National Association of State Auditors, Comptrollers and Treasurers

Presentation MaterialsAugust 18 2009

David RushExecutive DirectorMorgan Stanley1221 Avenue of the Americas, 30th FloorNew York, NY 10019(212) 762-8277David.Rush@morganstanley.com

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Section 1

Market Update

Market Overview

MARKET UPDATE

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0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09

UST30Y.Yield USS30Y.Swap Rate MMDAAA30Y.Rates SIFMA

30-Year U.S. Treasury, 30-Year LIBOR and 30-Year “AAA” MMDYield (%)

16-Mar-08

JPMorgan announces acquisition of Bear Stearns

15-Sep-08

Lehman Brothers files for Chapter 11 Bankruptcy

• The tax-exempt market has recovered from the liquidity dislocation of Sep/Oct 2008

30-Year “AAA” MMD

10/22/08: 5.37%

08/09/09: 4.66%

Change: -0.71%

30-Year LIBOR

10/22/08: 4.11%

08/09/09: 4.57%

Change: +0.46%

30-Year U.S. Treasury

10/22/08: 4.09%

08/09/09: 4.60%

Change: +0.51%

• Build America Bonds are partially responsible for the outperformance in tax-exempt bonds Source Bloomberg, Thomson, Morgan Stanley

14-Feb-08

Failure of auction rate market

0.41%

4.60%4.66%

April 2009

First BAB deal issued

4.57%

Ratio of Tax-Exempts to Treasuries is Unusually High

MARKET UPDATE

4

60%

80%

100%

120%

140%

160%

180%

200%

220%

240%

Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09

Tax-Exempt to Taxable Ratio BABs Funding Level (Treasuries +250)

30-Year “A” MMD to 30-Year U.S. Treasury RatioRatio (%)

• The high ratio of tax-exempts to treasuries makes the 35% long-term subsidy for BABs very attractive

Source MuniMon

118%

100%

5

Section 2

Build America Bonds

Build America Bonds Market Strong

BUILD AMERICA BONDS

6

• The American Recovery and Reinvestment Act of 2009 was signed into law on February 17, 2009 and allows for the issuance of a new class of municipal bonds: Build America Bonds

• Allows governmental issuers to sell taxable debt until 2011 and receive a cash rebate from the U.S. Treasury equal to 35% of all interest paid for the term of the debt

• Since the Treasury gave guidance in April 2009, Build America Bonds financings have proven to be heavily used by issuers

• The BABs program has generated over $20 billion of issuance

– 16.6% of municipal bond issuance since mid April

– Includes issuers from 34 states

• Taxable investors are seeking exposure to municipal credit, which has caused a substantial decline in BABs credit spreads

• Morgan Stanley was in the market earlier this month with two sizable BAB financings for:

– $400 million Dulles Toll Road (Book-running Senior Manager)

– $825 million North Texas Tollway (Co-manager on BABs and Bookrunner on Tax-Exempt Bonds))

• BAB financings have been done by almost every category of Section 103 issuers

• While limited as to use (no refunding and no working capital financings), BABs have been instrumental in providing low cost financing for many important infrastructure projects

69

2724

97

0

20

40

60

80

100

Less than $25 Million $25 - $49 Million $50 - $99 Million $100 - $499 Million $500 Million and Greater

Principal Amount

Distribution of Build America Bond TransactionsBy Par Amount

Source U.S. Department of the Treasury. 7/20/2009

BUILD AMERICA BONDS

7

Major Morgan Stanley Senior Managed Build America Bond Transactions

Issuer Pricing Book-

runner Size Structure Ratings Pricing Coupon/Yield

Subsidy Adjusted

Yield

Dulles Toll Road (MWAA) 8/5/09 MS $400MM

37Y Term Bond with Sinking Fund; Make-Whole Call (T+50)

Extraordinary Make Whole Call (T+100) Baa1 / BBB+ 30Y: +300 7.462% 4.850%

North Texas Tollway Authority 8/3/09 GS $825MM

40Y Term Bond with Make-Whole Call (T+40)

Extraordinary Call (T+100) A2/A 30Y: +230 6.718% 4.367%

City of Cincinnati

(Water System) 7/22/09 MS $78MM

15Y and 25Y Terms with Sinking Funds;

Optional call in (2019); Make-Whole Call (15Y T+30, 25Y T+35);

Extraordinary Call (T+100) Aa1/AAA

10Y: +190

30Y: +205

5.390%

6.458%

3.504%

4.198%

Curators of the University of Missouri 7/16/09 MS/JPM $256MM

30Y Term with Sinking Fund;

