Municipal Market Update

December 4, 2008

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Discussion Topics

Recent events in the capital markets

Impact on national and local municipal markets

Historical interest rates

Continued challenges with Bond insurers Commercial banks Investment banks

Summary

Contact information

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Timeline of Capital Markets Developments

Skyrocketing housing prices lured real-estate speculators

This created even more demand and drove the cycle further

US economy is healthy; interest rates are low and consumers feel confident

This helped push up real-estate values

With values escalating, lenders felt more confident about making mortgages to customers whose poor credit histories had prevented them from buying homes in the past

2000

Note: This timeline is highly simplified for discussion purposes

Sources: Ponder Investment Company research and NPR.org news articles

2006 2007

The mortgage market began seeing an increase in defaults and delinquency to a level that exceeded modeled expectations

Property values stopped increasing or started to decrease

Adjustable Rate Mortgages (ARM) began to reset higher

2008

Defaults in the mortgage market began to spill over into the asset-backed security and CDO markets and seeped into every area of the financial markets

There is great concern about the exposure of major investment banks, and several banks were downgraded

The rating agencies are concerned about the exposure of bond insurance companies, and a full review is initiated

Uncertainty and volatile markets continue as investors seek liquidity and safe credit structure

Volatility expected to continue

Recession expected to last until 2010

Sub-prime loans expanded to 20 percent of the mortgage market in 2006, from 9 percent a decade earlier

Home ownership reaches a record high of 69% in 2004

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A Historic Quarter for Wall Street

Week of Significant Events

September 15 • Lehman files for bankruptcy; Bank of America announces buyout of Merrill Lynch• AIG downgraded; government “Invests” $85 billion• Reserve Primary Fund “breaks the buck”

Treasury and Fed bolster Money Market Funds (“MMF”) with a guaranty program; extended to municipal market late in the week• Investor fears spurs flight to quality

Investors pull nearly $80 billion from money market funds The 3-month Treasury yield falls to near zero

• Global central banks join to unfreeze credit markets; U.S. Treasury announces $700 billion bailout plan• Goldman Sachs and Morgan Stanley, the only two remaining investment banks, become bank holding companies

September 22 • Morgan Stanley announces sale of up to $8.5 billion in stock to Japanese bank Mitsubishi• Warren Buffett’s Berkshire Hathaway announces a $5 billion investment in Goldman Sachs• FBI begins investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG for potential mortgage fraud• Washington Mutual is closed by the US government in the largest failure by far of a U.S. bank; the assets are sold to

JPMorgan Chase for $1.9 billion• EU government steps in with several major bailouts

September 29 • Citigroup agrees to acquire Wachovia’s banking operations for $2.1 billion in stock; later in the week, Wells Fargo offers $15.6 billion

• The House rejects the proposed bailout plan; the Senate approves the revised plan by a 74-25 vote; the House approved the revised plan by a vote of 263-171

• Commercial banks, investment banks and AIG borrowed a record $410 billion from the Federal Reserve

October 6 • Passage of the bail-out plan doesn’t allay market fears; the Dow drops below 9,000 for the first time since 2003• Fed announced a plan to buy commercial paper in an effort to thaw short-term lending markets• The Fed and several other foreign central banks lowered interest rates in an unprecedented coordinated effort• AIG to receive an additional $37.8 billion loan from the Fed• Treasury announces plans to buy stakes in a wide range of banks

October 13 • Volatile stock market continues• Report that housing starts fell to second lowest rate in 50 years• Hedge funds saw a record $210 billion drop in assets under management during the third quarter

Source: Various news reports; Citigroup market update presentation dated 10/23/08

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Week of Significant Events

October 20 • U.S. Government and N.Y. Attorney General open joint investigation into the $34.8 trillion credit-default swap market• Municipal bonds rally most in 26 years as the tax-exempt market thaws; yields drop 73 basis points in one week (nearly ¾ of

1%)• AMBAC and MBIA make bid for government help under rescue plan• Federal Reserve announces plans to shore up money market mutual funds

October 27 • Commodities head for their worst month since 1956 on concerns that a slump in global economic growth will sap demand for raw materials

• Commerce Department says gross domestic product contracted in the third quarter at the fastest annual pace since 2001

November 3 • U.S. Treasury announces its plans to sell $55 billion in long-term government debt this quarter as a slowing economy balloons the budget deficit to a record level

• U.S. Treasury announced major changes to its auction schedule, reflecting what is likely to be a record high $1 trillion-plus budget deficit this year

