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Updates on the U.S. Economy, Investment Markets, and Financing Strategies Prepared for: March 6, 2014 Bill Kielczewski SVP - Managing Director Institutional.

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Presentation on theme: "Updates on the U.S. Economy, Investment Markets, and Financing Strategies Prepared for: March 6, 2014 Bill Kielczewski SVP - Managing Director Institutional."— Presentation transcript:

1 Updates on the U.S. Economy, Investment Markets, and Financing Strategies Prepared for: March 6, 2014 Bill Kielczewski SVP - Managing Director Institutional Investments Huntington Capital Markets Dan VandenBosch VP - Director Public Finance Huntington Capital Markets

2 Introduction and Overview

3 Global Economic Growth – slow recovery continues 3 The IMF projects World Output to grow at 3.7% for 2014, up from 3.0% in “The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened,” said Olivier Blanchard, the IMF’s chief economist and director of its Research Department. “The drag from fiscal consolidation is diminishing. The financial system is slowly healing”. World Output Advanced Economies1.4%1.3%2.2%2.3% United States2.8%1.9%2.8%3.0% Euro Zone-0.7%-0.4%1.0%1.4% Japan1.4%1.7%1.7%1.0% United Kingdom0.3%1.7%2.4%2.2% Emerging and Developing Countries4.9%4.7%5.1%5.4% China7.7%7.7%7.5%7.3% India3.2%4.4%5.4%6.4% Latin America and Caribbean3.0%2.6%3.0%3.3% Middle East and North Africa4.1%2.4%3.3%4.8% Source: IMF website

4 4 All 4 of the worlds major central banks have implemented some form of quantitative easing in an attempt to increase their domestic growth rate. Globally, interest rates have increased year over year. With growth projected at 3.7% and inflation rates near or below growth rates, how much higher can they go? Global Economic Growth – Interest rates, FX, and global Q.E. CountryCredit Ratings Debt % GDP 10 Year IR 10 Year IR change YoY CPI YoYUnemployment Rate Currency % change YoY (USD) United StatesAA Aaa70%2.68%0.73%1.50%6.60%0.00% United KingdomAAA Aa189%2.71%0.62%2.00%7.10%4.79% GermanyAAA Aaa81%1.66%0.05%1.30%6.80%1.59% ItalyBBB Baa2127%3.68%-0.86%0.70%12.70%1.59% JapanAA- Aa219%0.61%-0.15%1.60%3.70%8.64% AustraliaAAA Aaa32%4.14%0.67%2.70%5.80%-12.78% ChinaAA- Aa332%5.50%0.88%2.50%--2.77% IndiaBBB- Baa52%7.50%0.89%9.13%-15.00% BrazilBBB Baa259%4.75%1.91%5.59%-20.90% Source: IMF website

5 U.S. Economy – can we reach our projected 3.0% GDP growth 5 The Federal Reserve projects U.S. GDP growth of 3.0% for Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, said he expects the economy to expand 3 percent in 2014 as the jobless rate falls to 6.2 percent by year-end, warranting a quicker tapering to bond purchases by the central bank. Policy makers made the first two cuts to asset purchases in December and January, slowing to $65 billion a month from $85 billion. “My preference is to scale back our purchase program at a faster pace to reflect the strengthening economy,” he said in a speech in Rochester, New York. “We must begin to back away from increasing the degree of policy accommodation in a manner commensurate with an improving economy,” Source: Bloomberg

6 U.S. Economy – Is this the best we can do 6 Leading Economic Indicators in February was 0.3% versus survey expectations of 0.3%. The 40 year average for the U.S. is 0.1% Source: Bloomberg

7 U.S. Economy – Is this the best we can do 7 LEI Leading Credit Indicators Index shows credit expansion slowing. Average rate of the LCI index over past 25 years is 0.1%. The current reading is -1.90% Source: Bloomberg

8 U.S. Economy – Is this the best we can do 8 Durable Goods Orders are negative for both readings thus far in The current reading is -1.0%; last months number was revised down to -5.30%. Both are well below our 0.8% historical average Source: Bloomberg

9 U.S. Economy – Is this the best we can do 9 Construction Spending shows signs of stabilization. The bottom looks to have been formed in 2009 and we are trending back to our historical average. The current reading is 0.1% vs. historical average of 0.5% Source: Bloomberg

10 U.S. Economy – Home Prices Rebound 10 Home Prices in the U.S. have bounced back from their 15 year lows during the credit crisis. Will this trend continue without the Fed’s Q.E. support? S&P/Case-Shiller Home Price Index Source: Bloomberg

