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MUNICIPAL BOND MARKET MONTHLYJANNEY FIXED INCOME STRATEGYFebruary 28, 2014

JANNEY MONTGOMERY SCOTT

www.janney.com

© 2014 Janney Montgomery Scott LLC

Member: NYSE, FINRA, SIPC

MUNICIPAL MONTHLY • PAGE 1

TOM KOZLIK Municipal Credit [email protected]

ALAN SCHANKEL Managing [email protected]

See page 23 for important information regarding certifi cations, our ratings system as well as other disclaimers.

CONTENTS PAGE

INTRODUCTION - OUTLOOK UPDATES 1

A SIMPLE READ ON THE ECONOMY 2

MUNICIPAL SECTOR CREDIT OUTLOOKS 6

PUERTO RICO DOWNGRADED 16

DETROIT’S ADJUSTMENT PLAN 17

PA SCHOOL DISTRICT INTERCEPT 18

SELECT RATING CHANGES 19

STATE ISSUER RATINGS 20

MUNICIPAL RATING DEFINITIONS 21

JANNEY MUNICIPAL PUBLICATIONS 22

DISCLOSURE 23

Our Annual Municipal Sector Credit Review & Outlook Update - Several “Cautious” Outlooks Remain• We still have “Cautious” outlooks on six of our eleven municipal sectors. We continue to like

the municipal bond asset class and there are quality municipal credits available, but individual credit selection is more important than ever.

• The still “not healthy” U.S. economy is a major factor to consider when investing in municipal bonds. Some issuers are not adjusting as they should and the uncertain economic environment could prove to be challenging going forward.

• We raised our outlook on the Airport Sector to “Stable” from “Cautious” because airlines have been and will continue to add capacity, and we think this will lead to higher levels of enplane-ments.

• All three rating agencies downgraded Puerto Rico general obligation ratings to below invest-ment grade in February. Rating outlooks from all three raters remain “Negative”.

• Detroit released a Plan of Adjustment, which was called “skeletal” by creditors. General obliga-tion holders would receive new securities valued at about 20 cents on the dollar.

• Moody’s changed its rating methodology on the post-default PA State Intercept Program for School Districts. Some ratings were withdrawn and others were downgraded.

• Puerto Rico was downgraded to Ba2 from Baa3 by Moody’s, to BB+ from BBB- by S&P, and to BB from BBB- by Fitch; 17 GARVEE issues were downgraded one notch by Moody’s; CA’s outlook was raised by Moody’s; IL’s outlook was revised to “Developing” by S&P; NJ’s outlook was low-ered by Moody’s; and West Brandywine Township Municipal Auth., PA downgraded 3 notches.

INTRODUCTION - OUTLOOK UPDATES

Credit Selection is Important With So Many “Cautious” Outlooks

Whether the economy continues to expand and the pace at which this occurs are key themes impor-tant to each of Janney’s Municipal Sector Credit Outlooks. State and local government revenues are connected to general economic activity and local housing markets. If revenues fall short of budgeted

Janney Municipal Sector Credit Outlooks

SectorJanney Credit

Outlook

Last Month Change

Barclay's 12 Month

ReturnKey Sector Trends

Recent Janney Sector Review

Municipal Bond Index - - -1.07% Barclay's Muni Index, 46k issues -

State Government Stable Same -0.95% Moody's raised outlook back to "Stable" Feb 2014 MBMM

Local Government Cautious Same -0.57% Budgets squeezed, pension related downgrades Feb 2014 MBMM

School Districts Cautious Same - Credit deterioration will continue, but remain limited Feb 2014 MBMM

Airports Stable Up -0.95% Added capacity should drive enplanements higher Feb 2014 MBMM

Health Care Cautious Same -0.72% Reimbursement uncertainty, margins pressured Feb 2014 MBMM

Higher Education Cautious Same -0.89% Enrollment declines equal fi nancial stress Feb 2014 MBMM

Housing Stable Same 1.13% Some benefi ts for HFAs from higher interest rates Feb 2014 MBMM

Public Power (Elec.) Stable Same -2.07% Essential purpose nature enhances stability Feb 2014 MBMM

Tobacco Cautious Same - More downgrades, consumption dropping Feb 2014 MBMM

Toll Facilities Cautious Same -0.95% Activity is leveling off, but still near 2004 levels Feb 2014 MBMM

Water and Sewer Stable Same -1.35% Essentiality factor, system upgrades looming Feb 2014 MBMM

Source: Janney Fixed Income Strategy.

MUNICIPAL BOND MARKET MONTHLYFebruary 28, 2014


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Our simple read of the U.S. economy is that it has been improving, steadily.

plans, then general obligation issuers are forced to re-evaluate their spending plans, and perhaps may resort to raising revenues. Revenue bond issuers typically have security linked to user activity. A moderating or weakening economy could apply pressure to revenue credits if activity declines and fees are not increased.

So, what does the direction of the economy look like now? Our simple read of the U.S. economy is that it has been improving, steadily. But its current state is still far from receiving a “healthy” diagnosis.

Our read of the economy has important implications, especially because there are so many major economic and key municipal market credit indicators that are still below 2007 & 2008 peaks. Several of our Janney Municipal Sector Credit Outlooks remain “Cautious”, accordingly. There are specifi c drivers within each sector, but one common overall theme throughout our commentary is that the still “not healthy” U.S. economy is a major factor to consider when investing in municipal bonds.

Janney Recommendation

Individual credit selection is more important than ever. This is especially true because we still have “Cautious” outlooks on six of our eleven municipal sectors. There are quality municipal credits avail-able, in almost every sector, but they all need to be assessed on an individual basis. This is a good environment for investors to utilize municipal bond insurance from the higher rated insurers. Recent examples of municipal defaults have helped prove the value proposition of select insurance pledges. The use of insurance should not be used to compensate for a weak credit profi le, however. In addi-tion, we advise investors to only invest in issues with underlying ratings, preferably from two of the three major rating agencies. And investors should confi rm that an issuer’s underlying ratings have been updated recently. Much has changed in the last fi ve to six years. A rating older than 2013-2014 is in dire need of a revaluation. Investors should confi rm that issuers are adjusting to recent economic trends. As you will read in the following paragraphs, some are not adjusting as they should and the uncertain economic environment could prove to be challenging.

A SIMPLE READ OF THE U.S. ECONOMY

The practice of reading then interpreting economic data is diffi cult enough under less noisy situa-tions. It is even more diffi cult when questions about the labor market, inventory spikes and Fed hawk expectations of interest rate hikes are amplifi ed. Analyzing broad economic trends and applying them to issuers’ within the municipal bond market while trying to understand how municipal issuer credit factors will potentially be affected is also challenging. However, under the current circumstances,

But the economy is still far from receiving a “healthy” diagnosis.

Individual credit selection is more important than ever.

Leading Economic Index Says No Recession in the Near Term, For Now

Source: Conference Board and Janney FIS.

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US Leading Economic Index (99.5) Jan 31, 2014

These leading indicators tend to move before changes in the

overall economy - and they give observers a sense of the future

state of the economy



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There does not appear to be a Recession on the horizon.

we believe it is important to do just that. We cannot ignore larger macro trends at such an impor-tant moment. The Federal Reserve is continuing to taper asset purchases, even though it is skeptical about the U.S. labor market. Economists have begun to pare down GDP growth expectations for the beginning of 2014. The U.S. economy is seemingly at a crossroads, and questions about its ability to continue to expand, even at a snail’s pace, are being countered not with satisfying answers but usually with more questions.

Positives for the U.S. Economy

On the one hand, although it might not seem like it, the U.S. economy has been experiencing a fairly signifi cant economic expansion since its most recent June 2009 trough. And, if the economy keeps on trucking along until the end of this year, it would mark the sixth longest expansion since World War II according to National Bureau of Economic Research (NBER) data. The economy should get marks for resilience. It shook off the Sequester cuts in 2013, for example. A true test will be whether it can shake off the last few months of noise from the bad weather and then, most importantly, fi nd a way to rejuvenate a structurally challenged labor market.

Other Positives Investors Should be Mindful of:

• There does not appear to be a Recession on the horizon. The Leading Economic Index (from the Conference Board) continues to trend up. In the last fi fty years there has never been a recession led by an upward LEI trend;

• It is no coincidence that bi-partisan cooperation is at a multi-year high especially with mid-term elections coming up. We believe Washington DC is mostly going to sit out 2014 – after passage of a 13-month debt limit ceiling extension bill signed by Pres. Obama) on Saturday Feb. 15th, which extends the debt limit and takes it off the table until at least March 2015;

• The U.S. economy could very well experience its 6th longest economic expansion (going back to WWII), according to NBER data, if economic growth continues through the end of 2014;

• A transparent and active Federal Reserve, which announced it would take “a notable change in the [economic] outlook” for it to stop or moderate their plan to taper asset purchases. The Fed will next meet on March 18-19;

• The University of Michigan Survey of Consumer Sentiment indicates consumers are still positive about the future (relative to the last 5 years) – and consumers are still a driving force (70%) in the U.S. economy.

