People. Ideas. Success. Guggenheim Partners, LLC Association of Defense Communities – 2012 Conference Financing Privatization Projects: Capital Markets Considerations August 7, 2012

 Prior to privatization: o The Department of Defense (DoD) owned and operated on-base housing facilities for military service members and their families o Funds for new construction, renovation and maintenance for the housing was part of the installation’s overall operating budget o This practice placed base commanders in the role of landlord in addition to overseeing their mission-driven responsibilities o This resulted in the quality of government-owned housing to deteriorate o By 1995, the average military housing unit was about 40 years old and had typically received minimal updates and maintenance o The generally poor condition of military housing was forcing service members to search off-base for adequate housing o Housing became a major issues as troop retention suffered in an all volunteer force  Privatization Initiative: o In 1996, Congress enacted the Military Housing Privatization Initiative (MHPI) legislation o MHPI allowed the military to partner with private developers to build and operate modern and attractive on-base housing o Private capital and leveraging government funds has proved to be a more efficient use of limited resources o Key structuring point is the securitization of rents provided through the service members’ Basic Allowance for Housing (BAH) o BAH is a key part of a military service members’ compensation o Since 1996, $24 billion in private capital has been raised in building and renovating over 204,000 housing units o The DoD provides the private developer a 50-year ground lease for existing housing that will be rebuilt or renovated o Under privatization the DoD has extracted itself from the housing business and vastly improved the quality of the housing o The DoD estimates that an additional $30 billion in private financing is still needed to complete the goals of the MHPI program. Overview of the Military Housing Privatization Initiative 2

 Ground Lease: o Financing is modeled after a traditional mortgage loan o Security of the financing is based on several market and base mission factors with no implicit Government Guaranty o The DoD partners with a private developer by entering into a 50-year ground lease between the two parties o The ground lease require no rent and is renewable with mutual consent for an additional 25 years o The ground lease obligates the developer to operate the housing and all associated improvements based on the lease terms o The developer is not granted ownership of the land or improvements as those assets are returned to DoD at the end of the lease  Source of Revenue: o The service members housing allowance or Basic Allowance for Housing (BAH) is the main revenue source o The intent/purpose of the BAH program is to provide military families with a fair and equitable housing allowance o The allowance is comparable to costs for housing in the market or private sector o BAH rates are set so that military families can afford suitable rental housing located a reasonable distance from their bases o BAH rates are set annually and are based on local submarket rents, utility costs and renter’s insurance  Partnership: o To facilitate the financing through the private debt markets the developer and the DoD create a public-private partnership o The two entities form an Limited Liability Corporation (LLC) to issue bonds for the ensuing construction and rehabilitation o The bonds are secured by the assignment of the leases and the rents Overview of the Military Housing Privatization Initiative 3

Military Housing – Historical Issuance by Service 4 All data compiled above from following sources: Guggenheim Partners, LLC database, Dept. of Defense, Moody’s, S&P, National PFG and Ambac.

Military Housing – Historical Issuance 5 All data compiled above from following sources: Guggenheim Partners, LLC database, Dept. of Defense, Moody’s, S&P, National PFG and Ambac.

Military Housing – Historical Issuance 6 All data compiled above from following sources: Guggenheim Partners, LLC database, Dept. of Defense, Moody’s, S&P, National PFG and Ambac.

Military Housing – Structuring Dynamics 7  Changes in Structuring Dynamics Four distinct eras in a relatively short time frame (1998 – 2012) Phase 1: Phase 2: Phase 3: Phase 4:2008-present Phase – 2003 Phase – 2005 Phase – 2008 Phase – present Credit ExecutionInsuredSenior / SubInsuredUninsured Min. Underlying Rating ABBB AA Stabilized DSC Ratio1.25x1.10x1.15x1.50x Growth 5-years3% / 3% 2% / 2% Mkt. Dependent Max 2% / 2% Primary Structured Developer/ Credit Enhancer Investment Banker/ Rating Agency Investment Banker/ Rating Agency Investor

Military Housing – Historical Issuance & Spreads 8 All data compiled above from following sources: Guggenheim Partners, LLC database, Dept. of Defense, Moody’s, S&P, National PFG and Ambac.

Military Housing – Historical Issuance 9 All data compiled above from following sources: Guggenheim Partners, LLC database, Dept. of Defense, Moody’s, S&P, National PFG and Ambac.

Military Housing – Historical Issuance 10 All data compiled above from following sources: Guggenheim Partners, LLC database, Dept. of Defense, Moody’s, S&P, National PFG and Ambac.

Military Housing – Color on Issuance History 11  Military housing market was highly fragmented in the beginning as credit and political risks were being scrutinized by the credit enhancers, rating agencies and investors.  By the end of 2007 ~85% of the overall market was credit enhanced by either MBIA/National or Ambac.  In 2008 issuance dropped by 80% as the loss of the AAA-rated credit enhancers was the key culprit.  In addition to the lack of credit enhancement, the market has had to adjust to wider spreads and the loss of Fannie Mae and Freddie Mac as key market participants.  Beginning in 2008 transactions are now structured to a AA-level as investors require high investment grade ratings on all new issues.  The lower leverage has further reduced the debt capacity of issuers and hampering the ongoing project development.  Recently investors have lightened up their holdings in the sector and most have stopped adding new paper due to negative headlines about the Defense budget.

Other Issues 12  Disclosure is very limited.  Insured deals have impaired ratings due to DSRF Surety or lack of ratings.  FY13 DOD budget. Current mark-up only has $32bb of mandated $48bb reductions per Budget Control Act of Beginning Jan additional $50bb in savings to be enacted per sequestration.  Per announcement by Administration on August 1 st – Military personnel accounts exempt from Sequestration cuts.  Limited liquidity in sector.  Most secondary trades are for small lots of high quality AA-rated paper. Most new deals have yields approaching 7% with a AA-rating.  With long term Treasury rates at historical lows our view is to be cautious when looking at long duration paper in this sector.

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