187,500 145,000,000

UAAL and COPs Costs if 08COPs had not been issued 10,509,654 63,258,621 64,342,892 47,620,097 170,282,614Note Fiscal Years Begin 7/1; FY07-08 and FY10-11 are partial years;Source: Denver Public Schools


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II. Proposed 2011 Refinancing: Issues and Options


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The Liquidity Facility on the 2008 COPs is Expiring

The Dexia liquidity facility expires in April 2011 and Dexia has stated it will not renew its facility

DPS must find alternative bank support to maintain the VRDO structure or convert obligations to a fixed rate

VRDO/synthetic fixed rate funding structure remains an attractive funding option relative to fixed rate cost

Changes in the market since September 2008 have decreased availability of credit support, and increased costs

This has affected DPS ability to replace the full amount of its original $750mm Dexia facility; it does not appearthat $750mm of liquidity is currently available at a reasonable cost or acceptable terms

Key considerations in structuring the 2011 transaction plan of financing:

Availability of credit support to replace Dexia and retain lower-cost VRDO structure

Decision of DPS to continue to accept ongoing transaction risks of VRDO/synthetic fixed rate structurecompared to higher annual lease payment costs of fixed rate alternative

The pending plan for the 2011 restructuring contemplates the utilization of both VRDO/synthetic fixed-rateobligations and the conversion of a portion of the 2008 COP obligations to a fixed-rate

Maximum amount of VRDOs/synthetic fixed rate will be limited by amount of LOC availability

The portions of the swaps associated with the 2008 COPs to be converted to a fixed-rate will need to beterminated

The current mark-to-market on the swaps (MTM) would be paid by the District to those swap providers toterminate the swaps


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Variable Rate Demand Obligation Economics and Risks

Economics of synthetic fixed rate VRDOs are based on numerous factors LOC fees (which can increase based on certain conditions, including a downgrade of DPS or AGM)

Remarketing fees (paid to dealers to remarket the Certificates on a weekly basis)

Difference between floating rate received on swap and floating rate paid on VRDOs (basis trading variations)

Future costs can increase when the LOCs expire (expected expiration of 2011 LOCs is in 3 years)

No guaranty of being able to obtain renewals or replacement LOCs

Failure to renew or obtain replacement LOCs would result in DPS having to convert COPs to a fixed rate andpay associated swap termination costs under then-current market conditions

Costs can also increase during the three-year LOC period for numerous reasons, including but not limited to:

Changes in the perception of either DPS or LOC banks credit could impact VRDO trading levels

Change in market acceptance of COP structure or overall market disruption could impact VRDO trading levels

Downgrade of DPS credit could result in higher LOC fees

Failed remarketing could trigger a requirement to fix out COPs or result in Bank Bonds at a high interest rate

Downgrade of AGM below Aa3/AA- could result in higher LOC fees and/or requirement to cash-fund a DSRF

Increased capital reserve requirements for banks triggered by Basel III could result in higher LOC feesOriginal Projections Current 2008 COPs Projected 2011 VRDOs

1

DPS Pays on Swap 4.859% 4.859% 4.859%

DPS Receives on Swap 1m LIBOR 1m LIBOR 1m LIBOR

DPS Pays on VRDOs 1m LIBOR +~0.20% 1m LIBOR +~0.20% 1m LIBOR +~0.20%

Wtd. Avg Remarketing Fees 0.100% 0.100% 0.125%

Ongoing Liquidity Fees 0.375% 0.675% 1.250%

Total Rate ~-6.00% ~5.85% ~6.45%

1Indicative only. Does not include amortized costs of any upfront fees, including 10bp fee to LOC banks or takedowns, counsel fees, or other costs of issuance. Assumes LOCs at 125bpthrough maturity, 20bp trading spread between VRDOs and swap receipt,12.5bp ongoing remarketing fees; Actual amounts and rates could vary materially.