Make-Whole Call (T+25);

Extraordinary Call (T+100) Aa2/AA 30Y: +155 5.960% 3.874%

Commonwealth of

Kentucky 6/25/09 MS $183MM

14Y and 20Y Terms with Sinking Funds;

Make-Whole Call (T+40 for 2023; T+35 for 2029); Extraordinary

Call (T+100) Aa3/A+/AA-

10Y: +250

30Y: +215

6.164%

6.573%

4.007%

4.272%

Indiana Finance

Authority 6/23/09 MS/GS $192MM

20Y Term with Sinking Funds;

Make-Whole Call (T+40);

Extraordinary Call (T+100) Aa3/AA+/AA 30Y: +220 6.596% 4.287%

University of Texas System 6/10/09 MS/JPM $331MM

32Y Term with Sinking Funds; Optional call in 2019; Make-Whole

Call (T+30); Extraordinary Call (T+100) Aaa/AAA/AAA 30Y: +160 6.276% 4.079%

Nebraska Public Power District 6/10/09 MS $50MM

17Y and 26Y Terms with Sinking Funds; Optional call in 2019;

Make-Whole Call (T+40); Extraordinary Call (T+100) A1/A/A+

10Y: +265

30Y: +260

6.606%

7.399%

4.294%

4.809%

Metropolitan Water Dist of So.

California 6/5/09 MS $78MM

17Y and 30Y Terms with Sinking Funds; Optional call in 2019;

Make-Whole Call (T+40); Extraordinary Call (T+100) Aa2/AAA/AA+

10Y: +205

30Y: +180

5.752% @ Par

6.25%/6.375%

3.739%

4.188%

Utah Transit Authority 5/13/09 MS $261MM

30Y Term with Sinking Funds; Make-Whole Call (T+30);

Extraordinary Call (T+100) Aa3/AAA/AA 30Y: +185 5.937% @ Par 3.859%

Illinois State Toll Highway Authority 5/12/09 MS/GS $500MM

15Y and 25Y Terms with Sinking Funds; Optional call in 2019 for

15Y maturity; Make-Whole Call (T+30); Extraordinary Call

(T+100) Aa3/AA-/AA-

10Y: +210

25Y: +200

5.293% @ Par

6.184% @ Par

3.440%

4.020%

State of California 4/22/09 MS/GS/ JPM/BC $5.23Bn

25Y and 30Y Bullets; Make-Whole Call (T+50); Extraordinary

Call (T+100) A2/A/A

30Y: +365

30Y: +365

7.50%/7.434%

7.55%/7.434% 4.832%

New Jersey Turnpike Authority 4/20/09 MS $1.38Bn

30Y Term with Sinking Funds; Make-Whole Call (T+50);

Extraordinary Call (T+100) A3/A+/A 30Y: +370 7.414% @ Par 4.819%

University of Virginia 4/15/09 JPM/MS $250MM 30Y Bullet; Make-Whole Call (T+40); Extraordinary Call (T+100) Aaa/AAA/AAA 30Y: +250 6.20%/6.222% 4.044%

Build America Bonds – Recent Market Activity

Build America Bonds Market Maturing QuicklyNew Issue Spreads Narrowing and Individual Transaction Size Decreasing

BUILD AMERICA BONDS

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Build America Bond Financings25/30Y Spreads and Transaction Size (BABs maturities over $5mm)

(bps)

100

150

200

250

300

350

400

April May June July August

AAA Aa1 Aa2 Aa3 A1 A2 A3

• The market for BABs is quickly maturing with pricing spreads narrowing and structures becoming more “muni-like”

– Term bonds are saleable with long sinking fund structures

– Serial maturities could become more common (Clark County, Nevada)

Many BABs transactions also are being

structured with 10Y par calls estimated

to cost approximately 40-50 bps

Notable BABs Transactions Statistics

Issuer Total Par (in $mm)

Spread (bps)

Cal $5,000 365

NJ Turnpike 1,375 370

MTA 750 350

UT Transit 261 185

Met Water 78 180

Nebraska 50 260

Notes

(1) Spread on 25/30Y Maturity

Large Taxable Fixed Income/BABs Investors

BUILD AMERICA BONDS

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• The overlap between taxable and tax-exempt investors is not insignificant, but small in terms of the overall pool of institutional investors

– For purposes of individual name diversification, certain investors may take into account their tax-exempt holdings when purchasing Build America Bonds

• Asset Managers are the largest buyers of Build America Bonds; however, Insurance Companies and Banks are also represented among the biggest active investors

