The various investment products that have evolved over the past few years are suitable for a variety of bond proceed funds, including:

Guaranteed Investment Contracts

A Guaranteed Investment Contract ("GIC") is a contract between an investor and a financial institution (the "Provider"), typically a commercial bank, insurance company, security firm or bond insurer, in which the bond proceeds deposited under the investment contract are guaranteed a rate of return by the Provider. GIC's have increased in popularity primarily because they satisfy the distinctive requirements, tax, legal and economic, associated with the investment of tax-exempt bond proceeds. Documentation for a GIC is usually a straight forward contract between the Provider of the GIC and the Trustee and/or the Issuer.

A GIC earns a fixed or indexed yield, preserves principal and, most importantly, allows for access to funds with no market risk. GIC’s are typically used for construction funds as they allow for full flexibility of draws, eliminating any market and/or reinvestment risk if construction draws fluctuate for any reason. They can also be used for bond funds, debt service reserve funds and escrow funds, with draws occurring semi-annually on bond payments dates or as required by the Indenture. The yield on an investment contract will generally exceed the yield on a repurchase agreement.

Typically, the security for a GIC is provided by requiring the Provider to maintain a certain level of long-term credit rating by one or more of the recognized Rating Agencies. The rating requirement for the Provider is often determined by the Indenture or other bond documents. In the event the Provider is downgraded below a certain level while the GIC is in place, then the Provider is required to provide additional security such as posting collateral with an independent third-party or assigning the contract to a new provider that is acceptable to the Issuer and meets the necessary rating requirements.

Forward Purchase Agreements

Forward Purchase Agreements are a common strategy of investing proceeds in Debt Service Reserve, Debt Service, Construction Funds and Defeasance Escrows. A forward purchase agreement allows the Issuer to lock-in a fixed earnings rate (or to receive an upfront cash payment) while providing for an Issuer to invest its proceeds directly in securities (Treasury Bonds, Agencies, Commercial Paper, etc.). As a result of the Issuer (or the Trustee on behalf of the Issuer) having direct ownership in the securities, the Issuer can receive a Bankruptcy Opinion stating that the provider of the Forward Purchase Agreement has absolutely no rights, title or interest in the securities being sold to the Issuer.

The securities the Issuer owns as a result of the Forward Purchase Agreement always mature in an amount equal to the proceeds initially delivered, plus accrued interest at the agreed upon guaranteed interest rate (unless a portion of the proceeds initially delivered have been expended subsequent to the initial delivery). Therefore the rating and credit worthiness of the investment provider are irrelevant because there is no counterparty risk associated with the return of principal invested. Because the Issuer owns the securities, if its needs so dictate, it may sell the securities at any time prior to their maturity in the open market and use the proceeds of such sale for the permitted purpose. Of course, the Issuer may also choose to wait until the securities have matured and then use that cash for a permitted purpose. In the event the invested proceeds are not required by the Issuer, they are then used to purchase the next securities delivered from the provider of the Forward Purchase Agreement at the guaranteed agreement yield.

As a result of this process, the Issuer's principal is always invested in either securities or cash for the life of the Forward Purchase Agreement. In either case, the securities or monies are held by the Trustee, not the provider of the Forward Purchase Agreement. Therefore, in the unlikely event the provider of the Forward Purchase Agreement would no longer exist or fail to perform, the Issuer has preserved its principal and can look at alternative investments available at that time.

Repurchase Agreements

A fully flexible Repurchase Agreement (Flex Repo) is an agreement between a municipal issuer and a financial institution combining a fixed interest rate, security of owning direct U.S. Government Obligations and the withdrawal flexibility associated with a money market account. Flex Repos are provided by commercial banks, insurance companies and broker/dealers. In a Flex Repo, the Provider delivers eligible collateral (U.S. Government Securities) to a trustee or an independent third-party custodian, pays a stated rate of interest on the investment and repurchases the securities on any date upon notification from the Issuer. Given these attributes, Flex Repos are ideally suited for tax-exempt bond proceeds and their economic, tax and legal requirements.

The fully flexible feature eliminates exposure to interest rate volatility inherent in any fixed rate investment. Market risk associated with a structured portfolio is eliminated should projected draws be faster than estimated and the sale of a security is required. Reinvestment risk is eliminated should the draws be slower than estimated as the funds can remain invested at the guaranteed rate as no sale of securities and reinvestment of those funds is necessary.

Most significantly, the Flex Repo eliminates the risk to principal. As the securities are held by a trustee or a third-party custodian with the issuer receiving a perfected first lien security interest, should the Provider be unable to perform, the securities may be liquidated. To insure the return of principal and accrued interest, the Provider provides collateral each day in an amount equal to 102-105% of the outstanding principal and accrued interest and this amount is marked-to-market on either a daily or weekly basis.

Flex Repos can also be structured to pay a floating rate for issuers with bond proceeds financed with variable rate debt. The floating rate can be indexed to BMA, LIBOR, U.S. Treasuries or other rates and guarantee a spread over the indexed rate.

Security Put Agreements

A Security Put Agreement is a contract between the Issuer and a Provider for use with a Debt Service Reserve Fund or Construction Fund, in which the Issuer purchases one or more long term U.S. Treasuries, Agency securities or other permitted investment security with Reserve Fund monies. The securities are owned and held on behalf of the Issuer by the Trustee. The Provider writes a contract which enables the Issuer to "put", or sell, the securities back to the Provider at the same yield to maturity at which the securities were purchased for any reason under the Bond Indenture. Advantages of the Security Put Agreement include:

• Subject to the underlying security, may be a high yielding investment product
• liquidity
• no loss of principal due to market price fluctuations
• fits most indentures and bond insurer's requirements
• additional security in that if the Provider fails to perform pursuant to the Put Agreement, the Issuer owns the underlying Treasury or Agency securities
• can be used with eligible tax-exempt securities, potentially creating non-rebatable positive arbitrage

Security Portfolios

IMAGE provides our clients services to design, structure and implement an investment strategy through the purchase of an open market security portfolio. Currently, direct open market purchases are not common as they typically result in a lower yield and the likelihood of inefficiencies due to the mismatch of investment receipts and cashflow needs. Nonetheless, certain issuers are constrained by investment guidelines or prefer the lowest credit risk securities.

Keeping in mind all arbitrage rebate requirements, IMAGE designs an investment portfolio of eligible securities (Treasuries, Agencies, guaranteed obligations, etc.) that matches the investments to the projected draw dates in the case of a project/construction fund or escrow requirement dates in a refunding bond transaction. After structuring the appropriate investments, IMAGE will competitively bid the structure, using an open bid process which typically generates the highest true yield for the Issuer. This bid process also provides independent valuation of the securities.

Alternatively, IMAGE will evaluate and arrange for a competitive process for Issuers to liquidate security portfolios in order to maximize the proceeds for Issuers.

Escrow Restructuring

During the recent low interest rate environment, many issuers of tax-exempt debt have experienced significant negative arbitrage (escrow yield below maximum allowable arbitrage yield) due to the dramatic difference between short-term (1-7 years) Treasury rates and long-term tax-free rates. In an effort to maximize yield many such escrows were put into open-market securities. The remainder were likely placed in escrows containing State and Local Government Series (SLGS) securities. Such open market and SLG escrows are candidates for escrow restructuring with the potential to recoup, much if not all, of the negative arbitrage.