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Role and Management of Interest Rate Swaps

Fixed Payor Swaps are integral element of creating synthetic fixed rate obligations

Savings derive from illiquidity of market for long-term, fixed rate municipal obligationsand from exchanging DPS forbank credit risk for 3 years at a time, compared to selling DPS credit risk to investors for 30 years

Funding in VRDO market and swapping to fixed provides lower cost access to funds, but requires DPS to accept andmanage transaction risks

Swaps act as natural hedge against movements in Treasury yield curve, reducing the interest rate risk of fixed rateconversion

If interest rates rise significantly, swap dealers would owe MTM payment to DPS, reducing effective fixed rate cost

If interest rates fall significantly, DPS would owe MTM payment to swap dealers, increasing effective fixed rate cost

Therefore, the effect of the swap hedge is to limit ability of DPS to benefit from low interest rates at time ofconversion to fixed rate, and limit DPS exposure to high interest rates at time of a conversion to fixed rate

The swap does not hedge or limit the impact of changes in municipal credit spreads (i.e. the cost to sell DPSappropriation risk to investors for the full term or maturity of COPs)

Swaps do entail a number of risks:

Swap counterparty credit or default event risk

Mark-to-market termination risk

Management of swap risks can be facilitated through adoption of swap policy as part of overall debt and leaseobligation management policies


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Fixed Rate Economics and Risk

The cost of a fixed rate restructuring depends on the cost to terminate swaps and the cost to issue fixed rate COPs

Mark-to-Market termination cost is source of headline risk related to swap transactions

MTM reflects market value of swap on a daily basis: If market swap yields drop below f ixed pay swap rate, MTM ispositive (owed by DPS to counterparty), If market swap yields rise above fixed pay swap rate, MTM is negative (owed bycounterparty to DPS)

MTM is based on prevailing 20year LIBOR swap rates (the average life of DPS swaps), not 1 month LIBOR

The cost of issuing fixed rate Certificates is based on 10yr and 30yr Treasury benchmark rates plus credit spreads

As Treasury rates rises, the benchmark cost of issuing fixed rises; as Treasury rates fall, the benchmark cost of f ixed falls As credit spread rises, the cost to issue rises, and as credit spreads fall, the cost to issue fixed also falls

DPS interest rate swaps serve as a hedge against movements in Treasury rates

Swap and Treasury rates tend to move together and the impact of an increase in the termination payment (due to adecline in rates) is generally offset by a reduction in the benchmark cost of issuing fixed rate obligations

Given the moving relationships between swaps rates, Treasury rates and credit spreads, there may be times in the futurewhich are more economically advantageous to the District to convert the obligations to fixed rate compared to today

Fixed Rate ConversionPricing Components Impact on Fixed Rate ConversionCosts if Benchmark Rises Impact on Fixed Rate ConversionCosts if Benchmark Falls

20 Year LIBOR Swap Rates Down Up

10 Year and 30 Year UST Rates Up Down

DPS Taxable Lease Appropriation Credit Spreads Up Down

Net Impact1 Largely Driven by Credit Spreads Largely Driven by Credit Spreads

1The impact of a 1 basis point change in 20yr swap rates is more than the impact of a 1 basis point change in US Treasury rates due to the swap MTM beingdiscounted at swap yields, which are lower than the fixed COP rate; Net impact depends on magnitude of movements of all three components


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The All-in Economics of a Fixed Rate Conversion Dependon Prevailing Rates and Credit SpreadsAssumes 100% Fixed with Full Cash-Funded Reserve Fund ($Mn)

The table to the right depictsthe sensitivity of the fixed rateconversion to movements inrates and credit spreads

Long-term US Treasury ratesare generally hedged by DPSexisting interest rate swaps

As can be seen across therows, the TIC does not movesignificantly based oninterest rate moves alone

Thats because increases(and declines) in USTreasury rates (which serveas a benchmark for the fixedrate COP pricing) are largelyoffset by declines (and rises)

in the swap MTM ortermination cost

Consequently, credit spreadshave a much larger impact onthe cost of a fixed rateconversion