• JPMorgan Chase, UBS and Royal Bank of Scotland, three of the world’s biggest banks, say they expect further pain from the global financial crisis

• Financing arm of General Motors, GMAC, posted its 5th straight quarterly loss and said its mortgage unit may not survive

November 10 • Treasury Secretary Paulson announces plan to use the second half of the $700 billion financial rescue program to help relieve pressure on consumer credit, scrapping an effort to buy devalued mortgage assets

• General Motors stock drops 30% after an analyst cuts price target to zero• American Express gets Fed’s OK to become a bank holding company

November 17 • Mortgage write downs and rising audit costs could push Freddie Mac’s 2009 losses into the range of $20-$40 billion, according to an analyst

• China takes over Japan’s spot as the biggest foreign holder of Treasury bills, notes and bonds• Standard & Poor’s drops AMBAC from AA to A• Fears about deflation push Dow Jones to close below 8,000 for the first time since March 2003

A Historic Quarter for Wall Street (continued)

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Impact on the Municipal Market

The immediate impact on the municipal market was high interest rates and a halt to new bond issues coming to market

Flight to quality generally meant investment in U.S. Treasuries which has pushed benchmark treasury yields to 50-year lows with the 2-yr at 1.00% and the 10-yr at 2.93% as of 11/28/08

Massive out-flows from municipal money market funds resulted in significantly higher rates SIFMA Index (1) resets

Few new variable-rate demand bonds were issued Many commercial banks have been unwilling to provide LOC support for new issues during

this volatile time Investment banks have been reluctant to take on additional remarketing business when it

was so difficult to successfully remarket debt currently outstandingDaily Variable Rate Demand Bonds (“VRDBs”) have significantly out-performed weekly bondsNo new fixed-rate bond issues came to market for several weeks

1) The Securities Industry Financial Market Association Index is a 7-day index comprised of tax-exempt variable rate demand bonds (“VRDBs). The Index represents a cross section of national VRDB issues. The rate resets on every Wednesday afternoon and becomes effective on Thursday.

9/10 1.79% 10/22 2.28%9/17 5.15% 10/29 1.82%9/24 7.96% 11/5 1.26%10/1 5.74% 11/12 1.14%10/8 4.82% 11/19 1.12%

10/15 3.45% 11/26 1.03%

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Short-term Variable Rates

Although the relationship between SIFMA and 67% 1M LIBOR has held over the long-term, the current credit turmoil has caused a spike in short-term tax-exempt VRDO yields in late September.

The SIFMA index as of 11/19/08 was 1.12%, implying a short term ratio of SIFMA to 1M LIBOR of 79%. The disruption in the tax-exempt market is attributable to several factors:

– Seasonal tax implications (September 15 tax payments and September 30 quarter end)– Money Market Fund Assets down substantially in late September– Flight to quality given credit and economic environment– Failed remarketings that result in higher rates– Widening demand gap between troubled and well-regarded Letter of Credit banks

Over the past month the market has responded positively– MMFs have begun to experience net inflows– Strong investor demand for new “untainted” VRDO issues

Significant concerns remain regarding concentration of exposure to relatively few bank names and uncertainty surrounding practical impact of central bank guarantees

(1) Based on market conditions as of November 21, 2008 and subject to change. SIFMA = 1.12% and 1M LIBOR = 1.39%

(2) Fixed spread quoted based on a Act/360 day count basis.

On September 24th, SIFMA

reset at 7.96%

0.0

2.0

4.0

6.0

8.0

67% of 1M LIBOR SIFMA Index

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Impact on the Municipal Market

Tax-exempt market has begun to recover

MMFs beginning to see net inflows; strong demand for short-term paper easing variable rate borrowing costs

Merrill Lynch brought a fixed-rate healthcare deal to market on October 23, the first in over six weeks

Providence Health and Services (Aa2/AA)

Yield of 6.70% in 2038 which reflects a credit spread of 1.33% versus 0.50% one year ago

In October and November strong AA and A rated credits begin coming to market, including Trinity (St. Alphonsus) and St. Luke’s

Credit spreads remain in the +1.50% to 1.80% for strong credits

The first BBB+ transaction went to market in October

Loma Linda, CA, with credit spread of 2.89%

Forward looking supply is still substantial

Transactions that can access retail distribution are benefiting with lower interest rates

Conditions still very volatile from day to day

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2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Apr-07 J ul-07 Oct-07 J an-08 Apr-08 J ul-08 Oct-08