• International investors potentially receptive to municipal taxable debt include money managers (HSBC, ING) and large Asian/Middle Eastern investors (including sovereign wealth funds)

New York

Boston

Philadelphia

Seattle

Minneapolis Milwaukee

ChicagoHartford

Austin

Atlanta

Denver

Los Angeles

Cedar Rapids

Charlotte

San Francisco

US. Investment Grade Target Investors

• Boston:• Fidelity (New

Hampshire)• John Hancock • Loomis Sayles• Mass Financial• Putnam • Standish • State Street Global

Research • Wellington• Income Research• Hartford: • Aetna• Cigna• Conning• GE Asset Mgmt.

(Stamford)• Knights of Columbus• Allianz

New England

• New Jersey:• Metlife• Prudential• SEIX• Chubb Insurance• Philadelphia:• Delaware• Vanguard• Aberdeen• Logan Circle

Mid-Atlantic

• Minneapolis:• Riversource

Investments• St. Paul• Thrivent• Galliard• FAF Advisors• Milwaukee:• Northwestern Mutual

Life• Strong

Midwest

• Microsoft• State of Washington

Seattle

• ING• Trusco

Atlanta

• San Francisco:• Wells Fargo • Barclays Global• Dodge & Cox• UCAL Regents• Wells Capital• Charles Schwab• Highmark• Franklin• Seneca• Sacramento:• Calpers• Calsters

San Francisco

• Allstate• Asset Allocation• Neuberger Berman• Northern Trust• PPM• State Farm• Legal & General

Chicago

• Aegon• Principal Insurance• Aviva Insurance

Iowa

Tallahassee

• AIG • Alliance • Blackrock • GSAM• JPMIM • Loews• Moore• New York Life • Teachers• Deutsche Asset Mgmt

New York• Newport Beach:• Pacific Mutual Life

Insurance • PIMCO • LA:• WAMCO • Payden & Rygel• Bradford & Marzec• Capital Research• MetWest• Transamerica• STW

Los Angeles

Build America Bonds ProgramTerms and Conditions

BUILD AMERICA BONDS

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• The U.S. subsidy to issuers is not a “line item” appropriation in Treasury’s annual budget, but rather will be part of Treasury’s general appropriation

Terms of the Program

Term: These provisions only apply to bonds issued before January 1, 2011, but apply for the life of the bonds.

Tax Status: Interest paid on the bond would be includable in gross income for federal income tax purposes.

Qualified Issuers: Only issuers that meet the standards of Section 1.103 of the Internal Revenue Code (governmental issuers) can issue the bonds.

Eligible Projects: 100% of the project proceeds from the bond issue must be used for capital expenditures that meet certain specifications.

Payment of Credit: The Secretary of the Treasury would direct the federal government to pay to the bond issuer 35% of the interest payable on each payment date, thereby lowering the costs on the original issuance.

Additional Considerations: The Issuer would still be bound to Section 1.148 of the Internal Revenue Code relating to arbitrage rules governing tax-exempt issues, net of the federal government credit.

Tax-Exempt Bonds vs. BABs: Structuring Considerations

BUILD AMERICA BONDS

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Tax-Exempt Bonds Build America Bonds (BABs)

Structural

Elements

Traditional bonds issued in the tax-exempt market

Coupon and principal paid by the issuer

Principal and Interest paid by issuer

Issuer receives 35% rebate of interest from the Treasury

Advantages Established market

Familiar funding vehicle

Achieves a lower funding cost than traditional tax-exempt debt

Allows the issuer to reach a new investor base for its bonds

Disadvantages Significantly higher interest costs compared to BABs on the long end

Less economic in short maturities

Cannot be used for refundings

10-year call option currently costs 40-50 bps

Amortization Combination of Serials / Terms

Can be issued at any maturity

Easily wrapped around existing Debt Service

Term Bonds

Generally 5Y, 10Y, 20Y or 30Y

Can achieve smooth bullet maturity with sinking fund

Callable Yes Pricing Dependent

Tax Status Tax-Exempt Taxable

• Non-callable (i.e. make-whole call) BABs are preferred by investors, although recently some have been issued as callable

• 10-year call option can cost 40-50 bps currently reflecting the more limited buyer base for callable bonds vs. the traditional non-call or make whole call structures to which corporate investors are accustomed

• BABs are not advance refundable in practice because of the treatment of the subsidy and the negative arbitrage likely to be associated therewith

• Overall deal size of at least $100 million to attract investor interest and allow for greater liquidity is ideal but issues of smaller size are saleable