-100 bps -50 bps 0 bps +50 bps +100 bps

Par Amount 1,034.7 966.5 904.7 847.6 795.7

Swap Termination 172.7 111.8 56.5 5.5 -40.8

Total Interest Cost (TIC) 9.82% 9.71% 9.59% 9.46% 9.32%

TIC w/out Swap 7.82% 8.34% 8.85% 9.36% 9.87%

Par Amount 1,034.7 966.5 904.7 847.6 795.7



TIC w/out Swap 7.32% 7.83% 8.34% 8.85% 9.36%

Par Amount 1,034.7 966.5 904.7 847.6 795.7



TIC w/out Swap 6.81% 7.32% 7.83% 8.34% 8.86%

Par Amount 1,031.0 966.5 904.7 847.6 795.7



TIC w/out Swap 6.30% 6.81% 7.32% 7.83% 8.35%

Par Amount 1,026.9 963.9 904.7 847.6 795.7



TIC w/out Swap 5.79% 6.30% 6.81% 7.32% 7.84%

ChangeinTaxableMunicipalCreditSpr

eads

Change in Long-Term Taxable Rates

-100bps

-50

bps

+0bps

+50b

ps

+100bps

Note: Based on Market Conditions as of February 7, 2011


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Estimated Historical Fixed Rate Economics

Changes in Credit Spreads Largely Drive the TIC of Converting the 2008 COPs to a Fixed Rate,as Treasury Rates are Generally Hedged by the Interest Rate Swaps

Estimated Historical Fixed Rate Economics

0

50

100

150

200

250

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

SwapMTM(

$Millions)

E

stimatedCreditSpreadsandTIC(%

)

Estimated Credi t Spreads Estimated TIC

30y UST Estimated Swap MTMCurrent Fixed

Rate TIC: 8.50%

Current Swap

MTM: $56.5mn

Note; Estimates only,, particularly credit spread estimates prior to September 2009


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Historical Treasury Rates, Swap Rates and Credit Spreads

Fixed rate financing costs are driven by the net movements between Swap and Treasury rates (bottom left)

and credit spreads (bottom right)US Treasuries 20yr LIBOR Swap Rates

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

UST 10 (%)UST 30 (%)

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

20y Swaps (%)

Swap Rates UST Rates Municipal Credit Spreads

-150

-100

-50

0

50

100

150

20y Swaps - UST30 (bps)

Improvedeconomics for

DPS (Swap ratesabove UST rates)

0

50

100

150

200

250300

350

400MCDX (Municipal Investment Grade 10yr CDS)


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III. Development of the 2011 Plan of Finance


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Plan of Finance Objective: Reduce Risks and Manage Costs

The proposed plan of finance seeks to reduce risk to DPS while managing overall costs to minimize budget impact

1. Use available LOC capacity to refinance portion of the 2008 COPs with VRDOs:

Provides lowest annual cost, while retaining current risks

2. Fix out the balance of the 2008 COPs and terminate associated swaps

Eliminates risks on those COPs, but at a higher cost

VRDOs: Series 2011A Fixed Rate: Series 2011B

Refund estimated $370-500 million of the 2008COPs with 2011A Variable Rate Certificates

Replace Dexia facility with LOCs from three banks

Diversify bank-related risks

Lower costs with 125bps LOC fee compared tohigher costs in fixed rate market

Retain AGM insurance policies for reserve fund,swap and COPs

Do not need to fund a Certificate Reserve Fundunless AGM is downgraded further

Retain swap, bank, credit and other risks on thisportion of financing

Fix out balance of the 2008 COPs

On this portion, eliminate risks, including: COP market event risk Bank renewal of the facility upon expiration Bank credit deterioration Swap counterparty and termination risk Basis trading risk on COPs vs. swaps Market disruption/access risk

AGM downgrade risk

DPS credit deterioration

Swap termination costs increase transaction size,or renegotiate swaps to fund termination over time

Certificate Reserve Fund, if required, will increasetransaction size


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Summary of Comparative Costs and Risks$000s

Rates as of February 7, 2011

2011A:$375mm - $500mm

VRDOs

2011B:$456 -$306mm

Fixed Rate

Combined Series2011A & 2011B

Transaction

Par Amount $375,000 - $500,000 $455,610 - $305,605 $830,610 - $805,605

Projected All-in TIC 6.43% - 6.43%1 8.54% - 8.55% 7.56% - 7.20%

Certificate Reserve Fund2 N/A $42.561 - $30,561 $42,561 - $30,561

Swap Termination Payment N/A $28,270 - $18,847 $28,270 - $18,847

Avg. Annual Lease Payments FY2012-FY20173 $23,845 - $31,793 $34,798 - $23,309 $58,643 - $55,102