Bi-partisan cooperation is at a multi-year high especially with mid-term elections com-ing up.

The University of Michigan Survey of Consumer Senti-ment indicates consumers are still positive about the future.

Consumers are Still Optimistic About the Future

Source: Thomson Reuters, U of MI and Janney FIS.

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U of MI Consumer Sentiment (81.2) on Jan. 31, 2014



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Many believe the “noise” from severe weather may be depressing numbers.

What Trends are Economists Watching Right Now?

Recent trends economists seem to be focusing on currently are the lower than expected non-farm payroll data points that were reported in December and January. Many believe the “noise” from severe weather may be depressing numbers.

Another trend being watched closely is the build-up of inventories that appeared at the end of 2013. Some believe this could result in a lower level of near-term production as business tips the scales back into balance if consumers are not ready to increase consumption.

On the Other Hand - Some Negatives to Watch

On the other hand, there are still many signifi cant macro-economic trends that are troubling. The most important is that almost all of the most important economic indicators are still below pre-recession levels, and they are not showing signs of a quickening recovery.

Another trend being watched closely is the build-up of in-ventories that appeared at the end of 2013.

Almost all of the most im-portant economic indicators are still below pre-recession levels.

Source: Bureau of Labor Statistics and Janney FIS.

Non-Farm Payroll Numbers in Dec. and Jan. Were Much Lower than Expected

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Change in Nonfarm Employment (113k) Jan. 31, 2014

The Change in Real Inventories Spiked in the 3rd and 4th Quarters of 2013

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Change in Real Inventories ($127.2 Bill) Q4 2013

Source: Bureau of Economic Analysis and Janney FIS.



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There are still structural un-employment problems in the U.S. labor market.

Other Negative Economic Factors Investors Should be Mindful of:

• Most economic indicators are still below pre-crisis levels;

• Structural unemployment problems;

• Near term questions – Labor data and high inventories – see above;

• Uncertainty about the long-term effects of Federal Reserve bond buying;

• Another housing price bubble is forming;

• Housing market activity is still very low (housing activity index);

Tom Kozlik

Another housing price bubble is forming.

Housing market activity is still very low.

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Household Median Income (Left)

Shiller Home Price Index (Right)

Housing bubble #1 started to drive home

prices well over the long term trend

Is this the beginning of

Housing bubble part #2?

Housing Prices are Once Again Rising Faster than Incomes - Another Bubble?

Source: Shiller Home Price Index, U.S. Census Bureau and Janney FIS.

What Housing Recovery?

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Total Housing Activity Composite Index

Billions of dollars spent on: Home Buyer Tax Credits, Mortgage writedowns, QE1, QE2, QE3,

"Operation Twist", foreclosure delays, ZIRP, fraudclosure

settlement

Source: National Assoc. of Realtors, U.S. Census Bureau and Janney FIS. (Includes: New, existing sales, permit and starts.



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JANNEY MUNICIPAL SECTOR CREDIT OUTLOOK & REVIEW UPDATES

Many Key Credit Indicators Remain Below 2007-2008 Peaks

We often stress the “levers” state governments have at their disposal as a key reason for this sector’s “Stable” sector outlook. However, one of those levers, chiefl y state’s ability to cut spending on local governments is a key reason why our outlook for local governments, and school districts remains “Cautious”. Many local governments receive value from the many credit enhancement programs usually sponsored by state governments. Enhancements like Pennsylvania’s Act 47 for Distressed Municipalities and Pennsylvania’s School District Intercept Program are examples. In the revenue bond sector slow economic growth is keeping overall usage still below 2007-2008 period highs by most measures. But, we are seeing that most issuers have the willingness and ability to adjust user or other fees as need is demonstrated.

We are also observing extensive policy changes at the state and local government levels concerning budgets. Many, for example, have been shoring up pension liabilities/funding plans. Illinois approved in December 2013 signifi cant changes that should help shore up their pension funding over time, for example. While additional adjustments are likely going to be needed broadly, it is the nature of state and local governments to adjust slowly, but we have been closely monitoring broader trends to make sure surprises are not waiting around the corner.

We did not make any changes to our Municipal Sector Credit Outlooks in 2013. While Moody’s did see fi t to raise its outlook on state governments to “Stable” from “Negative” at the end of the summer, Janney maintained a “Stable” outlook on U.S. states throughout the Great Recession and during the U.S. economy’s recovery. Moody’s also raised its U.S. Local Government Sector outlook to “Stable” from “Negative” at the end of 2013. We have kept our “Cautious” outlooks on the U.S. Local Government and School District sectors, in contrast.

To begin 2014 we are making one outlook change, however. We revised our outlook for the Air-port sector to “Stable” from “Cautious”. The Great Recession certainly took a toll on the nation’s airports, but enplanement levels, although not reaching pre-recession levels, are gradually recover-ing. Airlines are increasing capacity by adding seats and we believe additional capacity will support further enplanement growth. Tom Kozlik

We often stress the “levers” state governments have at their disposal as a key reason for this sector’s “Stable” sec-tor outlook.

State’s ability to cut spend-ing on local government aid is a key reason why our out-look for local governments and school districts remains “Cautious”.

We revised our outlook for the Airport sector to “Stable” from “Cautious” to begin 2014.

Janney Municipal Sector Credit Outlooks

SectorJanney Credit

Outlook

Last Month Change

Barclay's 12 Month

ReturnKey Sector Trends

Recent Janney Sector Review

Municipal Bond Index - - -1.07% Barclay's Muni Index, 46k issues -

State Government Stable Same -0.95% Moody's raised outlook back to "Stable" Feb 2014 MBMM

Local Government Cautious Same -0.57% Budgets squeezed, pension related downgrades Feb 2014 MBMM

School Districts Cautious Same - Credit deterioration will continue, but remain limited Feb 2014 MBMM

Airports Stable Up -0.95% Added capacity should drive enplanements higher Feb 2014 MBMM

Health Care Cautious Same -0.72% Reimbursement uncertainty, margins pressured Feb 2014 MBMM

Higher Education Cautious Same -0.89% Enrollment declines equal fi nancial stress Feb 2014 MBMM

Housing Stable Same 1.13% Some benefi ts for HFAs from higher interest rates Feb 2014 MBMM

Public Power (Elec.) Stable Same -2.07% Essential purpose nature enhances stability Feb 2014 MBMM

Tobacco Cautious Same - More downgrades, consumption dropping Feb 2014 MBMM

Toll Facilities Cautious Same -0.95% Activity is leveling off, but still near 2004 levels Feb 2014 MBMM

Water and Sewer Stable Same -1.35% Essentiality factor, system upgrades looming Feb 2014 MBMM

Source: Barclay’s Capital as of Jan. 31, 2014 and Janney FIS.



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JANNEY MUNICIPAL SECTOR BRIEFS

U.S. State Government (Sector Outlook - “Stable”)

“Levers” Will Allow State Government Credit Quality to Remain “Stable”

The fi scal status of U.S. State credits continued to mostly strengthen in 2013. 2014 looks promising too, assuming economic growth continues and the economy cooperates. Select challenges such as structural imbalances & lower than optimal reserve fund balances remain. State revenue growth has been generally stable over the recent near term and it has even exceeded expectations in some cases. Recent Rockefeller Institute data showed that state tax revenues have been higher for 14 straight quarters, 9% higher in 2Q2013 and preliminary data suggests that revenues will be about 6% higher in 4Q2013.

The fi scal status of U.S. State credits continued to mostly strengthen in 2013.

2014 looks promising too, assuming economic growth continues and the economy cooperates.

States most often used spending cuts as a strategy to balance budgets.

U.S. State Tax Revenues Continue to Climb Higher

Source: Rockefeller Institute, U.S. Census Bureau, and Janney FIS.

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Nominal Change (%) Left State Tax Revenues ($ in bill) Right

State tax revenues have been higher for 14 straight quarters, 9% higher in 2Q13 and prelim data indicates

about 6% higher in 3Q13.

Spending Cuts Were the Most Common Strategy States Used to Balance Budgets

Spending Cuts, 76%

Emergency Federal Aid,

4%

Taxes and Fees, 12%

Rainy Day Funds, 4%

Other, 5%

Source: Center on Budget and Policies Priorities for FY12, and Janney FIS.



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We kept our “Stable” out-look on the U.S. state gov-ernment sector again to start 2014 and do not anticipate a change to this outlook in the near term.