Comparison of Funding Costs

BUILD AMERICA BONDS

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• Given the steeper municipal curve, Build America taxable debt is more cost effective on the long end

• Build America Bonds may afford the issuer significant interest savings

• Optional call provisions have been used on some recent transactions

– A 10-year call option would currently cost 40-50 bps

Market Conditions as of August 3, 2009

TERM TREASURY

YIELD

SPREAD (10-yr Call for 20 and 30-yr Bonds)

BOND YIELD

COST TO THE ISSUER

(NET OF 35% REBATE)

COMPARABLE INSURED TAX-EXEMPT YIELD

(10-yr Call)

SAVINGS TE (10-yr Call)

– TX (10-yr Call) Basis Points

5 2.66 5yr Tsy + 190 4.56 2.96 2.49 (47)bps

10 3.63 10yr Tsy + 200 5.63 3.66 3.76 10 bps

20(2) 4.40 30yr Tsy + 255 6.95 4.52 4.85 33 bps

30 4.40 30yr Tsy + 265 7.05 4.58 5.25 67 bps

(1) Preliminary, subject to change (2) 20-year maturity will price off 30-year Treasury

Generic A rated issuer

1.00

2.00

3.00

4.00

5.00

6.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Tax-Exempt Yields Taxable Yields (Net of Subsidy, 10-yr Callable)

Tax-Exempt Yields vs. Taxable Build America Bonds Yield CurveEstimated based on market conditions as of August 3, 2009

(%)

Build America Bonds Federal Subsidy Treatment

BUILD AMERICA BONDS

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• Most revenue bond issuers have treated the BABs subsidy as a top line revenue as opposed to a net against debt service

• For state general obligation BAB issuers treatment of subsidy is a state by state issue

– Budgeting

– Debt Limits

– Appropriation

The BAB subsidy can be treated in one of three ways:

1) Revenue: this method may hurt debt service limits and budgeting requirements

2) Net Against Debt Service via Deposit to Debt Service Fund: this is the preferred method

3) Deposit to Capital Improvement Fund: this method would reduce capital improvement requirements and would reduce future borrowing needs

Taxable/BAB Announce Deal

- Release POM and Roadshow

- Post Confirmed Ratings- Open Books

Gather Indications

Price Guidance / Revised Price Guidance

Price Talk/Launch

Allotments

Pricing

Tax-Exempt Retail Order Period (1 Day)

Institutional Pricing (1 Day)

Final Pricing

Allotments

Announce Deal- Release POM and Roadshow- Post Confirmed Ratings- Open Books

Gather Indications

Price Guidance/Revised Price Guidance

Price Talk/Launch

Allotments

Pricing

Announce Deal

Receive Confirmed Ratings

Mail POS

Investor Roadshow Presentation

Begin Rating Agency Process

Begin Drafting POS

Monitor Cost-Benefit Analysis of Tax-Exempt versus Taxable Issuance

Closing and Delivery of Bonds (2 Weeks)

BUILD AMERICA BONDS

Build America Bond Sample Financing TimelineFinancing Timeline

Taxable Build America Bond Marketing Combined or Tax-Exempt Only Marketing

Week 1-2

Week 3

Week 4

Week 5

Taxable/BAB Formal Marketing Period (1 Day)

Begin Rating Agency Process

Begin Drafting Build America Bond POM

Closing (5 days)

14

Closing (5 days)

BABs Mechanical Considerations

BUILD AMERICA BONDS

15

Payment of Interest

• Payment is “contemporaneously with each interest payment date under such bond"

• Initially, an issuer needs to submit a new form 8038-CP to claim the credit for each interest payment

– For a fixed-rate bond, the form needs to be submitted between 45 and 90 days before the interest payment date; the refund will be paid by that date

– For variable-rate bonds, the credit is paid quarterly on a reimbursement basis, based on the actual bond rates for the quarter

• The regulations expect a more streamlined approach for payment mechanics to be developed by 2010

Additional Documentation

• The issuer must irrevocably elect to designate the bonds as BABs before the bonds are issued, and the election must be reported on IRS form 8038-G

– The designation should be made (or delegated) in the issuer’s authorizing resolution/ordinance

• The issuance should also be reported on the 8038-G by checking Line 18, "Other", and inserting "Build America Bond (Direct Payment)”

Appendix A

Case Studies

16

• On August 5, 2009, Morgan Stanley completed the landmark $963.3 million inaugural financing for the Dulles Corridor Metrorail Project