Avg. Annual Lease Payments After FY20172 $33,148 - $44,197 $44,926 - $29,961 $78,073 - $74,157

Max Annual Lease Payments2 $35,532 - $47,381 $48,590 - $31,679 $84,122 - $79,060

Post Refinancing Remaining Risks:

COP Market Risk

Bank Renewal Risk

Bank Credit Risk

Swap Counterparty Risk

Basis Risk

Market Disruption/AccessAssured Guaranty Downgrade Risk

4

DPS Credit Risk

Remaining Swap MTM after Refinancing $28,270-$37,693 $0 $28,270-$37,693

Remaining Swap MTM Sensitivity after Refinancing $515,000 - $687,000/bp $0 $515,000 - $687,000/bp

1Assumes all on-going VRDO costs (125bp LOC fees, 12.5bp remarketing fees, 10-20bp trading spread, 4.859% swap rate) remain in place and no puts to banks; any change can materially impact costs2

Assumes cash-funded Certificate Reserve Fund at inception for fixed rate COPs at the lesser of MADS, 10% of par, and 125% of average annual lease payments; make-whole call.3

For fixed rate bonds, includes earnings on reserve fund at the 2-year UST rate4

Assured Guaranty downgrade would trigger requirement for a cash-funded reserve fund on VRDO and could also trigger a mandatory tender and remarketing of Certificates


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Additional Considerations

Fixed Rate COPs and Synthetically Fixed Rate VRDOs may include a Make-Whole Call (or its equivalent) Fixed Rate COPS

Taxable fixed rate investors charge a substantial premium for par call options

Fixed rate taxable COPs would carry lower costs with a make-whole call rather than a par call

A make-whole call would allow the COPs to be called at marketi.e. by making investors whole based on prevailinginterest rates

The make-whole call price consists of the minimum of:

The present value of expected future cash f lows discounted at prevailing US Treasuries plus a pre-determined spread,

The par amount of outstanding COPs The net impact of a make-whole call is that the fixed rate COPs cannot be called for economic savings

VRDOs with Interest Rate Swap

The VRDOs can be called at any time at par

However, terminating the associated swaps entails making (or receiving) a termination payment based on prevailingmarket rates (as reflected by the mark-to-market value of the swap)

This is effectively equivalent to the make-whole call contemplated on fixed rate COPs, but in a swap termination theDistrict could receive a payment if rates have increased enough, while fixed rate COPS cannot be called for less than par

Increase in Lease Pool to Accommodate GO Bond Proceed Expenditures

The proposed 2011 financing will include additional buildings in the leased pool as GO bond proceeds have been expendedon nearly all District buildings, including those in the existing 2008 leases

In the case of an event of default, COP investors will be required to transfer to the District moneys received from a re-letting of the buildings (up to the amount of expended GO bond proceeds outstanding) beforethey recoup any losses

Willingness of fixed rate investors to support such a structure is untested in the market


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Overview of Proposed Transaction Process and Timeline

Step 1: Procurement of professional services (Nov Jan) Step 5: Mail Offering Documents (Mid-March)

Conducted by DPS with assistance of financial advisor

Includes procurement and negotiation of bank letters ofcredit

Offering documents are provided to investors

Documents are posted online through an electronicdistribution

Step 2: Preparation of Documents (Feb March) Step 6: Marketing (Late March)

Led by various counsels, with input from all parties

DPS, Financial Advisor and Underwriters continue toevaluate various structures and refine the plan of finance

Ongoing dialogue with Finance and Audit Committee

Typically 1 to 2 weeks, led by the underwriters

Will include an investor presentation by the Districtposted online for investors

Step 3: Initiate Dialogue with Rating Agencies (Early March) Step 7: Pricing (Late March/Early April)

This will include near final financing documents

Meetings or calls typically follow in 1 to 2 weeks

Ratings typically follow 2 to 3 weeks after meetings

Ongoing dialogue with Finance and Audit Committee

Underwriters take orders from investors

Pricing negotiated for the purchase of COPs by theUnderwriters

Fixed rate pricing in 1 day or 2 days; VRDOs in 1 day

Step 4: Board Approval of Transaction (Mid-March) Step 8: Closing (Early Mid-April)

Board reviews financing plan, terms, economics andpotential risks

Board approval includes documents and parametersapproval

Documents are finalized with results of sale

Funds wired to trustee to refinance existing COPs, newCOPs sold to underwriters

Post transaction review by Finance and AuditCommittee

Step 9: Transaction Review (Mid-April)

Review results of transaction with Board


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Appendix A: Comparison of Risk Profiles


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Comparison of Risk Profiles

Description

Exists in 2008Synthetically

Fixed POCPs?