However, the uneven economic and housing recoveries have made full fi scal recovery elusive in some states and regions. Many have asked us, “The economic environment still seems so volatile, how is it that U.S. state credit quality has been able to stay strong?” The answer is because states, generally, have a variety of what we commonly refer to as levers, or options, they can use to balance budgets. Most importantly, state governments have the sovereign ability to control most of their revenue and expenditures. It is generally a lever in the form of spending cuts that states have recently utilized to close budget gaps.

We kept our “Stable” outlook on the U.S. state government sector again to start 2014 and do not anticipate a change to this outlook in the near term. U.S. states showed they were willing and able to pay debt service since the World Financial Crisis began, and we expect the same fulfi llment of debt service obligations in 2014 and beyond. Spending pressures from growing pension liabilities, questions about Medicaid expenditures and uncertainty surrounding future federal defi cit reduction, while manageable in the short term, could build over time. We expect many of the solutions will need to be political in nature in order to become sustainable and result in long-lasting positive credit effects. Tom Kozlik

U.S. Local Government (Sector Outlook - “Cautious”)

Stagnating Revenues are Not Keeping Pace with Revenue Demands

Although most local government issuers have managed fi nances well in the post recession time-frame, challenges continue. Rating downgrades in this sector has outpaced upgrades for the last several years and we expect this trend to persist. Overall tax revenue has recovered to pre-recession levels, but annual growth has failed to keep up with modest infl ation increases and stagnating revenues are not keeping pace with revenue demands. Our outlook for U.S. local governments re-mains “Cautious” even though the U.S. economy was mostly stronger in 2013. In 2014, we expect economic growth at a slower than historical pace, low state aid payments, questions surrounding housing valuations, and budgetary uncertainty to continue to pressure local governments.

The majority of local governments are and will remain highly rated. There are just over 7,000 local governments rated by Moody’s and they possess median ratings between Aa2-Aa3. Most of those issuers are facing the post-2010 environment with open eyes. They’ve started to or already do bud-geting conservatively, and are not taking excessive risks. However, other local governments have not adjusted to the new economic reality. Many are still waiting for a return to the pre-2010 boom time when revenues (and spending) grew rapidly. The problem is that stagnating revenues are not keep-ing pace with expenditure demands and a return to that pace of growth is unlikely to materialize.

Although most local govern-ment issuers have managed fi nances well in the post re-cession timeframe, challeng-es continue.

Stagnating revenues are not keeping pace with expendi-ture demands and a return to the pre-recession pace of growth is unlikely to materi-alize.

Risk Factors to Watch - Local Govt Revenues Not Trending Close to Pre-2010 Levels

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Actual U.S. Local Government Tax Revenues

The yellow line shows how revenues were trending before the Great Recession, when U.S. growth was much higher

The green line is a revenue trend based on local govt revenues from

just post 2010 results

This difference is a reason why some local govt.

issuers are susceptible to rating downgrades

Notice the trend of local govt tax revenues since 2010 is barely

higher, this is not a positive for local government credit

quality

Source: U.S. Census Bureau and Janney FIS.



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We estimate 10-20% of local government issuers have not adjusted to this new reality and are still susceptible to rating downgrades. Local government downgrades have outpaced upgrades by very wide margins in recent years. Local governments do not possess the budget fl exibility states have, so this trend of downgrades outpacing upgrades is likely to continue. Our “Cautious” outlook does not mean investors should shun local governments. But this is a sector where our recommendation to be careful with credit selection is very important. Our “Cautious” outlook means investors need to be increasingly conscious of the factors pressuring local governments. Investors must carefully assess credits on an individual basis. Tom Kozlik

School Districts (Sector Outlook - “Cautious”)

Housing Values are Rising but State Aid Payments Could be Volatile

We remain “Cautious” on the school district sector. A leading metric to consider for school districts, like other local government issuers, starts with property tax collections. The housing market recovery has been uneven as some regions have benefi ted more than others. But, overall housing price reco

We estimate 10-20% of local government issuers have not adjusted to this new reality and are still susceptible to rating downgrades.

We remain “Cautious” on the school district sector.

State funding (aid) for PA schools districts is still below its recent peak.

Housing Prices are Higher on a National Scale

Source: Case Shiller Home Price Index & Janney FIS.

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Case Shiller YoY % Change (Right) Home Price Index (Left)

Source: Commonwealth of Pennsylvania & Janney FIS. Light blue is forecasted. ($ in billions).

Basic Education Funding for Pennsylvania School Districts

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very has been uneven as some regions have benefi ted more than others. Overall housing price re-covery has been signifi cant, if you look at national indicators like the Shiller housing index. Problem is that this is a lagging indicator, so it will take a few years for higher housing prices to work their way into tax revenues.

Most school districts are also highly reliant on state aid payments. In Pennsylvania there are some school districts that rely on state aid payments for almost 80% of their overall budget, for example. But, average state aid payments as a percent of overall revenues are about 40% in Pennsylvania. We noted above that a strength of the U.S. State sector is that they have many levers available to them in order to raise revenue or cut spending. As some states have struggled to balance budgets, K-12 school district state aid has often been cut, reducing school district revenue streams. Pension funding and healthcare costs have also continued to rise, assuming a growing portion of school district budgets. From a bondholders’ perspective, it’s important to note that many states employ bond support mechanisms such as state aid intercept programs, which enhance bondholder security. Tom Kozlik

Airports (Sector Outlook - “Stable”)

We Revised our Outlook to “Stable” because Airlines are Adding Capacity

We are revising our outlook for the Airport sector to “Stable” from “Cautious”. The Great Recession certainly took a toll on the nation’s airports, but enplanement levels, although not reaching pre-recession levels, are gradually recovering. Airlines increased capacity by adding seats beginning in the second quarter of 2013, after six quarters of contraction, and according to Moody’s, capacity will be further expanded with additional planes in service beginning in the current quarter following ten quarters of decline. Additional capacity will support further enplanement growth. Moody’s notes a strong correlation between enplanement growth and airport revenue increases. The airlines them-selves are in stronger shape with consolidation, including the recently completed merger of American and US Airways, narrowing the U.S. fi eld to only four large US carriers.

Recent capital projects have increased borrowings, with debt per enplaned passenger grow-ing from $60.30 in 2008 to $76.81 in 2012 (Moody’s), but the focus has been on termi-nal renovation projects, which should contribute to non-airline based revenue improve-ments at many airports, and new money issuance in 2014 is expected to be signifi cantly lower than 2013. With a growing pace of passenger traffi c, a more stable airline industry and less need for near-term capital borrowing we expect stability in the airport sector in 2014 and beyond. Alan Schankel

Most school districts are highly reliant on state aid payments.

We are revising our outlook for the Airport sector to “Sta-ble” from “Cautious”.

Additional capacity should result in higher emplane-ments.

After a Post-Recession Drop Enplanements are Rising Again

Source: U.S. Bureau of Tranportation & Janney FIS. (# in millions of passangers)

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Healthcare (Sector Outlook - “Cautious”)

ACA and Other Measures are Squeezing Providers

We retain our “Cautious” outlook for the nonprofi t healthcare sector. The overwhelming recent infl uence on the sector of course is the Affordable Care Act (ACA) and its various consequences, with much media focus fueled by rancorous political discourse surrounding “Obamacare”. Beyond the direct impact of the ACA, other measures are squeezing U S healthcare providers, as the country wrestles with healthcare costs that are well above those of any other country using per capita or percent of GDP comparisons. Non-ACA sequester reductions pared reimbursements to Medicare providers by 2%, and the recent Ryan-Murray budget agreement extended those reductions by two additional years. Private insurers are reducing reimbursement levels in various ways, including limi-tations on which providers (doctors and hospitals) can be accessed using plan insurance.

Financial margins of hospital organizations are being squeezed by various trends including reduced utilization of inpatient delivery with trend to lower margin outpatient service delivery; transition from fee-for-service models to value-based models; and growth of high deductable healthcare insurance plans, which for example discourage the use of emergency rooms by insured consumers. On a posi-tive note, ACA in general is creating more customers for healthcare providers, especially in states that have accepted the Medicaid expansion element.

We favor the larger, well managed systems, which have capacity and capital to anticipate and re-spond to the changing environment. Consolidation is ongoing, with certain smaller, sometimes struggling systems benefi tting through affi liation or merger with a larger system, but generally the larger systems are best equipped to navigate the quickly changing environment that we expect to characterize nonprofi t healthcare in coming years. Alan Schankel

Higher Education (Sector Outlook - “Cautious”)

Affordability is a Key Driver Pressuring Private Universities

Our outlook for the higher education sector remains “Cautious”, but within the sector there is diver-gence, with bigger often equating to stronger. Affordability is a key issue, particularly for private in-stitutions, which generally charge higher tuition than public universities. Smaller liberal arts oriented schools face a very competitive environment for students, with less selective schools forced to offer signifi cant fi nancial aid (tuition discounts) to maintain enrollment levels, often stressing margins. This may be a more acute problem in the northeast and midwestern United States, where the amount of high school graduates (potential students) is expected to be fl at or declining in coming years.