"A" Healthcare Revenue Bond SIFMA Swap

67% LIBOR Swap AAA MMD

Recent Trend in Long-term Fixed Rates

Graph shows the relationship between indices over the past 18 months

Key Stats (1) 30 YR “A” Healthcare (2) 30 Yr SIFMA Swap (3) 30 Yr 67% LIBOR Swap (3)

As of 11/21/2008 7.15% 3.53% 2.22%

Average 5.44% 3.94% 3.41%

Min 4.51% 3.33% 2.12%

Max 7.44% 4.47% 4.09%

Std Dev 0.67% 0.22% 0.31%

(1) Rate history provided from April 2007 through November 21, 2008(2) Approximate “A” rated Healthcare traditional fixed rates. Rates are estimates and do not necessarily reflect actual traded levels.(3) Swap rates are quoted at mid-market and do not include any ongoing costs

Trinity Pricing Summary

Highlights of the market includedStrong retail demand in IdahoOne of first 5 Healthcare transactions to come to market in six weeks due to credit crunchSignificant institutional investor participation

The limited supply of Idaho municipal bonds was a plus with institutional investors

Idaho benefit of 12 to 30 basis points

Issue: MI Hosp Finance Auth- Trinity Health Credit Group Issue: IDHealth Fac Auth- Trinity Health Credit Group

Aa2/AA Aa2/AA(Moody’s/S&P) (Moody’s/S&P)

Pricing 10/28/2008 Pricing 10/28/2008Par $192.795 million Par $178.31 millionPar call 12/1/2018 Par call 12/1/2018Maturity Amount Coupon Yield Spread

to AAAMaturity Amount Coupon Yield Spread

to AAA12/1/2014 5,905 5.00% 5.25% 1.58% 12/1/2014 5,110 4.75% 4.95% 1.28%12/1/2015 6,205 5.25% 5.40% 1.57% 12/1/2015 4,040 5.00% 5.11% 1.28%12/1/2016 6,535 6.00% 5.60% 1.60% 12/1/2016 4,610 5.25% 5.29% 1.29%12/1/2017 6,895 5.75% 5.00% 1.58% 12/1/2017 4,505 5.40% 5.45% 1.28%12/1/2018 7,290 6.00% 5.90% 1.55% 12/1/2018 7,155 5.63% 5.65% 1.30%12/1/2019 5,000 6.25% 6.05% 1.54% 12/1/2019 4,550 5.63% 5.80% 1.29%12/1/2023 34,515 6.12% 6.25% 1.40% 12/1/2023 41,260 6.00% 6.10% 1.25%12/1/2028 22,825 6.25% 6.50% 1.46% 12/1/2028 45,415 6.13% 6.35% 1.31%12/1/2034 97,625 6.50% 6.65% 1.40% 12/1/2034 61,665 6.25% 6.50% 1.28%

192,795 178,310

Bond Ratings

Bond Ratings

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Challenges for Healthcare Providers Accessing Capital Markets

Investment Banking Firms 3 top underwriters exited the municipal business

Bear Stearns

UBS

Lehman

Others, including Citigroup, under pressure and reluctant to commit capital

Reduced headcount through mandatory reductions in force

Significant decrease in available capital

Product offerings have changed dramatically, and differ by firm

Increased return on capital requirements, putting further pressure on fees

Monoline Bond Insurance Companies No consensus on long-term stability of any insurer

Little perceived value of bond insurance

Higher premiums and more restrictive covenants

Requests for consent difficult and costly to secure

Credit Enhancement Providers (primarily commercial banks) Letters and lines of credit significantly more costly

Covenants more restrictive

Trading levels increased due to market capacity constraints

Provision of credit tied to additional fee business

Regional banks gaining business

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Bond Insurer Ratings November 24, 2008

Moody’s S&P Fitch

ACA Not Rated A to CCC Negative Dev

12/19/2007

Not Rated

AMBAC Baa1 Developing Outlook

11/5/2008

A Negative Outlook

11/19/2008

Rating Withdrawn

6/26/2008

Assured Guaranty Aa2 Stable

Downgrade from Aaa on 11/21/2008

AAA Stable

6/18/2008

AAA Affirmed Stable

12/12/2007

BHAC Aaa Stable AAA Stable Not Rated

CIFG B3 Under Review

10/28/2008

B Watch Developing

8/22/2008

Withdrawn

10/21/2008

FGIC B1 Negative Outlook

6/23/2008

CCC Negative Watch

7/31/2008

CCC Negative Outlook

7/31/2008

FSA Aa3 Developing Outlook

Downgrade from Aaa on 11/21/2008

AAA Negative Watch

10/9/2008

AAA Negative Watch

10/10/2008

MBIA Baa1 Developing Outlook

11/7/2008

AA Negative Outlook

8/14/2008

Rating Withdrawn

6/26/2008

Radian A3 Negative Outlook

6/25/2008

BBB+ Negative Outlook

8/26/2008

Rating Withdrawn

5/2/2008

XLCA (Note is now Syncora)