• The Metropolitan Washington Airports Authority (MWAA) has a 60-year concession to operate and maintain the Dulles Toll Road and develop the Metrorail Project

– The Dulles Metrorail Project is a 23 mile extension of the existing Metrorail system that will provide service to Tyson’s Corner, the Reston/Herndon area, and provide a direct connection from Dulles International Airport to downtown Washington

• The purpose of the Series 2009 Bond was to pay for capital improvements to the Dulles Toll Road and fund the initial costs of Phase I of the Project

• Morgan Stanley developed a comprehensive marketing plan that included an on site in-person tour of the road along with an electronic roadshow

• Morgan Stanley worked with MWAA and its finance team to develop a credit structure that resulted in strong investor demand across the multiple liens and funding instruments

CASE STUDIES

Metropolitan Washington Airports Authority / Dulles Metrorail and Capital Improvements Projects

Transaction SummaryDulles Corridor Metrorail Project$963.3MM Series 2009 Bonds

• Morgan Stanley demonstrated its comprehensive capabilities in the transportation sector in serving as joint bookrunning senior manager for the inaugural financing of the Dulles Corridor Metrorail Project

– As the market leader in Build America Bond market, Morgan Stanley priced $400mm of Series 2009D BABs at attractive spreads with strong investor demand

Dulles Toll Road Revenue Bonds, Series 2009

17

Series 2009A

$198,000,000First Senior Lien CIBs

Series 2009B

$207,056,689Second Senior Lien CABs

Series 2009C$158,234,960

Second Senior Lien Convertible CABs

Series 2009D$400,000,000

Second Senior Lien BABs

• On August 3, 2009, Morgan Stanley served as Senior Manager on North Texas Tollway Authority’s $596.475 million restructuring

• The financing plan involved the termination of four swaps, release of a FGIC insurance policy, refundings for savings, a restructuring and a commercial paper takeout

• The bonds were issued in conjunction with $825 million Build America Bonds, which were issued to finance NTTA’s capital projects. Morgan Stanley served as co-manager on the Build America Bond transaction

• Morgan Stanley developed the financing model NTTA’s long term capital plan and ran cashflows for all three transactions during pricing. Morgan Stanley successfully achieved NTTA’s targeted coverage for its current and anticipated transactions despite challenging tax-exempt market conditions - allowing for a significant upsizing of the Build America issue

• To support the restructuring, Morgan Stanley underwrote $40 million of the 2009A Bonds

• The current refunding for savings achieved $1.4 MM net pv savings and 3.28% of refunded bonds

$418,165,000North Texas Tollway Authority First Tier Tax-Exempt Current Interest Bonds, Series 2009A

$178,310,000 Dallas North Tollway System

Revenue Bonds, Series 2005C

Ratings: A2/A-(Moody’s/S&P)

CASE STUDIES

North Texas Tollway Authority $418.165 Million Refunding and $178.310 Million Fixed-Rate Remarketing

North Texas Tollway Authority Summary of Transaction Terms

Series 2009A 2005C

Issuer:

North Texas Tollway Authority

Dallas North Tollway System

Ratings: A2/A A2/A

Structure / Yields:

2011 Serial / 2.65%

2012 Serial / 3.00%

2013 Serial / 3.20%

2024 Term / 5.90%

2028 Term / 6.10%

2039 Term / 6.34%

2019 Serial / 5.03%

2020 Serial / 5.35%

2021 Serial / 5.50%

2022 Serial / 5.65%

2023 Serial / 5.78%

2025 Term / 6.00%

Total Par Amount:

$418,165,000 $178,310,000

Call Feature:

1/1/2019 @ par 1/1/2019 @ par

Use of 2009A Proceeds:

• Commercial paper takeout

• Refunding of currently callable bonds for savings

• Restructuring to achieve debt service coverage requirements (1.50X on all debt through FY 2048)

• Partial termination of four existing swaps

• Refunding of bank bonds

Use of 2005C Proceeds:

• Fixed rate remarketing of bank bonds to avoid large swap termination payment

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Appendix B

Disclaimer

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This material was prepared by sales, trading or other non-research personnel of one of the following: Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. International Limited, Morgan Stanley Japan Limited and/or Morgan Stanley Dean Witter Asia Limited (together with their affiliates, hereinafter “Morgan Stanley”). This material was not produced by a Morgan Stanley research analyst, although it may refer to a Morgan Stanley research analyst or research report. Unless otherwise indicated, these views (if any) are the author’s and may differ from those of the Morgan Stanley fixed income or equity research department or others in the firm.

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Disclaimer

DISCLAIMER

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