We retain our “Cautious” outlook for the nonprofi t healthcare sector.

On a positive note, ACA in general is creating more cus-tomers for healthcare provid-ers, especially in states which have accepted the Medicaid expansion element.

.

Our outlook for the higher education sector remains “Cautious”.

Healthcare Spreads have Narrowed Since the Passage of the ACA

Source: Thomson Reuters and Janney FIS.

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Challenges take the form of uncertainty on many fronts including potential changes to federal pro-grams such as Pell grants as DC wrestles with federal spending; volatile state funding for public schools (60% of states cut funding since 2008); increased focus on performance-based funding models; and evolving delivery systems with growing on-line course usage and movement towards in-creased mobility across institutions. Larger, well managed institutions are more adept at responding to these challenges, with public universities continuing to have a cost advantage in an increasingly competitive environment for students. Alan Schankel

Housing (Sector Outlook - “Stable”)

HFAs have Adjusted and are Poised for the Future

State Housing Finance Agencies (HFA) adjusted their business models to address loan fi nancing chal-lenges that evolved in the falling/low interest rate environment. They added to their menu of fi nanc-ing strategies by utilizing new mechanisms such as pass-through bond structures and mortgage-back

Affordability is a key issue, particularly for private institu-tions, which generally charge higher tuition than public universities.

Larger, well managed high-er-ed institutions are more adept at responding to chal-lenges.

.

HFAs added to their menu of fi nancing strategies.

Student Demand Will be Stronger in the Southern and Western U.S.

Source: U.S. Dept of Education and Janney FIS. Actual and projected high school graduates.

2,700M

2,800M

2,900M

3,000M

3,100M

3,200M

400M

600M

800M

1,000M

1,200M

1,400M

2002–03 2005–06 2008–09 2011–12 2014–15 2017–18 2020–21

Total US - Right Axis Northeast Midwest South West

HFA Median Asset to Debt Ratios Improved & Outstanding Bonds Declined

$1.00

$1.20

$1.40

$1.60

$1.80

1.16

1.18

1.2

1.22

1.24

1.26

2008 2009 2010 2011 2012

Asset to Debt Ratio (Left) Bonds Outstanding $ (Right)

Source: Moody’s and Janney FIS.



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ed security sales in the secondary market or to government sponsored enterprises (please see the May 2, 2013 Janney report titled “A State HFA Mortgage Backed Security Pass Through Bond” for more info). These new strategies will help HFA credit quality remain stable in all interest rate envi-ronments going forward. The fi nancial positions of most HFAs are continuing to improve. HFA asset positions were solid through the economic downturn, and one key reason why we never assigned a “Cautious” outlook to the sector.

Program profi tability is also trending upwards. Asset to debt ratios have steadily improved since 2010 and we expect this trend to remain solid as well. A key factor that we are continuing to watch in this sector is the higher than normal level of foreclosure and delinquencies. Overall we still believe investors should have transitioned back to concentrating on structure and redemption considerations versus credit in this sector. State HFA credit quality remains strong and we have maintained our “Stable” outlook on the Housing sector. We are also continuing to see attractive state HFA single family housing bond spreads. They remain a strong relative value option compared to other munici-pal revenue bonds. Tom Kozlik

Public Power (Sector Outlook - “Stable”)

A Pull-back in Economic Activity Could be Problematic

The public power sector is another municipal sector that has generally remained stable over the recent past. Also, unlike the municipal transportation sectors, where usage is still down closer to 2004-05 levels, electric consumption has almost recovered to its 2007 summit. This strong and generally rising demand bodes well for U.S. public power electric utilities. Public power electric utili-ties have also avoided some of the stresses that have been troubling state and local government and some other revenue sector issuers. Most municipal utilities have a small number of employees, so unfunded pensions have not developed into an issue for them to solve, generally. An issue that could present itself is if local government issuers turn to utility surpluses in order to alleviate budget pressures in future years. This could pose a threat to the future of utilities in some cases by creating undo credit stress and making long-term planning more diffi cult. A pull-back in broader economic activity would also be problematic, and that is why watching broader economic trends is important for this sector too.

We still believe public power issuers’ mostly monopolistic business models are strong. Debt service coverage ratios among public power issuers are recovering despite uncertain and sometimes volatile economic conditions in recent years. Pricing power is a likely key factor here, when politically fea-sible. Public power issuers can often use their ability to set rates to maintain ratings and meet debt service requirements. However, there continues to be a small number of cases where rate setting pressures are greater than normal, often due to high cost structures or legacy expenses. Tom Kozlik

New fi nancing strategies will help HFA credit quality re-main stable in all interest rate environments going forward.

The public power sector is another municipal sector that has generally remained “Sta-ble” over the recent past.

.

However, there continues to be a small number of cases where rate setting pressures are greater than normal, of-ten due to high cost struc-tures or legacy expenses.

Median Adjusted Total Debt Service Coverage (All Debt) Own Generation

Source: Moody’s and Janney FIS. 2013 and 2014 are estimates.

2.15

1.891.90

1.971.94

1.91 1.90

1.75

2.00

2.25

2008 2009 2010 2011 2012 2013 2014



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Tobacco (Sector Outlook - “Cautious”)

Falling Consumption Continues to Pressure the Tobacco Sector

We remain cautious towards the tobacco sector. The structures of bonds secured by payments from cigarette manufacturers under the 1998 Master Settlement Agreement between the manufacturers and states vary greatly, often based on when they were issued. The number of cigarettes consumed in the United States underlies the amount of annual payments to states (and DC & territories). Bonds issued in 2008 and earlier were often structured with the assumption that cigarette consumption would decline by no more than 4% annually. The April 2009 hike in the federal excise tax generated smoking declines of about 9% and 6% in 2009 and 2010, putting many issues behind anticipated amortization schedules, with several issuers forced to tap reserve funds to make debt service pay-ments. Issues of 2010 vintage and beyond were structured with more conservative assumptions, so that debt service payments could be met even if smoking declined by as much as 10% annually.

Based on Department of Treasury data on cigarette shipments, we note that the pace of annual de-clines in smoking is again on the rise, with consumption in the 12 months through November 2013 about 5.26% below the prior twelve month period. Although data is not available, it could be that the growing popularity of electronic cigarettes is eating into cigarette sales. Tobacco (or nicotine) consumed via e-cigarettes is not captured in MSA payments. If annual declines in cigarette con-sumption continue to grow, many pre-2009 issues will see further stress. Uncertainty about future consumption patterns, heightened by growth in the use of e-cigarettes as well as future government efforts to reduce smoking, underlie our cautious outlook on the sector. Alan Schankel

Toll Facilities (Sector Outlook - “Cautious”)

We Expect Continued Pressure on the Toll Road Sector

We remain cautious on the toll road sector. The recovering economy has led to stabilization of traf-fi c volume, but vehicle miles traveled metrics remain below peak pre-recession levels. With federal transportation funding streams uncertain amidst DC gridlock, states and other toll road sponsors will increasingly look to fi nance toll and non-toll highway projects using toll revenue sources. For exam-ple the Ohio Turnpike and Infrastructure Commission borrowed $1 billion in July 2013 under a junior lien, with proceeds earmarked for non-toll transportation projects across the state. Ohio turnpike toll payers are subsidizing non-turnpike capital projects. The American Society of Civil Engineers’ Report Card for America’s Infrastructure (2013) gives a grade of D to the nations’ roads highway system, noting that $170 billion in annual capital investment is needed to signifi cantly improve high-

We remain cautious towards the tobacco sector.

Based on Department of Treasury data on cigarette shipments, we note that the pace of annual declines in smoking is again on the rise.

.

We remain cautious on the toll road sector.

Cigarette Consumption Continues to Decline

Source: U.S. Treasury and Janney FIS.