Exists in SyntheticFixed Variable Rate

2011A COPs?

Exists inFixed Rate

2011B COPs?

Committed Funding through Maturity

Funding committed through maturity (2037)

No No Yes

Bank Renewal Risk

Ability to renew or replace LOCs at expiration

Pricing for renewal or replacement

Basel III impacts on bank capacity

Yes Yes

Mitigated in part by havingthree banks

No

Bank Credit Risk

Perceived credit-worthiness of LOC bankscould impact VRDO trading levels

Downgrade of bank ratings may result in puts

Yes Yes

Mitigated in part by havingthree banks, creatingdiversity in credit exposure

No

DPS Credit Risk Perceived credit-worthiness of DPS could

impact VRDO trading levels

Downgrade of DPS ratings would result inincreased LOC fees

Yes Yes No


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Comparison of Risk Profiles(Continued)

Description


Fixed POCPs?


2011A COPs?

Exists inFixed Rate

2011B COPs?

Market Disruption Risk

Disruption of VRDO market or DPS VRDOsspecifically for any reason at any time couldresult in COPs tendered to banks

Unreimbursed draws on banks accrue interest

at high rates 90-day window to fix out COPs begins after 30

days of failed remarketings

Yes

Existing terms differbased on Dexia

standby purchaseagreement

Yes No

COP Sector/Legislative Risk

Perceived viability of COP structure couldimpact VRDO trading levels/ market access tofix out in future

Yes Yes No

Swap Basis Risk

Floating rate received on swap (1m LIBOR,

driven by inter-bank lending rates) could be lessthan floating rate paid on VRDOs (market-based, driven by numerous factors)

Yes Yes No

Assured Guaranty Downgrade Risk

Downgrade of AGM ratings by both ratingagencies could result in higher LOC fees andmandatory tender

Downgrade of AGM ratings would triggerrequirement to cash fund a DSRF

Yes

AGM downgradetriggers mandatoryput and inability formoney market fundsto purchase VRDOs

Yes

Mitigated in part by LOCs;however, downgrade wouldresult in higher LOC fees orrequirement to fund DSRF

Partial

If surety policy is retained,downgrade of AGM couldtrigger requirement tocash-fund DSRF


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Comparison of Risk Profiles(Continued)

Description


Fixed POCPs?


2011A COPs?

Exists inFixed Rate

2011B COPs?

Swap Termination Risk

Swap could be terminated at a time when alarge MTM is owed by the District

Termination events include combineddowngrade of Assured Guaranty and event of

default by DPS (non-appropriation) Bankruptcy of swap counterparties could also

result in termination and payment owed by DPSdepending on prevailing rates

Yes Yes No

Release or Substitution of Leased Property

Ability to release or substitute leased propertysecuring Certificate holders

Pre-authorizedrelease schedule withminimum principalamortizationrequirements

Substitution ofproperties subject toinsurer approval

Pre-authorized releaseschedule with minimumprincipal amortizationrequirements

Substitution of properties

subject to certification of NetValue, useful life,essentiality, title insuranceand other conditionsincluding bank approval

Pre-authorized releaseschedule with minimumprincipal amortizationrequirements

Substitution of properties

subject to certification ofNet Value, useful life,essentiality, title insuranceand other conditions

Call Option

Ability to call structure prior to maturity

VRDOs callable anytime at par; Swapcallable at market(pay/receive MTM)

VRDOs callable any time atpar; Swap callable at market(pay/receive MTM)

COPs callable at a make-whole price (i.e. DPS paysminimum of par and aspread to prevailing UST)


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Appendix B: Transaction Participants


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Transaction Participants

IssuerDenver School Facilities Leasing

Corp

Leases school buildings to the District pursuant to a lease in return for annual rent

