1 of 28

Credit Evaluation of MunicipalBonds in the Dodd-Frank Era

Prepared by:Mikell Tomlinson

Senior Vice President

21st Annual Investment Education ConferenceSan Antonio, Texas

March 26th, 2013

2 of 28

• Provide an overview of the regulatory changes impacting municipal risk due diligence requirements.

• Review OCC guidance to evaluation muni credit.• Recommended protocol for documenting pre-and post-purchase

credit risk analysis on municipal bond investments.• Identify the key financial, economic, and demographic

considerations.• Shay Tear Sheets• How to recognize red flags of credit deterioration.• Shay Muni-Monitor• EMMA• Ratings Template

Agenda

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

3 of 28

Dodd- Frank and its Impact on Depository Investment Regulations

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

4 of 28

OCC Rule Change and Guidance

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

5 of 28

OCC Rule Change and Guidance

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

6 of 28

OCC Rule Change and Guidance

Source: The Office of the Comptroller of the Currency

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

7 of 28

FDIC Rule Change and Guidance

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

8 of 28

NCUA Rule ChangeNCUA Rule Change

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

9 of 28

Municipal Credit Monitoring and Analysis Program

I. Robust Pre-Purchase AnalysisII. Monthly or Quarterly Ratings UpdateIII. Comprehensive Annual Financial ReportIV. If/when a bond experiences a negative ratings action, elevate analysis and monitoring.

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

10 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

11 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

12 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

13 of 28

What are you Investing in?

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

14 of 28

What are you Investing in?

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

15 of 28

What are you Investing in?

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

16 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

17 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

18 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

19 of 28

Metrics for Credit Evaluation

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

20 of 28

Metrics for Credit Evaluation

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

21 of 28

Metrics for Credit Evaluation

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

22 of 28 Source: Bloomberg

23 of 28

Signs of Fiscal Distress

• Qualified Audit Option• Cash Problems• Tax Collections 95% or lower• At or close to tax ceiling• Rising Mandated or Fixed Cost• Variability in Sales or Income Tax Receipts• Negative trends: Operating Losses, Reserve Draws• Pension Deferrals• For GO bonds, debt to assessed ration grater than 20% or debt to capita greater than $3,000• Decreasing Capital Outlay• Significant Litigation or Settlement• Interest Earnings as Large % of cash on hand• Negative Demographic trends

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

24 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

25 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

26 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

27 of 28

Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA

Source: Bloomberg

28 of 28

Conclusion:• Examiners must see proof of an internal credit analysis process.• You can use third party research but it cannot be the only source at determination.• Determination must come to conclusion based on an internal process.

Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

Source: Bloomberg

29 of 28

Disclosure:THIS MATERIAL IS FOR USE BY INSTITUTIONAL INVESTORS ONLY and may not be distributed or redistributed to retail investors. This presentation is provided by Shay Financial Services, Inc. (“Shay”) and is intended for your private use and does not constitute an offer or solicitation with respect to the purchase or sale of any security.  This presentation is not prepared or intended to be investment advice and is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient.  The information was obtained from sources we believe to be reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.  The information was based in part on current market indicators, which may vary over time.  Shay makes no representation, express or implied, as to the accuracy, timeliness, completeness or correct sequencing of any such information or with regard to the results to be obtained from its use.  All expressions of opinion are subject to change without notice, and Shay does not undertake any responsibility to update or supplement the information contained herein. In no event should Shay or any affiliated party be liable for any direct or indirect investment or trading losses directly or indirectly caused by, or resulting from, the information presented.  Investors should do their own research and due diligence.  This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Shay may from time to time buy or sell or have long or short positions in securities identical or related to those identified herein. The individual presenting may benefit financially from any investments in Shay and/or its affiliated entities.  The views expressed are those of Shay. These views do not necessarily reflect the opinions of any other firm. Shay Financial Services, Inc., is a registered broker-dealer with the U.S. Securities and Exchange Commission ("www.SEC.gov”) and is a member of the Financial Industry Regulatory Authority (“www.FINRA.org”) and the Securities Investor Protection Corporation (“www.SIPC.org”).