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%250 bln

275 bln

300 bln

325 bln

350 bln

375 bln

400 bln

425 bln

Jan-04 Mar-05 Jun-06 Sep-07 Dec-08 Feb-10 May-11 Aug-12

Trailing 12 Month Cigarettes Shipped YOY Shipment Declines %



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way system, noting that $170 billion in annual capital investment is needed to signifi cantly improve highway conditions and performance, with an additional $20 billion needed each year to address the county’s bridges, with one in nine rated as structurally defi cient. With state revenues just recovering from the Great Recession, and some states reducing taxes, toll road cash boxes will increasingly be tapped to secure bonds issued to fi nance non toll projects, increasing leverage of many toll systems. Unless vehicle traffi c increases in coming years, we anticipate continued pressure on the toll road sector. Alan Schankel

Water and Sewer (Sector Outlook - “Stable”)

Credit Quality will Remain “Stable” Despite Drought & Infrastructure Concerns

We expect municipal water and sewer credit quality to remain “Stable” in 2014 despite continuing worries about weather conditions and aging infrastructure. The essential nature of water and strong fi nancial ratios for operators in the sector cause us to recommend this sector but with a caveat based on regions. Water scarcity, whether it ends up being simply a myth or not, is a larger issue depending upon the region of the U.S. And drought conditions in the western United States could be problema-

We anticipate continued pressure on the toll road sec-tor.

We expect municipal wa-ter and sewer credit quality to remain “Stable” in 2014 despite continuing worries about weather conditions and aging infrastructure.

.

Water scarcity, whether it ends up being simply a myth or not, is a larger issue de-pending upon the region.

Vehicle Miles Traveled has Been Flat Post-Recession

Source: Federal Highway Administration and Janney FIS.

2,000 bln

2,300 bln

2,600 bln

2,900 bln

3,200 bln

1992 1996 2000 2004 2008 2012

Number of Municipal Defaults by Sector (Moody’s Rated), 1970-201229

22

43 3

2 2 21

0

5

10

15

20

25

30

Housing Hospital & Health

Infrastructure Education Cities Utilities Water & Sewer

Counties Other

Source: Moody’s and Janney FIS.



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tic, especially if consumers decrease use considerably. From a demand standpoint water is an es-sential product consumers cannot do without and provides benefi t from low levels of payment delinquency. This stable collection ability and our expectation that demand will remain constant even as prices increase are also positives for the sector. We expect future debt levels to rise to meet infrastructure demands but ratios should remain at positive levels in the near term. It is not surpris-ing to us that there have only been two defaults (Moody’s rated) in the water and sewer sector. We believe this experience is a strength investors should not ignore.

Challenges issuers in the sector might face in the near to medium term include environmental con-sent decrees, potential increased capital and debt needs to meet environmental regulations as well as stress at the local government level, which may lead to use of water and sewer system revenues to supplement strained local government budgets, as we also noted in the public power section. Tom Kozlik

PUERTO RICO DOWNGRADED TO BELOW INVESTMENT GRADE

All Three Major Rating Agencies Took Negative Actions in February

The month of February was very busy for Puerto Rico general obligation ratings and other credits related to the island economy. For some time the market was pricing in downgrades to below invest-ment grade, and in February the rating agencies fi nally acted.

Standard and Poor’s was fi rst. On Tuesday February 4th S&P downgraded Puerto Rico’s general obli-gation rating to BB+ from BBB- and the rating agency kept the rating on “CreditWatch with negative implications”. Later that week, on Friday February 7th, Moody’s downgraded the GO two notches to Ba2 from Baa3 and Moody’s kept a “Negative” outlook on the credit. Then, Fitch followed the trend at the beginning of the following week when it downgraded the GO rating two notches to BB from BBB-. Fitch also kept a “Negative” outlook on the credit rating.

For more details about the rating downgrades to below investment grade please see our recent analysis of the negative rating actions in the following Janney Municipal Market Notes. Tom Kozlik

Puerto Rico Expects to Bring Some Supply

As we go to publication the municipal market awaits what is expected to be the largest municipal issue thus far in 2014, $2.8 billion Puerto Rico GO (Ba2/BB+/BB). Details on timing, structure and pricing of the anticipated bond issue are lacking. Despite downgrades to below investment grade by all three rating agencies early in February, trading levels of larger blocks of various Puerto Rico issuers have improved in recent weeks, with yields declining and credit spreads narrowing across maturities. A Commonwealth sponsored February 18 investor webcast provided a broad array of information, including data about short term liquidity needs. If the planned bond issue is success-ful, most of the proceeds will go towards refi nancing short term loans and requirements including the fi nancing of past and current debt service requirements; paying off short term notes; fi nancing a portion of the current year budget defi cit; and swap termination fees. If Puerto Rico is successful in transitioning a long list of short term debt into long term bonds, it will forestall a liquidity crunch and give the Commonwealth fi nancial team much needed breathing room.

The longer term issue for Puerto Rico is the contracting economy, which, with only a few brief gaps, has been in recession since 2006. Without economic growth, Puerto Rico will fi nd it increasingly dif-fi cult to support its mountainous debt load. Aggravating the island’s economic stagnation is the loss of population, which has exceeded 1% of the population annually in recent years, with much of the

It is not surprising to us that there have only been two de-faults (Moody’s rated) in the water and sewer sector.

The month of February was very busy for Puerto Rico general obligation ratings and other credits related to the island economy.

.

Without economic growth, Puerto Rico will fi nd it in-creasingly diffi cult to support its mountainous debt load.

Recent Janney Puerto Rico Related Research Notes

Source: Janney FIS.

Date Janney Title Summary

02/11/14Puerto Rico - Moody's and Fitch

DowngradesMoody's & Fitch downgraded Puerto Rico 2 notches to Ba2

and BB, outlooks still "Negative"

02/06/14 Puerto Rico - S&P DowngradeS&P downgraded PR to below investment grade (BB+), retains "Watch" for additional negative rating actions



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population loss focused on younger, more educated residents.

Investing in bonds of Puerto Rico issuers remains a risky proposition. The upcoming new issue will be closely watched. There are reports of signifi cant demand for what will be a high yield offering, but if the sale were to fail or if the targeted amount is not nearly achieved, the recently buoyant market conditions could reverse quickly. If the sale is successful, Puerto Rico will gain time to execute its economic recovery plans, although headwinds to economic improvement are strong. Alan Schankel

DETROIT’S PLAN OF ADJUSTMENT

Reflections on Detroit

Last week Detroit publicly released its Plan of Adjustment, a key milestone in the bankruptcy pro-cess being managed by federal bankruptcy judge Steven Rhodes. The initial Proposal for Creditors submitted by the Detroit Emergency Manager last June, divided the creditors into two major buckets - Secured and Unsecured as noted in the table. The Plan of Adjustment put meat on the bones of the original proposal, with more discrete treatment of creditor classes than the initial proposal. The plan also considered the city’s future viability, specifying funds to be invested in improved police and fi re services, better street lighting, and updated technology among other efforts.

Under the plan, general obligation bondholders would receive new securities valued at about 20 cents on the dollar. Water and sewer bondholders would receive recovery closer to 100%, although it could come in the form of new securities with weaker security provisions, lower coupons abroga-tion of call protection in some cases. The unfunded portion of pension plans would effectively re-cover closer to 30% thanks to contributions from a group of private foundations as well as proposed state funding. Certifi cate of Participation holders would receive nothing under the plan of adjust-ment and swap payments are being negotiated.

Investing in bonds of Puerto Rico issuers remains a risky proposition.

Last week Detroit publicly re-leased its Plan of Adjustment, a key milestone in the bank-ruptcy process.

Under the plan, general obli-gation bondholders would re-ceive new securities valued at about 20 cents on the dollar.

From the Emergency Manager’s Initial Proposal

Source: Proposal for Creditors as of June 14, 2013 and Janney FIS.

Detroit - Unsecured Debt Detroit - Secured DebtGO Bonds/Notes $641 MM Sewer Bonds (Sew Revs) $3,372 MMCOPs (Service Contract) $1,452 MM Water Bonds (Water Revs) $2,556 MMUnfunded OPEB Liabilities $5,700 MM Secured GO (State Aid) $440 MMUnfunded Pension Liabilities $3,500 MM Swap Payments (Gambling Tax) $879 MMOther Liabilities $300 MM Other $97 MMTotal Unsecured Liabilities $11,593 MM Total Secured Liabilities $7,344 MM

Puerto Rico Yields Fell Post-Downgrade

Source: MSRB EMMA PR GO 5% of 2014 $1 million plus trades, daily avg yield and Janney FIS.

4.00%

6.00%

8.00%

10.00%

01/11/13 05/09/13 07/10/13 10/17/13 01/02/14 02/06/14



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The 440 page proposal has been called “skeletal” by creditors, with many details yet to be expanded upon, and others missing, but the city, with support of Judge Rhodes, is attempting to keep the process moving, with a trial on the plan scheduled to begin on June 16. During a February 19 hear-ing, bond insurers argued that unlimited tax general obligation bonds should be treated as secured bonds since voters approved the property tax levy which pays debt service, but the city argued that this voter approval does not constitute a lien on the revenue in favor of bondholders. The judge said he planned decision on the issue in two to three weeks.