Raises proceeds from investors through the issuance of Certificates of Participation(COPs) and passes on annual rent payments from the District to those investors

LesseeDenver Public Schools

School District No. 1, in the City and County of Denver and State of Colorado Sells school buildings to the Leasing Corp in exchange for proceeds; leases

buildings back from the Leasing Corp and pays annual rent

Bond CounselKutak Rock

Prepares principal transaction documents (lease and indenture)

Provides opinion that the COPs are legal, valid and binding Reviews entirety of transaction and documents for completeness

Financial AdvisorsFiscal Strategies Group

Magus

Provides advice to the District on all financing matters

Financial reform requires SEC registration and fiduciary duty to issuer

UnderwritersGoldman Sachs & Co

JP MorganRoyal Bank of Canada

Purchase COPs from the issuer in an arms-length relationship

Market and sell COPs to investors

Provide structuring and other market-related color regarding the transaction

Not a financial advisor nor f iduciary to the District

JP Morgan and RBC are underwriters, LOC providers and swap counterparties

Underwriters CounselHogan & Lovells

Assists DPS and its advisors in the preparation of offering document(s) summarizingall material information about the borrower as well as terms and conditions of COPS

Provides opinion to underwriters

Prepares and negotiates purchase contract between issuer and underwriters

Assists in due diligence review of accuracy and completeness of information


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Transaction Participants(Continued)

Letter of Credit BanksJP Morgan Chase

Royal Bank of CanadaWells Fargo

Provide liquidity and credit support to COPs issued as Variable Rate DemandObligations (VRDOs)

Relevant documents include the Letter of Credit and Reimbursement Agreements

Bank CounselChapman & Cutler

Prepares Letter of Credit and Reimbursement Agreements

InsurerAssured Guaranty Municipal

Provides transaction insurance policy on COPS and swaps

Provides surety policy in lieu of cash-funded Certificate e Reserve Fund

Swap CounterpartiesJP Morgan

RBC & Bank of America Provide interest rate swaps on VRDOs to hedge interest rate risk

Rating AgenciesMoodys and Standard & Poors

Conduct credit analysis and assign ratings to the financing

Typically at least two ratings are necessary for marketing a transaction

TrusteeWells Fargo Bank, NA

Follows instructions under the documents on behalf of COP holders


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Appendix C: Annual Lease Payment Profile


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DPS Expected Annual Lease Payment ProjectionsBased on $400mn VRDOs and Balance Fixed Rate COPs

As of February 7, 2011

Expected Combined Lease Payments

0

10

20

30

40

50

60

70

80

90

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

2036

2037

2038

$Millions

2011 Pro Forma VRDB COP Payments 2011 Pro Forma Fixed Rate COP Payments Unrefunded 1997A COP Payments

Note: Annual lease payments based on a fiscal year basis, assuming April 2011 issuance; Fixed and Variable rate assumptions same as those footnoted on pg 18


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31

Appendix D: Current Municipal Market Environment


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32

In 4Q10, Municipal Supply Collided with Rising Rates, BondFund Outflows and the Looming BAB Expiration

Significant Supply During Q4 2010 Collided with Rising Rates Post QE2

$0

$20

$40

$60

$80

$100

$120

$Mn

Fixed Variable BABs

Quarter 1 Quarter 2 Quarter 3 Quarter 4

3.50%

3.80%

4.10%

4.40%

4.70%

5.00%

5.30%

2-Nov 16-Nov 30-Nov 14-Dec 28-Dec

Yield(%)

30yr MMD 30yr USTJan. 3

4.68%

Jan. 3

4.40%

The Resulting Bond Fund Losses Triggered Swiftand Severe Asset Outflows

Comparable to the Fund Outflows Seen Duringthe Credit Crisis.