11 U.S. Economy – How are Homes Sales 11 Home sales in the U.S. have slowed to -9.10%. Is there a correlation between buying a home and Government intervention in the market place? See below: Stimulus Package 1 st Time Home Buyer Tax Credit / QE’s 1-3 / Fed Tapering U.S. Pending Home Sales Index YoY QE 1 starts in 11/08 1 st Time Home Buyer Tax Credit added to Stimulus Package. 2/09 QE2 QE 2 11/10 QE 3 9/12 QE2 Fed announced “Tapering” Source: Bloomberg

12 U.S. Economy – Is Corporate America hiring 12 U.S. job openings are picking up after the “great recession” and we have made our way back to hiring levels. Are there enough “qualified” employees in our underemployment bucket to fill these new positions? Source: Bloomberg

13 U.S. Economy – Unemployment Rate at 6.60% 13 We are very close to the Federal Reserves 6.50% desired rate which they state will allow them to slow their accommodative policy. Will they follow through with an end to QE and look to raise the overnight rate anytime soon, or, change their playbook with the recent weakening economic data? Source: Bloomberg

14 U.S. Economy – Underemployment rate at 12.70%. 14 Do we have a “structural” employment problem within the U.S.? We are well off the high rate of 17.20%, but, we are also 5 years out from the start of the “great recession”. Why can’t these folks in the underemployment index match up with all the new hiring opportunities presented in the JOLT Index? 38% of business owners surveyed in the January 2014 NFIB say they can not find “qualified workers” in the U.S. work force Source: Bloomberg

15 Investment Strategies

16 Investing in the Current Market 16 Quantitative Easing and Federal Funds Rate Discussion The Federal Reserve has held the U.S. overnight rate near zero for the last 4.5 years. In their most recent meetings they started to “taper” Government Bond purchases by $10 Billion dollars. Most economists expect the Fed to continue with tapering and end their bond purchasing program (Q.E.) by the end of The Federal Reserve has also said that they will hold the target interest rate for Federal Funds Rate at 0 to 0.25 at least as long as unemployment remains above 6.5% and inflation remains below their accepted level of 2.0 – 2.50%. The Unemployment rate fell to 6.6%, but, the participation rate within that survey fell to 63%, near the lowest level since Inflation data for the U.S. in March showed the Fed’s favorite gauge, PCE core YOY, was at 1.10%. The market has started to adjusted to “tapering”, economic data, and the Federal Reserves forward guidance on rates by extending the dates at which it anticipates the overnight rate to increase. Please see the Chicago Board of Trades Fed Funds Futures Contracts on the next slide for expected date and rate changes.

17 Investing in the Current Market Fed Funds Futures Contracts 17 Source: Bloomberg

18 18 Bond Strategies; Portfolio Ladders and Barbells Ladder Strategy / Asset-Liability Match Staggers maturities of bonds in a portfolio and sets a schedule for reinvestment of proceeds Total Portfolio Benefits: Periodic maturities allow you to control liquidity based upon anticipated needs Interest rate volatility is reduced as portfolio is spread across different maturities and coupons Proceeds from the maturing investment can be used for the scheduled draw, or reinvested in another investment if it is not needed. Barbell Strategy Utilizes only short-term investments and longer term bonds Total Portfolio Benefits: Longer-term bonds provide higher interest rates, while shorter- term bonds provide liquidity Can help to mitigate risk of owning longer-term bonds in a rising (or anticipated to rise) interest rate environment by allocating just a portion of investments to longer-dated securities Maturities of shorter-term bonds can be reinvested in different types of bonds or other securities should market conditions change Portfolio Maturity Portfolio Maturity

19 Investing in the Current Market – “Roll down” the yield curve and use it’s “steepness” to your advantage. Changes in the U.S. Yield Curve 2010 / 2012 / Source: Bloomberg

20 Fixed Income Options for MI Government Entities: Overview 20 Time Horizon Short-Term (12 months and < ) Intermediate / Long Term (> 12 months) Relative Risk Risk-Free Treasury Bills Agency Discount Notes Government MMKT Treasury Notes/Bonds Agency Notes/Bonds Low Bank Deposit / MMKT Accounts Bank Certificates of Deposit Commercial Paper (IG A1/P1) Agency MBS Callable Agency Bonds MI Municipal Notes/Bonds Moderate

21 Financing Outlook and Strategies

22 Municipal Yields (Last 5 Years) 22 The MMD "AAA" curve is written daily to represent a fair value offer-side of the highest-grade AAA rated state GO's, as determined by the MMD analyst team. Source: Thomson Reuters. As of March 3, Years Ago Today 1 Month Ago 3 Months Ago 1 Year Ago (%) (Years) 10 year Michigan Municipal Bonds are currently trading at a 0.65% spread to “AAA” MMD 10 year Bonds. (Illinois Muni Bonds are trading at a 1.20% spread)

23 Municipal Bond Funds Suffered in 2013 but Investors are Starting to Come Back 23 MUNICIPAL BOND FUND FLOWS – PRESENT Source: ICI Institute..