The resolution to this argument is critical for municipal bond investors. If the city is successful in its argument, and GO bondholders (insurers) receive 20% recovery, it calls into question the security of the general obligation pledge for other issuers, particularly those in Michigan. Some analysts make the valid argument that investors should require higher yields for GO bonds issued in states that allow bankruptcy and do not give GO bondholders a secured lien on tax revenues. We believe the more meaningful takeaway is the importance of underlying creditworthiness. Alan Schankel

THE PENNSYLVANIA STATE INTERCEPT PROGRAM FOR SCHOOL DISTRICTS

A Summary

The PA State Intercept Program for School Districts is based on the Commonwealth School Code’s intercept provisions, which enforces the payment of school districts’ bond debt service. It provides that the Secretary of Education will withhold current or future Basic Education Funding or state aid payments from a school district that fails to make a debt service payment and remit the funds directly to the paying agent bank for the benefi t of bondholders.

There are two pre-default programs and one post-default mechanism. Moody’s revised its method-ology for rating school districts using the post-default program in the fall of 2013. Moody’s is now using a “bottom-up” approach where the enhanced rating also refl ects the underlying credit char-acteristics of the school district. This new methodology changed the “enhanced” post-default rating for many PA school districts, and Moody’s withdrew ratings for 38 issuers. Investors should make a note of these changes. We still think the PA State Intercept Program is a positive for PA school dis-trict bond investors. Investors need to remember that the enhanced ratings from the pre-default and post-default PA State Intercept Program DO NOT replace the underlying rating of the school districts.

Please also see the report titled, “The Pennsylvania State Intercept Program for School Districts - An Updated and Comprehensive Review” for an in-depth look at the Pennsylvania State Intercept Pro-gram for School Districts published on January 22, 2014. Tom Kozlik

We believe the more mean-ingful takeaway is the impor-tance of underlying credit-worthiness.

The PA State Intercept Pro-gram for School Districts is based on the Commonwealth School Code’s intercept pro-visions, which enforce the payment of school districts’ bond debt service.

.

Please also see the report ti-tled, “The Pennsylvania State Intercept Program for School Districts - An Updated and Comprehensive Review” for more.

The PA School District Intercept Mechanisms

State aid payments can be “intercepted”

PA School Districts PA State Government

PRE-DEFAULT- STATE PUB. BUILDING AUTH.- Prior to the scheduled payment date, based on an agreement between the State Dept. of Education (DoE) & the school district (SD) the DoE intercepts

state aid and sends directly to paying agent

State aid payments make up 10%-78% of school district revenues (40% avg.) in PA

PRE-DEFAULT- FISCAL AGENT OPTION (Section 633)- If a school district has not deposited funds prior to the payment date, based on an agreement between the DoE and the SD, state aid is intercepted by the

DOE and sent directly to paying agent

POST-DEFAULT (Act 150)- After school district misses a scheduled payment, DoE intercepts state aid and sends directly to paying agent

Paying Agent Bank

Source: Janney FIS.



Select Recent Changes to Ratings & Outlooks (as of Feb. 28, 2014)

Source: Moody’s; S&P; Fitch and Janney FIS.

Issuer State Recent Rating Action DateUnderlying Rating(s)

Notes

W. Brandywine Twp Auth PA Downgraded to BBB- from A- by S&P 19-Feb-2014 BBB- Persistant negative fi nancial performance

Cedar Crest College PA Downgraded to BB+ from BBB- by S&P 21-Feb-2014 BB+ Enrollment pressures and neg op margins17 GARVEE Issues NA Dwngrd one notch by Moody's, neg outlook 18-Feb-2014 Various Increased risk of interuption of paymentsJefferson County AL Upgraded to Ba3 from Caa3 by Moody's 18-Feb-2014 Ba3/BBB Recent exit from Chapter 9 bankruptcy

Wstcsr Cty Health Corp NY Placed on review for downgrade by Moody's 19-Feb-2014 A3 Prospective merger w St. Francis Hosp.

Easton School Dist PA Downgraded to Aa3 from Aa2 by Moody's 13-Feb-2014 Aa3 Op. defi cits and narrowing reserves

Lancaster (County of) PA Outlook lowered to Negative by Moody's 11-Feb-2014 A1 Operating defi cits, low reserves, swap exp

Puerto Rico GO PR Downgraded to BB from BBB- by Fitch 11-Feb-2014 Ba2/BB+/BB Reduced fi nancial fl ex., weak economy

U of Puerto Rico PR Downgraded to Ba3 from Ba1 by Moody's 10-Feb-2014 Ba3/BB+ Enrlmnt. stagnated, exposure to state GOPuerto Rico GO PR Downgraded to Ba2 from Baa3 by Moody's 7-Feb-2014 Ba2/BB+/BB Years of defi cit fi nancing, pensionPuerto Rico GO PR Downgraded to BB+ from BBB- by S&P 4-Feb-2014 Ba2/BB+/BB Years of defi cit fi nancing, pension

University of Puerto Rico PR Downgraded to BB+ from BBB- by S&P 4-Feb-2014 Ba3/BB+ Enrlmnt. stagnated, exposure to GO

Rollins College FL Downgraded to A2 from A1 by Moody's 5-Feb-2014 A2 Stagnate tuition rev, high leverage

Ithaca (City of) NY Removed from review by Moody's 29-Jan-2014 Aa2 Received FY12 information

Fresno (City of) CA ICR dwngrd to Baa1 from A3 by Moody's 28-Jan-2014 Baa1/BBB- Persistant weaknesses of economy

Puerto Rico GO PR Placed on CreditWatch Negative by S&P 24-Jan-2014 Baa3/BBB-/BBB-Weakening liquidity, chronic budget

defi citsPlattsburgh (City of) NY Downgraded to A- from A+ by S&P 23-Jan-2014 Aa3/A- Structural imbalances, new criteria

California (State of) CA Outlook revised up to Positive by S&P 14-Jan-2014 A1/A/A Budget proposal to build reserves

Polytechnic Inst of NY NY Upgraded to AA- from BBB- 14-Jan-2014 AA- Based on NYU acquisitionCurrituck (County) NC Upgraded to AA from AA by S&P 13-Jan-2014 Aa3/AA Based on new criteria

Yeshiva University NY Downgraded to B1 from Baa2 by Moody's 9-Jan-2014 B1/A Extremely narrow liquidity, defi cits

Poughkeepsie (City of) NY Downgraded to Baa3 from Baa2 by Moody's 6-Jan-2014 Baa3 6 years of operating defi cits

Chester (City of) PA "A" underlying withdrawn by S&P 6-Jan-2014 Withdrawn Due to a lack of timely information

Philadelphia (City) PA Upgraded to A+ from A- by S&P 23-Dec-2013 A2/A+/A- Based on new criteria

Jefferson County AL Upgraded to BBB from D by S&P 20-Dec-2013 Ba3/BBB Recent exit from Chapter 9

New Jersey (State of) NJ Outlook lowered to Negative by Moody's 17-Dec-2013 Aa3/AA-/AA- Sluggish recovery & weak liquidity

North Dakota (ICR) ND Upgraded to AAA from AA+ by S&P 13-Dec-2013 Aa1/AAA Strong fi n. perform, oil extraction

Puerto Rico GO PR Placed on review for downgrade by Moody's 11-Dec-2013 Baa3/BBB-/BBB- Weakening liquidity, chronic defi cits

Lincoln Park (City of) MI Downgraded to BB from A+ by S&P 11-Dec-2013 BB Unwillingness to support lease pymnts

Illinois (State of) IL Outlook revised to Developing by S&P 10-Dec-2013 A3/A-/A- To developing on pension agreement

Fresno (City of) CA ICR downgraded to BBB- from BBB by S&P 7-Dec-2014 Baa1/BBB- Weak budgetary fl exibility

Collingswood (Boro of) NJ Upgraded to Baa2 from Baa3 by Moody's 5-Dec-2013 Baa2/AA- Reduced uncertainty about enterprise risk

Arizona (State of) AZ Outlook raised to Positive from Stable by S&P 27-Nov-2013 Aa3/AA- Improved balances, limited debt

Arizona (State of) AZ Outlook raised to Positive by Moody's 26-Nov-2013 Aa3/AA- Improved balances, limited debt

Collingswood (Boro of) NJ New GO rating "AA-" assigned by S&P 22-Nov-2013 Baa2/AA- Adequate economy & fl exibility

Puerto Rico GO PR Placed rating watch Negative by Fitch 14-Nov-2013 Baa3/BBB-/BBB- Weak liquidity, chronic defi cits



Source: Moody’s; S&P; Fitch and Janney FIS. (*) Denotes a Lease or Issuer Credit Rating.

