1. Municipals - Attractive relative value with favorable risk characteristics

2. 1 Downgrade of financial guarantors  Effectively increased the supply of A rated municipals since many insured bonds now trade based on their underlying credit ratings Failure of auction rate securities market and decrease in available bank liquidity  Resulted in an increase in fixed rate supply since these issues could not be refinanced with variable rate demand bonds (VRDBs)  There were $102 billion of auction rate securities refinanced out of a total of $166 billion Massive de leveraging of tender option bonds (TOBs)  Hedge funds that could not meet collateral calls  TOBs containing underlying bonds that were downgraded due to insurance  TOBs with liquidity guarantees from downgraded investment banks  Total amount of leverage that was unwound was as much as $150 billion Municipal bond mutual funds experienced strong outflows during the fourth quarter  AMG Data Services reported over $9 billion in outflows during the quarter Affect on municipal yields  Higher yield ratios to Treasuries  Steeper high grade yield curve  Wider credit spreads Impact of the financial crisis on the municipal market

3. 2 Municipal yield spreads: 10yr A – AAA February 28, 1999 - February 28, 2009 A decrease in municipal bond insurance has widened credit spreads Source: Thomson Financial, Deutsche Insurance Asset Management

4. 3 Outflows by mutual funds and de leveraging by hedge funds caused longer municipal yields to increase while shorter yields were falling Municipal yield curve: 30yr AAA – 2yr AAA February 28, 1999 - February 28, 2009 Source: Thomson Financial, Deutsche Insurance Asset Management

5. 4 Municipal default history Municipals have a much lower default rate than equivalent rated corporate credits Cumulative default rates Moody’s 1970-2006S&P 1986-2005 MunicipalsCorporatesMunicipalsCorporates Aaa/AAA0.00%0.52%0.00%0.44% Aa/AA0.06%0.52%0.00%0.81% A0.03%1.29%0.04%1.83% Baa/BBB0.13%4.64%0.31%5.82% Ba/BB2.65%19.12%1.35%18.29% B11.86%43.34%9.04%32.38% Caa/CCC-C16.58%69.18%34.31%53.05% Between 1970 and 2006, only 1 municipal credit in the general obligation or water and sewer revenue sector that was rated by Moody’s experienced a default –There were 41 total defaults in the Moody’s rated universe including 17 in the not for profit healthcare sector and 16 in the state and local housing sector

6. 5 Why do municipals have a low default rate? Ability to pay: State an local governments have broad power to raise taxes, rates and fees Willingness to pay: Most municipalities seek to protect their ratings to maintain access to capital markets Many states must legally pay bond interest before paying other expenses and require their local governments to do the same States may be the beneficiaries of federal stimulus during recession to avoid the pro cyclical nature of balancing a state budget It is more efficient for municipalities to preserve their market access by acting fiscally responsible and maintaining investment grade ratings

7. 6 The probability of state and municipal bankruptcy (Chapter 9) is also remote It is difficult for municipalities to file for bankruptcy  States may not file for bankruptcy  Municipalities in many states must get state approval in order to file for bankruptcy and then come under state control  Municipalities must prove insolvency including the use of increased taxes to pay their debts  Creditors may not force a municipality into bankruptcy  Chapter 9 does not provide for a liquidation of a municipalities assets  In most cases, municipalities in bankruptcy do not default on debt

8. 7 U.S. State General Obligation ratings changes 1974-76 Moody’sS&P Upgrade (10)Downgrade (10)Upgrade (4) Downgrade (3) AL A1 to AaCT Aaa to AaAK A to A+ CT AAA to AA AK Baa1 to A1CT Aa to A1MS A to A+ MA AAA to AA GA Aa to AaaDE Aa to A1WA AA to AA+ MI AAA to AA- HI A1 TO AaDE A1 to AWV AA to AA+ LA A1 to AaME Aaa to Aa MS A1 to AaMA Aa to A1 NV A to A1NJ Aaa to Aa NM Aa to AaaNM Aaa to Aa OK Aa to AaaNY Aa to A1 TN Aa to AaaNY A1 to A 1982-83 Moody’sS&P Upgrade (2)Downgrade (7)Upgrade (1) Downgrade (7) DE A1 to AaMI A to Baa1DE AA- to AA CA AA+ to AA ME Aa to AaMN Aaa to AaIL AAA to AA+ NH Aaa to AaMN AA+ to AA NH Aa to A1NY AA- to A+ OR Aa to A1RI AA to AA- WA A1 to AWA AA to AA- WI Aaa to AaWI AA+ to AA In past recessions, most states have efficiently managed their finances and have avoided wide spread downgrades

9. 8 U.S. State General Obligation ratings changes 2001-02 Moody’sS&P Upgrade (1)Downgrade (6)Upgrade (1) Downgrade (7) CT Aa3 to Aa2CA Aa2 to Aa3HI A+ to AA- CA AA to A+ CA Aa3 to A1CA A+ to A NJ Aa1 to Aa2CO AA to AA- NC Aaa to Aa1KY AA to AA- TN Aa1 to Aa2 NJ AA+ to AA WI Aa2 to Aa3TN AA+ to AA WI AA to AA- Notes: Out of 51 (including PR) states, Moody’s has no rating on 4. S&P rates 51, but not throughout the entire period. Moody’s introduced the modifiers (2 and 3) in 1997.

10. 9 Municipals vs. other asset classes: Risk vs. return From February 28, 1999 through February 28, 2009. Sectors listed in the graph above refer to Barclays indices. Standard deviation is a statistical measure of volatility. Generally, the greater the standard deviation, the greater the volatility. Standard deviation is subject to change. 1 Annualized – monthly standard deviation of return *Barclays Municipal Bond Index estimated income grossed up for 35% Federal Income tax for taxable bonds and 5.25% for municipals Return, % T-Bill Credit Barclays Aggregate ABS MBS UST BCMBI tax adjusted* High Yield Agency BCMBI Risk 1 Compared to the broad fixed income market, municipals offered attractive after- tax returns relative to risk

11. 10 Taxable Equivalent Yield Spreads: Municipals vs Industrial Corporates AAA Spread5yr AverageSpread5yr Average 2 year-73-081004 5 year-28032915 10 year895612164 15 year1566914570 30 year26610317189 Taxes applied are 35% for corporates and 5.25% for municipals Source: Barclays Capital Longer municipals have historically provided higher taxable equivalent yields than similar rated industrial corporate bonds March 2, 2009

12. 11 Conclusions Municipal credits will experience headline risk during 2009, but defaults should only affect smaller municipalities with small amounts of debt outstanding –The risk of default or bankruptcy is higher for project revenue bonds vs. bonds backed by a general obligation pledge or essential service revenues The municipal bond asset class allows an investor to lower idiosyncratic risk relative to corporate bonds –Longer maturity municipals provide higher taxable equivalent yields than some corporate bonds The current dislocation in the municipal market represents the transition back to a retail dominated market –Leveraged buyers are no longer the marginal buyer –Current valuations are not representative of the credit risk in the municipal market

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