24 Emergence of the Taxable Market  Taxable municipal issuance increased 17% in 2013  Approximately 40% of taxable proceeds were used for the refunding of outstanding indebtedness  The receptiveness from “cross-over” buyers in municipal offerings shows the trend of an emerging market that started out of the Build America Bond Program  The added buyer universe continues to add depth and liquidity to the municipal market 24 Source: Bond Buyer, Offering Documents Source: Bond Buyer TAXABLE ISSUANCE VOLUME $32,832 $38,364

25 With a Sharp Decline in Refunding's, New Bond Issues Fell 12.5% in MUNICIPAL MARKET ISSUANCE – 2013 Source: Bond Buyer

26 Michigan Municipal Market Issuance 26 Michigan Municipal Issuance Source: Michigan Municipal Advisory Council Michigan Community College Issuance $14,320,000 (1 Bond Issue) $92,065,000 (7) $44,465,000 (6)

27 But How Much Are We Missing As Borrowers Utilize Direct Bank Placements? 27 UNITED STATES FINANCIAL INSTITUTIONS – MUNICIPAL HOLDINGS 86% Increase since 2008 Source: Bond Buyer

28 Rating Changes

29 On 1/15/14 Moody’s Investor Services released a new rating methodology 29

30 Pension Adjustment Steps Allocates cost-sharing plan liabilities Discounts accrued liabilities using a market discount rate Determines the value of plan assets Calculates adjusted net pension liability Amortizes adjusted net pension liability Applies to calculation versus full value and to revenue 30

31 Refunding Opportunities

32 Refunding What is a Refunding? Issuance of new debt at lower interest rates to replace debt which is currently outstanding at higher rates A refunding of debt can also entail the issuance of new debt at either lower or higher interest rates to restructure the payments on existing debt. Budget relief Creates debt service capacity for new money Factors that make a refunding work: Lower Interest Rates Time Savings Target: 3% in minimum present value savings 32

33 Refunding - Continued Current – refunding completed within 90 days of the call date on the bonds being refunded Bond holders are notified and bonds are paid off Advance – refunding completed more than 90 days before the call date on the bonds being refunded Long Escrow period – escrow reinvestment rate is critical Only one advance refunding of a new money bond issue is permitted by the IRS Proceeds are “Escrowed” until call date then bond holders are paid off 33

34 Refunding - Continued Typically, 10 Years after the original borrowing, a 20 year bond interest rate can be replaced with a 10 year bond interest rate Today’s market allows issuers to capture: 1) Rolling down the Yield Curve 2) Historically Low Rates 3) Steep Yield Curve 34

35 Example – Tax Exempt Refunding 35

36 Example – Tax Exempt Refunding 36

37 Taxable Refunding 37 Advance refunding rules only apply to tax-exempt debt Issuers are permitted to refund an issue more than 90 days prior to the call date even if the issue has been advance refunded once if it uses taxable debt For the first half of 2013 spreads between taxable and tax-exempt rates were very narrow making it a very good tool to use Spreads have widened out and with the expectation that rates will remain low through 2014 it may make sense to wait to be able to use tax-exempt rates if an issue is callable 11/1/14 and becomes an current refunding as of 8/1/14

38 Build America Bonds

39 Build America Bond’s Build America Bonds are a taxable municipal bond program enacted by congress in 2009 and extended through December 31, The taxable bonds receive an interest subsidy(originally 35%) and at the time a comparable if not a lower cost option to tax-exempt bonds. On March 1, 2013, approximately $85 billion of federal budget cuts went into effect, meaning all subsidy payments for direct-pay municipal bonds, including BABs, to be paid between that date and Sept. 30 would be reduced by 8.7% through 9/30/13 and 7.2% from 10/1/13 to 9/30/14. With the subsidy cut, issuers started to look to redeem Build America Bonds at par plus accrued interest because they believe the cuts in their federal subsidy payments under sequestration has triggered the extraordinary redemption provisions in their bond documents. The bond documents said an “extraordinary event” would occur and trigger a call if there was a change to the federal tax code, pursuant to which the federal subsidy payment is reduced or eliminated.” 39