State and Other Select Issuer Ratings (Feb. 28, 2014) Moody's S&P Fitch

State Rating Outlook Last Rating Outlook Last Rating Outlook LastAlabama Aa1 Stable 4/16/2010 AA Positive 11/27/2013 AA+ Stable 5/3/2010Alaska Aaa Stable 11/22/2010 AAA Stable 1/5/2012 AAA Stable 1/7/2013

Arizona (*) Aa3 Positive 11/26/2013 AA- Stable 12/23/2011 NR - -Arkansas Aa1 Stable 4/16/2010 AA Stable 1/10/2003 NR - -California A1 Stable 4/16/2010 A Positive 1/14/2014 A Stable 8/5/2013

Colorado (*) Aa1 Stable 4/16/2010 AA Stable 7/10/2007 NR - -Connecticut Aa3 Stable 1/20/2012 AA Stable 9/26/2003 AA Negative 7/2/2013Delaware Aaa Stable 4/30/2010 AAA Stable 2/22/2000 AAA Stable 4/13/2006

Dist. of Columbia Aa2 Stable 8/2/2013 AA- Stable 3/21/2013 AA- Stable 4/5/2010Florida Aa1 Stable 4/16/2010 AAA Stable 7/12/2011 AAA Stable 8/23/2013Georgia Aaa Stable 4/16/2010 AAA Stable 7/29/1997 AAA Stable 4/13/2006Hawaii Aa2 Stable 5/17/2011 AA Positive 10/10/2013 AA Stable 6/15/2011

Idaho (*) Aa1 Stable 4/16/2010 AA+ Stable 3/30/2011 AA Stable 4/5/2010Illinois A3 Negative 6/6/2013 A- Developing 12/10/2013 A- Negative 6/3/2013

Indiana (*) Aaa Stable 4/16/2010 AAA Stable 7/18/2008 AA+ Stable 4/5/2010Iowa (*) Aaa Stable 4/16/2010 AAA Stable 9/11/2008 AAA Stable 4/5/2010

Kansas (*) Aa1 Negative 4/6/2011 AA+ Stable 5/20/2005 NR - -Kentucky (*) Aa2 Negative 3/30/2011 AA- Negative 1/31/2013 A+ Stable 11/8/2012

Louisiana Aa2 Stable 4/16/2010 AA Stable 5/4/2011 AA Stable 4/5/2010Maine Aa2 Negative 5/17/2012 AA Stable 5/24/2012 AA Stable 1/23/2013

Maryland Aaa Stable 7/19/2013 AAA Stable 5/7/1992 AAA Stable 4/13/2006Massachusetts Aa1 Stable 4/16/2010 AA+ Stable 9/16/2011 AA+ Stable 4/5/2010

Michigan Aa2 Positive 3/28/2013 AA- Positive 4/2/2013 AA Stable 4/2/2013Minnesota Aa1 Stable 7/30/2013 AA+ Stable 9/29/2011 AA+ Stable 7/7/2011Mississippi Aa2 Stable 4/16/2010 AA Stable 11/30/2005 AA+ Negative 11/5/2013Missouri Aaa Stable 7/19/2013 AAA Stable 2/16/1994 AAA Stable 4/13/2006Montana Aa1 Stable 4/16/2010 AA Stable 5/5/2008 AA+ Stable 4/5/2010

Nebraska (*) Aa2 Stable 4/16/2010 AAA Stable 5/5/2011 NR - -Nevada Aa2 Stable 3/24/2011 AA Stable 3/10/2011 AA+ Stable 4/5/2010

New Hampshire Aa1 Stable 4/16/2010 AA Stable 12/4/2003 AA+ Stable 4/5/2010New Jersey Aa3 Negative 12/17/2013 AA- Negative 9/18/2012 AA- Stable 8/17/2011New Mexico Aaa Stable 7/19/2013 AA+ Stable 2/5/1999 NR - -

New York Aa2 Positive 8/22/2013 AA Positive 8/27/2012 AA Positive 5/31/2011North Carolina Aaa Stable 1/12/2007 AAA Stable 6/25/1992 AAA Stable 4/13/2006

North Dakota (*) Aa1 Stable 4/16/2010 AAA Stable 12/13/2013 NR - -Ohio Aa1 Stable 3/16/2012 AA+ Stable 7/19/2011 AA+ Stable 4/11/2011

Oklahoma Aa2 Stable 4/16/2010 AA+ Stable 9/5/2008 AA+ Stable 4/5/2010Oregon Aa1 Stable 4/16/2010 AA+ Stable 3/10/2011 AA+ Stable 4/5/2010

Pennsylvania Aa2 Stable 7/16/2012 AA Negative 7/19/2012 AA Negative 7/16/2013Puerto Rico Ba2 Negative 2/7/2014 BB+ Negative 2/4/2014 BB Negative 2/11/2014

Rhode Island Aa2 Negative 7/1/2013 AA Stable 4/22/2011 AA Stable 7/18/2011South Carolina Aaa Stable 12/7/2011 AA+ Stable 7/11/2005 AAA Stable 4/13/2006

South Dakota (*) Aa2 Stable 5/27/2010 AA+ Stable 3/25/2011 AA Stable 4/5/2010Tennessee Aaa Stable 12/7/2011 AA+ Stable 11/5/2013 AAA Stable 4/5/2010

Texas Aaa Stable 4/16/2010 AAA Stable 9/27/2013 AAA Stable 4/5/2010Utah Aaa Stable 4/16/2010 AAA Stable 6/7/1991 AAA Stable 4/13/2006

Vermont Aaa Stable 4/16/2010 AA+ Positive 9/17/2012 AAA Stable 4/5/2010Virginia Aaa Stable 7/19/2013 AAA Stable 11/11/1992 AAA Stable 4/13/2006

Washington Aa1 Stable 7/19/2013 AA+ Stable 11/12/2007 AA+ Stable 7/19/2013West Virginia Aa1 Stable 7/9/2010 AA Stable 8/21/2009 AA+ Stable 7/8/2011

Wisconsin Aa2 Stable 4/16/2010 AA Stable 8/15/2008 AA Stable 4/5/2010Wyoming (*) NR - - AAA Stable 5/3/2011 NR - -



Municipal Credit Rating Scale and Definitions

Source: Moody’s; S&P; Fitch and Janney FIS.

Rating Agency

Moody's S&P Fitch Defi nition

Investment Grade

Aaa AAA AAA Exceptionally strong credit quality and minimal default risk.Aa1 AA+ AA+ Upper medium grade and subject to low credit risk.Aa2 AA AA Upper medium grade and subject to low credit risk.Aa3 AA- AA- Upper medium grade and subject to low credit risk.A1 A+ A+ Strong credit quality and subject to low default risk.A2 A A Strong credit quality and subject to low default risk.A3 A- A- Strong credit quality and subject to low default risk.

Baa1 BBB+ BBB+ Subject to moderate risk and possess some speculative characteristics.Baa2 BBB BBB Subject to moderate risk and possess some speculative characteristics.Baa3 BBB- BBB- Subject to moderate risk and possess some speculative characteristics.

Sub-Investment Grade

Ba1 BB+ BB+ Weak credit quality with speculative elements and substantial credit risk.Ba2 BB BB Weak credit quality with speculative elements and substantial credit risk.Ba3 BB- BB- Weak credit quality with speculative elements and substantial credit risk.B1 B+ B+ Very weak credit quality, very speculative with high credit risk.B2 B B Very weak credit quality, very speculative with high credit risk.B3 B- B- Very weak credit quality, very speculative with high credit risk.

Caa1 CCC+ CCC+ Extremely weak credit quality and subject to very high credit risk.Caa2 CCC CCC Extremely weak credit quality and subject to very high credit risk.Caa3 CCC- CCC- Extremely weak credit quality and subject to very high credit risk.Ca CC CC+ Highly speculative and are in or near default with some prospect for recovery.

C CC Lowest class of rated bonds and may be in default with little prospect for recovery.CC- Lowest class of rated bonds and may be in default with little prospect for recovery.

D D DDD Issuer is in default and/or has failed to make a payment.



Source: Janney Fixed Income Strategy.