2,616 2,8602,076

4671,100 837

2,5843,012 3,363

1,154

(5,333) (5,177) 96.0%

98.0%

100.0%

102.0%

104.0%

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000

Fund Flows ($mm) NAV

$6.4$5.4

$0.6

$(1.9)

$3.1

$8.0

$3.2

$(9.8)

$6.0

$11.2

$17.3

$10.3

$7.6

$2.4

$9.0

$(9.4)

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2007 2008 2009 2010

While supplyreached its peakin 2010 Q4, bondfund outflowsneared 2008 Q4levels, pushing30yr MMD up by

96 bp in a singlequarter


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The Early Part of 2011 has Further Challenged the MunicipalMarket

Municipal Rates Have Underperformed Treasuries(MMD Rates Increased More than Treasuries)

Municipal Ratios (MMD as a % of Treasuries)Have Recently Climbed Over 100%

+127

+75

+140

+87

0

2040

60

80

100

120

140

160

10yr MMD 10yr UST 30yr MMD 30yr UST

Increase in Rates Since Beginning of Q4 2010 (bps )

50%

60%70%

80%

90%

100%

110%

120%

10yr Ratios 30yr Ratios

2/1/2010 9/1/2010 1/14/2011 2/11/2011

September 1 2010 - January 14 2011

Municipal Bond Funds Have Continued to Lose Assets

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

10/06/10

10/13/10

10/20/10

10/27/10

11/03/10

11/10/10

11/17/10

11/24/10

12/01/10

12/08/10

12/15/10

12/22/10

12/29/10

01/05/11

01/12/11

01/19/11

01/26/11

02/02/11

Assets($mm)

Outflows:$24.8 bn


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Negative headlines have also played a role in the weak toneof the municipal market

Muni investors in default mode; Fearsabout safety of state, local bonds riseafter TV prediction

December 29, 2010: Investors are panickyabout losing their money in municipal bonds andhave been calling their financial advisers forassurances since a recent "60 Minutes" TVshow predicted massive bond defaults by local

governments over the next 12 months.

Upset over muni bond forecast;Whitney's dire prediction on '60 Minutes'brings no shortage of criticism.

December 24, 2010: Star banking analystMeredith Whitney has been saying for monthsthat the next phase of the housing meltdownwould be a local-government financial crisis.This week she put a number on it, asserting that

"hundreds of billions of dollars" of municipalbond debt would end up in default.

Chowchilla, Calif., Stops Paying OffDebt

January 6, 2011: Rocked by the recession,the rural California city of Chowchilla hasstopped making payments on the bonds itused to finance its city hall.

Mourn the Muni Market

December 13, 2010:People are just waking upto the idea that there might be some risk in themunicipal bond market, Mr. Bienstock said.People are realizing that there are really issuesat the state and local levels that are not beingaddressed.

Local Revenues Climb as EconomyRecovers

December 30, 2010: State and local taxrevenues continue to recover as the economyimproves, but remain below pre-recessionpeaks and are likely to face continuedpressure in 2011.

Battle is joined in cities

January 4, 2011: Questions about whethercountries can go bust are still a pressingtheme at the start of the year, but as avariation, there is now the drama aboutwhether American cities will go bust.

Private investors head for hills asdefault fears mount

January 3, 2011: A fierce debate has eruptedover the standing of US municipal bonds, theonce sleepy corner of the credit marketswhere states and local governments raisemoney for roads, bridges, schools and otherprojects.

Safer Than Connecticut Signals DebtRally May Be `Overdone'

January 3, 2011: Traders have moreconfidence in Brazil honoring its debts than thewealthiest U.S. states including Connecticutand New Jersey

Dire States

January 2011: Deep in debt, most governorswill have to either raise taxes or cut spendingexactly what not to do when recovering from arecession.
http://www.ft.com/


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Fixed Rate Municipal Taxable Issuance is FurtherChallenged Due to its Small Presence in the MarketModest Supply Contributes to Illiquidity of Taxable Fixed Rate (Non-BAB) Transactions

With the expiration of Build America Bond program, taxable municipal issuance has fallen precipitously in 2011

Historical Municipal Issuance ($bn)

$182.7

$269.5

$336.3 $338.5 $332.1

$381.2$354.2

$395.8$363.0

$322.8

$279.4

$14.7

$11.4

$14.4

$18.9$40.1

$23.7

$25.2

$27.9

$28.4

$23.5

$20.0

$33.9

$1.2

$64.1 $117.3

3.2%2.5%

4.1%

8.0%

5.1%5.8%

4.5%3.9%

4.5%

15.9%

25.6%

1.8%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011YTD

Municipal Tax-Exempt Municipa l Taxable BABs Muni Taxable & BABs as a % of IG, Muni Taxable & BAB Issuance

Source: Thomson Reuters; Note Municipal tax-exempt issuance includes Alternative Minimum Tax


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Appendix E: Glossary


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38

Glossary of Key Terms

Basis Point: 1/100 of 1 percent of yield. For example, if a yield increases from 8.25% to 8.26%, the difference is referred toas a one basis point increase. Often a basis point is referred to as bp.