Caa1 Under Review

10/24/2008

B Watch Developing

11/18/2008

Rating Withdrawn

9/05/2008

Sources: Moody’s Investors Service; Standard & Poor’s; The Bond Buyer; UBS; Morgan Stanley; WSJ Online

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Current Underwriting Experience

Variable Rate Debt

For direct pay letters of credit deals, rates have returned to one to two percent and lower in some instances

For standby letters of credit, insured transactions, and issues with other credit concerns, variable rates are as high as 7%

Fixed Rate Debt

Access to market remains very volatile even for highly rated issuers and has become more difficult in the last two weeks

Longer underwriting periods for negotiated transactions and shorter notices for competitive transactions are becoming more common

Underwriters are less willing to commit capital by taking down bonds without increased underwriting spreads

Difficult to find buyers throughout the entire maturity structure

Mitigation Measures

Be flexible with timing and structure

Smaller issues are better because of strong but limited retail demand

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Idaho Tax-Exempt Market

Idaho Market for fixed rate, tax-exempt debt has performed relatively well:

Low supply of bonds; likely to continue

Retail demand is strong

Conditions are still very volatile; similar transactions receive wildly varying reception only days apart

What could change on a local basis

If rates fall significantly, retail is less likely to be a major factor. Six percent appears to be threshold level

If rates decline, issuance could rise as slated refundings reach market

Issuance is likely to remain relatively low because decrease in housing development will mean fewer school bonds

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Summary

The relationship between SIFMA and 1-month LIBOR has normalized, at least for now

Current VRDB programs should trade at or near SIFMA with the following qualifications

VRDBs with “tainted” credit support may continue to trade off significantly

– Involvement of bond insurers

– Credit quality of the supporting bank

– Expertise of the remarketing agent

Daily VRDBs may continue to out-perform weekly VRDBs in the near term (months?)

– Daily liquidity more valuable to investors than weekly liquidity

– Many remarketing agents will not agree to take on the risks of daily remarketing

New bond issues are limited by access and cost of credit enhancement

Self-liquidity is a good option for strong (AA) borrowers

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Summary, continued

The fixed-rate market appears to be opening up, particularly for highly rated credits, but there remains significant supply of new bonds with limited investor demand

The Bond Buyer’s 30-day visible supply as of December 2, 2008 was $21.3 billion, highest since October 2002 and 55% higher than the 12-month average

In recent years, institutional demand has been driven by tender option bond programs (“TOBs”) and leveraged buyers who have been under pressure from dislocated muni/Treasury ratios and margin calls

Many investors set up TOBs when the 30-year muni/Treasury ratio was 90% while recent levels were 134%, resulting in losses

Major broker-dealers have been imposing margin calls on customer TOBs

As VRDBs are put back to dealers, some are losing financing and therefore being forced to liquidate assets

High short-term rates may cause TOB programs to unwind if the short-term funding cost exceeds the coupon on the bonds

Retail investors have become much more important than in the past, but institutional buyers are still a major requirement for successful sale of a large issue

Covenant and security packages are more restrictive now than in the past

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Summary, continued

Developments that could improve the municipal debt market include the following

Fear needs to subside and confidence needs to be restored

Continued retail buyer interest is important for sale of fixed-rate bonds and to support municipal money market funds

New issue volume and/or secondary market portfolio unwinding needs to ease and be absorbed

Crossover buyers need to return to the market, lured by relative upside and cheapness of municipals

Broker-dealers need to re-commit capital to improve liquidity in the marketplace

Financial products have generally performed as expected

With the possible exception of auction bonds, where investors significantly under-priced the value of liquidity

Market uncertainty increases cost, security requirements and investor scrutiny

“Flight to quality” behavior by investors tends to disproportionately affect the tax-exempt market

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Contact Information

Michael Lewis, Vice President Public Finance Office phone: 208-344-8587 Mobile phone: 206-330-7656 Email: mlewis@snwsc.com

Michael Tym, Vice President Office phone: 219-531-2369 Mobile phone: 312-961-0274 Email: mtym@ponderco.com