Janney Municipal Bond Market Publications Title Date Pub Notes

Municipals: Positive but Tepid Demand February 24, 2014 Weekly Modest mutual fi nd infl ows Moody's and Fitch Downgrade - Puerto Rico February 11, 2014 Note Moody's & Fitch downgraded GO below investment grade

Municipals: Puerto Rico Downgrades February 10, 2014 Weekly A Review of recent downgrades related to Puerto RicoS&P Downgrade - Puerto Rico February 6, 2014 Note S&P downgraded GO below investment grade

Municipals: Low January New Issue Volume February 3, 2014 Weekly Volume is lower but new money issuance is risingLower Yields Breeds Duration Adjustment January 27, 2014 Weekly Opportunity to manage duration by realigning portfoliosPA Intercept Program for School Districts January 22, 2014 Note In-depth Look at the mechanisms and Moody's changes

Municipals: A Good Start to 2014 January 13, 2014 Weekly Munis enjoyed a strong start for the year amid light supplyJanney Outlook for Local Governments January 7, 2014 Note Outlook still "Cautious"

U.S. State Fiscal Health Update January 6, 2014 Note "Stable" Outlook for U.S. States- full steam aheadMunicipals: Fewer New Munis January 6, 2014 Weekly Borrowing for projects remains below pre-recession pace

A Unique Local Govt Refunding Strategy December 19, 2013 Note IL school districts funding escrows with IL GOsThe Municipal Market in 2014 November 22, 2013 Monthly We highlight 5 events/issues we expect to be big

Municipals: Jefferson Cty, AL and Puerto Rico November 25, 2013 Weekly Questionable debt structure and PR econ indicatorsMunicipals: Rating Action Divergence November 18, 2013 Weekly Diffi cult to rationalize upgrades by S&PConnecticut: A Review of State Issuers November 8, 2013 Note CT faced signifi cant economic challenges

Municipals: Puerto Rico Update November 4, 2013 Weekly Disclosure has improved and yields narrowedMunicipals: Old Normal Returns October 28, 2013 Weekly Market stabilizing, S&P's optimistic view

Municipals: Back to Normal? October 21, 2013 Weekly Growing primary market calendar post-shutdownMunicipals: Regional Economic Shutdown October 7, 2013 Weekly State & regions just around DC to be most affected

Puerto Rico: Island Visit and COFINA October 4, 2013 Note Sales & use tax revs growing despite weak economyU.S. State Fiscal Health Update October 3, 2013 Note Status of U.S. States largely secure, laggards remainMunicipals: Washington Crunch September 30, 2013 Weekly Commentary on outfl ows and DC interference

Debt Ceiling Debate Part II: Treat Uncertainty September 27, 2013 Monthly More uncertainty, but will be less impactful than in 2011M/T Ratios Continue to Retreat September 23, 2013 Weekly Sparse supply helps municipals stabilize

New Issuance & Outstanding Debt Declining September 16, 2013 Weekly Municipal issuers have reduced new money borrowingPuerto Rico Accomplishments and Challenges September 13, 2013 Note Fiscally better but headwinds remain

Taper, a New Fed Chief and War- Oh My! September 11, 2013 Monthly Advice: municipal investors stay composedReceiver Unveils "Harrisburg Strong" Plan August 27, 2013 Note A guide for handling municipal distress

A Bond Insurance Revival August 26, 2013 Weekly Bond insurance remains an important part of marketMuni Tax Considerations-Market Discount August 22, 2013 Note Investors should consider market discount ramifi cationsTrials and Tribulations- Lehman Like Move August 21, 2013 Monthly A new period of volatility for investors has begun

Tobacco Bonds August 19, 2013 Weekly Smoking declines may pressure pricesMotown's Bankruptcy Blues August 9, 2013 Note Bankruptcy process will be contentious and protracted

Creative Financings- Allentown, PA August 5, 2013 Weekly Structure can serve to reduce local stressDetroit fi les for Chapter 9 Protection July 19, 2013 Note Action not representative of credit conditions

Municipal: Technical Notes July 15, 2013 Weekly A focus on fund fl owsU.S. State Fiscal Health Update July 1, 2013 Note Tremendous amount of budget pressure for some states

Opportunities in Munis June 25, 2013 Note Good entry point for investorsMunicipal: Looking Back and Ahead June 24, 2013 Weekly A focus on fund fl ows, compares 2011, 2012 & 2013

A Look at Several Municipal Credit Topics June 20, 2013 Monthly Local governments on the periphery are examinedPuerto Rico Hgwy Trans- Bumpy Road June 13, 2013 Note Solvency requires additional revenues

Puerto Rico- The Clock is Ticking June 3, 2013 Note Need political action to avert downgrade21st Century Manufact. Renaissance June 3, 2013 Note Onshoring and reshoring jobs in the US

Why Municipal Bonds? May 16, 2013 Monthly Several reasons to consider municipal bondsBond Insurance Comeback? May 6, 2013 Weekly Increasing market share for insurance providers

State HFA MBS Pass-Through Bond May 2, 2013 Note An innovation in housing fi nance, strong relative valueU.S. State Fiscal Health Update April 29, 2013 Note State revenues are up for a 12th consecutive quarter

Eye on Economic Data- Rising Home Values April 9, 2013 Monthly Home values are rising, credit updates on outliersPuerto Rico On the High Yield Precipice April 2, 2013 Credit Much needed to prevent further downgrades

Mary Washington Healthcare, VA March 22, 2013 Credit Current fi nancial metrics resemble lower rated mediansSharon Regional Health System, PA March 18, 2013 Credit Outlines recent stresses and metrics

Build America Mutual Assurance March 12, 2013 Note A new insurer on the block, catching up to AssuredTennessee Valley Authority March 7, 2013 Note A self-funded government corporation

Good Samaritan Hosp of Lebanon, PA March 4, 2013 Credit Update on recent negative rating actionsSequester 2013- Limited for Municipals February 27, 2013 Monthly Meaningful GDP drag but limited municipal credit fallout

U.S. State Fiscal Health Update February 11, 2013 Note There are a limited number of states exposed to SequesterSequester and BABs February 11, 2013 FI Weekly Subsidy cuts and ERP trigger as a result of Sequester



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Analyst Certifi cation

We, Tom Kozlik and Alan Schankel, the Primarily Responsible Analysts for this report, hereby certify that all of the views expressed in this report accurately refl ect our personal views about any and all of the subject sectors, industries, securities, and issuers. No part of our compensation was, is, or will be, directly or indirectly, related to the specifi c recommendations or views expressed in this research report.

Defi nition of Outlooks

Positive: Janney FIS believes there are apparent factors which point towards improving issuer or sector credit quality which may result in potential credit ratings upgrades

Stable: Janney FIS believes there are factors which point towards stable issuer or sector credit quality which are unlikely to result in either potential credit ratings upgrades or downgrades.

Cautious: Janney FIS believes there are factors which introduce the potential for declines in issuer or sector credit quality that may result in potential credit ratings downgrades.

Negative: Janney FIS believes there are factors which point towards weakening in issuer credit quality that will likely result in credit ratings downgrades.

Defi nition of Ratings

Overweight: Janney FIS expects the target asset class or sector to outperform the comparable benchmark (below) in its asset class in terms of total return

Marketweight: Janney FIS expects the target asset class or sector to perform in line with the comparable benchmark (below) in its asset class in terms of total return

Underweight: Janney FIS expects the target asset class or sector to underperform the comparable benchmark (below) in its asset class in terms of total return

Benchmarks

Asset Classes: Janney FIS ratings for domestic fi xed income asset classes including Treasuries, Agencies, Mortgages, Investment Grade Credit, High Yield Credit, and Municipals employ the “Barclay’s U.S. Aggregate Bond Market Index” as a benchmark.

Treasuries: Janney FIS ratings employ the “Barclay’s U.S. Treasury Index” as a benchmark.

Agencies: Janney FIS ratings employ the “Barclay’s U.S. Agency Index” as a benchmark.

Mortgages: Janney FIS ratings employ the “Barclay’s U.S. MBS Index” as a benchmark.

Investment Grade Credit: Janney FIS ratings employ the “Barclay’s U.S. Credit Index” as a benchmark.

High Yield Credit: Janney FIS ratings for employ “Barclay’s U.S. Corporate High Yield Index” as a benchmark.

Municipals: Janney FIS ratings employ the “Barclay’s Municipal Bond Index” as a benchmark.

Disclaimer

Janney or its affi liates may from time to time have a proprietary position in the various debt obligations of the issuers mentioned in this publication.

Unless otherwise noted, market data is from Bloomberg, Barclays, and Janney Fixed Income Strategy & Research (Janney FIS).

This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent.

This report has been prepared by Janney and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specifi c features or securities available at a given time. Preliminary Offi cial Statements, Final Offi cial Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or fi nancial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. We have no obligation to tell you when opinions or information contained in Janney FIS publications change.

Janney Fixed Income Strategy does not provide individually tailored investment advice and this document has been prepared without regard to the circumstances and objectives of those who receive it. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. For investment advice specifi c to your individual situation, or for additional information on this or other topics, please contact your Janney Financial Consultant and/or your tax or legal advisor.

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