Certificates of Participation (COPs): COPs are a credit instrument evidencing a pro rata share in a specific pledgedrevenue stream, usually lease payments by the issuer that are subject to annual appropriation. The certificate generallyentitles the holder to receive a share, or participation, in the lease payments from a particular project. The lease payments arepassed through the lessor to the certificate holders. The lessor typically assigns the lease and lease payments to a trustee,which then distributes the lease payments to the certificate holders

Insurance: A guarantee by an insurer of the payment of the principal of and interest on municipal obligations as they become

due should the borrower fail to make required payments. The issuer of the policy typically is provided extensive rights tocontrol remedies in the event of a default..

Interest Rate Swap: A contract entered into by an obligor with a swap provider to exchange periodic interestpayments. Typically, one party agrees to make payments to the other based upon a fixed rate of interest in exchange forpayments based upon a variable rate. Interest rate swap contracts typically are used as hedge against interest rate risk or toprovide fixed debt service to an borrower dependent on a specified revenue stream for payment of such debt.

Letter of Credit: A commitment, usually made by a commercial bank, to honor demands for payment of a debt uponcompliance with conditions and/or the occurrence of certain events specified under the terms of the commitment. Inmunicipal financings, bank letters of credit are sometimes used as additional sources of security for VRDOs, with the bank

issuing the letter of credit committing to pay principal of and interest on the securities in the event that the issuer is unable todo so. A letter of credit may also be used to provide liquidity for VRDOs and other types of securities.

Liquidity: The relative ability of a security to be readily convertible into cash without substantial transaction costs or reductionof value. A municipal securitys liquidity is a function of its structure (coupon, maturity, credit enhancement, etc.) andmarketability, including factors such as size and investor base.
http://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspxhttp://emma.msrb.org/educationcenter/Glossary.aspx


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Glossary of Key Terms(Continued)

Standby Bond Purchase Agreement(Liquidity Facility or SBPA): An agreement with a third party, typically a bank, inwhich the third party agrees to purchase variable rate demand obligations that have been tendered for purchase in the eventthat they cannot be remarketed. Unlike a letter of credit, a standby bond purchase agreement does not guarantee thepayment of principal and interest by the borrower and is not an unconditional obligation to purchase the tender option bonds

Synthetic Fixed Rate: Term used to describe the coupling of variable rate obligations with an interest rate swap. Forexample, an issuer may issue variable rate debt and simultaneously enter into an interest rate swap contract. The swapcontract may provide that the issuer will pay to the swap counter-party a fixed rate of interest in exchange for the counter-party making variable payments equal to the amount payable on the variable rate debt

True Interest Cost (TIC): A method of computing the interest expense to the borrower; defined as the rate, compoundedsemi-annually, necessary to discount the amounts payable on the respective principal and interest payment dates to thepurchase price received for the new issue of obligations.

Unfunded Actuarial Accrued Liability (UAAL): Pensions are typically funded through a combination of workercontributions, employer contributions, and market returns. Pension funds, depending upon the composition of theirinvestment portfolios, are subject to the same market/economic conditions as other retirement vehicles. In addition, peopleare living longer yet workers are retiring at relatively earlier ages with higher salaries. Absent modifications to benefits orincreases in investment returns, required contributions need to be increased to meet the plan commitments. When assetsand returns projected by the pension fund actuary are insufficient to fund future needs, an Unfunded Actuarial AccruedLiability (UAAL) is created. Generally, pension plan owners are then required to increase future contributions to fully-fund

the pension, eventually reducing the UAAL to zero

Variable Rate Demand Obligations (VRDOs):Floating rate obligations that have a nominal long-term maturity but have acoupon rate that is reset periodically (e.g., daily or weekly). The investor has the option to put the security back to the trusteeor tender agent at any time with specified (e.g., seven days) notice. The put price (demanded by the investor) is par plusaccrued interest