40 Build America Bond Structure 40 Subsidy shown is original 35%

41 Types of Call Features Extraordinary Redemption Provision (ERP) Percentage of Par Amount of bonds Make-Whole Provision 41

42 Make- Whole Call Calculation 42

43 Build America Bond Refunding 43

44 Bank Qualified Issues

45 Bank Qualified Banks are large buyers of municipal bonds. However, Banks may not deduct the carrying cost (the interest expense incurred to purchase or carry an inventory of securities) of tax-exempt municipal bonds. For banks, this provision has the effect of eliminating the tax-exempt benefit of municipal bonds. An exception is included in the Code that allows banks to deduct 80% of the carrying cost of a "qualified tax-exempt obligation." In order for bonds to be qualified tax-exempt obligations the bonds must be (i) issued by a "qualified small issuer," (ii) issued for public purposes, and (iii) designated as qualified tax-exempt obligations. A "qualified small issuer" is (with respect to bonds issued during any calendar year) an issuer that issues no more than $10 million of tax-exempt bonds during the calendar year. Qualified tax-exempt obligations are commonly referred to as "bank qualified bonds." Effectively two types of municipal bonds were created under the Act; bank qualified (sometimes referred to as "BQ") and non-bank qualified. Although banks may purchase non-bank qualified bonds they seldom do so. The rate they would require in order for the investment to be profitable would approach the rate of taxable bonds. As a result, issuers obtain lower rates by selling bonds to investors that realize the tax-exempt benefit. In contrast, banks have a strong appetite for bank qualified bonds that are in limited supply. As a result, bank qualified bonds carry a lower rate than non-bank qualified bonds 45

46 Bank Qualified - Continued Any issuer that is planning to issue less than $10 million of tax-exempt securities in a calendar year should consider designating the issue as bank qualified in order to obtain the associated interest cost savings. Issuers requiring more than $10,000,000 may be able to take advantage of bank qualification by issuing two series of bonds. For example, for a $20,000,000 financing, a $10,000,000 issue could be sold this year and one could be sold next year to obtain 2 bank qualified issues. Similarly, for a $25,000,000 financing, $10,000,000 could be sold as bank qualified bonds this year and a non-bank qualified $15,000,000 issue could be sold next year. 46

47 Bank Qualified Spreads 47

48 Appendix C: Disclaimer and Additional Considerations

49 49 Disclaimer This report has been prepared for informational purposes only, and does not constitute an offer, recommendation or solicitation to buy or sell any securities. The content of this report is based upon information generally available to the public from sources believed to be reliable. No representation is made that the information is accurate or complete or that any returns indicated will be achieved. Past performance is not indicative of future results. Price and availability are subject to change without notice. The Huntington Investment Company (HIC), or persons involved in the preparation or issuance of this material, may from time to time, have long or short positions in, and buy or sell, the securities, futures or options identical with those mentioned herein. HIC is a wholly owned subsidiary of Huntington Bancshares Incorporated (HBI) and is registered as a Broker Dealer with the NASD, and a member of SIPC. Investments are Not FDIC Insured, May Lose Value, and are Not Bank Guaranteed.

50 50 Additional Considerations  Huntington does not offer or provide accounting, tax or legal advice to its clients. Each client should seek his or her own, and Huntington advises you to seek your own, advisors for tax, accounting and legal issues in light of your own circumstances.  Although the statements of fact in this presentation have been obtained from and are based upon sources that Huntington believes are reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions, estimates and examples constitute Huntington’s judgment as of the date of this presentation and are subject to change without notice.  This presentation is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security or derivative product or a recommendation for you to utilize any product. This presentation also does not attempt to forecast future movements of market prices.  The information in this presentation provides a general overview of each of the topics addressed, and may include general information regarding certain of the U.S. legal, tax and accounting considerations that may affect the transactions described herein. The descriptions of such matters are necessarily general, do not address the situation of a particular client and do not purport to be complete.  The statements contained in this presentation to you are intended for your sole use. It may not and should not be relied upon or utilized by any other party without the express prior written consent of Huntington.  This presentation does not constitute an assessment of the creditworthiness or financial strength or weakness of the client or any dealer.  ® and Huntington® are federally registered service marks of Huntington Bancshares Incorporated.  © 2012 Huntington National Bank.


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