In January, the Fed confirmed its position and outlook for the economy, suggesting that low interest rates are “warranted for an extended period” but iterating that the Fed is poised to take actions necessary to ensure stable markets. This posture did not significantly impact an already nervous municipal market environment. March’s meeting saw more of the same, albeit with slightly more upbeat language regarding economic recovery indicators. Investors will look to future Fed statement language modifications as potential signals of pending changes in Fed policy.

The consumer confidence rate plunged unexpectedly in February as the jobs situation continues to weigh down the recovery process, yet the consumer spending increase statistic contradicted the fall in the confidence rate. The Dow and the Nasdaq have climbed back from hitting a 12-year low in March 2009 to returning gains of 64% and 86% respectively since that point. The weeks ahead bring an end to the first quarter which may offer more disappointments than positive results.

New issuance in the municipal market is up over 2009 with $58.5B in volume for January and February 2010 compared to $46.3B during the first two months of last year. The municipal yield curve remains steep with rates from 2017 and shorter trading at lower that 70% of treasuries –lower than the historically typical range of 70%-85% of treasuries. Daily fluctuations aside, the benchmark tax-exempt 20-year AAA MMD interest rate has increased only marginally since January 1, 2010.

The Build America Bond (“BAB”) program continues to offer interest cost savings and be very popular among both buyers and sellers. This success is reflected by an astounding increase of 1849% in taxable issuance in January and February 2010 over the same period in 2009. The market can expect to see continued significant volume of BAB issuance (including issuance of Recovery Zone Economic Development Bonds) before the program is scheduled to expire at the end of the calendar year.

Throughout much of the past 18 months, unrated credits have been extremely challenging to market. But there has been some recent indication of a slow thaw in the market for unrated debt. SNW underwrote $2.815MM City of Orting (WA) Water and Sewer Revenue Refunding Bonds in February 2010 as an unrated credit. Original issue yield spreads were between +72 and +157 basis points, an indication that investors are willing to accept credits with good underlying fundamentals, even if those credits are unrated and uninsured.

Stressed budgets, deficit gaps and the rise in concern of municipal bankruptcy have caused some buyers to shift credit preference to essential service revenue bonds that have an identified revenue stream as a source of debt service repayment. Energy Northwest (WA) sold multiple series of electric revenue refunding bonds totaling $473.5MM, producing significant debt service savings to the issuer.

Though yields on the short end of the curve increased by between 15-25 basis points last week, the benchmark municipal yield curve remains steep, with 5-year AAA MMD yields at 1.70% and 20-year AAA MMD yields at 3.85%, as of March 30, 2010. With interest rates at these historically low levels, a rational assumption is that interest rate increases will occur – though it is impossible to predict when or at what magnitude. The general tone of the market remains cautious as investors await clear indication of economic recovery and with recovery, the potential for inflation. Until then, market conditions are likely to remain relatively unchanged and subject to day-to-day volatility.

Qualified School Construction Bond Webinar: April 6, 2010 from 1-3 pm

SNW will be hosting a webinar on April 6, 2010 for Oregon school districts interested in Qualified School Construction Bonds (QSCBs). The webinar, sponsored by the Oregon School Boards Association (OSBA) and including representatives from SNW, McLiney and Company and K&L Gates, will be held from 1-3 pm. Districts outside of Oregon are also welcome to participate in the webinar.

The American Recovery and Reinvestment Act of 2009 (ARRA) created several new financing tools, many of which have been difficult to utilize. Among the programs authorized by ARRA were QSCBs, intended as zero-cost tax-credit bonds for school districts. The lack of demand for tax credits, coupled with the steep learning curve associated with a new form of obligation has severely limited the number of QSCB buyers, particularly for smaller borrowing amounts. As a consequence, buyers have typically demanded supplemental interest payments of between one and three percent, depending on the credit.

On March 17, 2010, Congress passed the HIRE Act, which authorizes school districts to issue QSCBs as interest-bearing bonds with an interest subsidy from the federal government paid directly to the issuing school district as an alternative to issuing tax credit bonds. The subsidy will be equal to 100% of the interest costs up to a given rate established by the Treasury on the sale date of the bonds. The new structure is similar to Build America Bonds, an ARRA program which has been well received in the market and has reduced issuer debt service obligations by millions of dollars nationwide.

Although issuing QSCBs as interest bearing bonds will greatly expand the audience of buyers, small issue sizes may still present a significant barrier to entry. OSBA, in coordination with SNW, McLiney and Co, K&L Gates LLP and The Bank of New York Mellon is sponsoring a pooled financing program, for Oregon school districts looking to issue QSCBs to fund eligible projects. The pooled QSCB program will allow districts to maximize the appeal of their offering to investors by increasing the total amount sold and minimize the costs of issuance through economies of scale.

The webinar will unravel the mysteries of QSCBs in general and implications of the HIRE Act, and will discuss the timing and process associated with the pooled QSCB program. K-12 school districts that have an unissued allocation of QSCBs or are considering applying for a QSCB allocation would benefit from participation. The initial pooled QSCB issue is expected to close on June 30, 2010 but a second issue will be considered if there is additional demand.

Please contact Tracey Harris (tharris@snwsc.com) by April 1, 2010 if you are interested in participating in the April 6 webinar. Details will be sent to interested parties several days prior to the webinar. Questions about QSCBs or the Oregon pooled QSCB program can be directed to Carol Samuels or Lauren Foote at (503) 275-8300.

OSBA FlexFund Program for Oregon School Districts

Does your district have a project planned that is too expensive to pay out of your general fund, but has restrictive financing costs associated with a bank or vendor borrowing? The FlexFund program may be your answer! FlexFund has been an effective financing tool offered by OSBA for over a decade. As financing sources have become scarce or expensive, FlexFund has become an even more beneficial option for school districts and community colleges to consider.

The program is sponsored by OSBA, in association with Seattle-Northwest Securities, K&L Gates LLP and The Bank of New York Mellon Trust Company. It helps school districts, education service districts and community colleges finance purchases by pooling together the needs of multiple districts simultaneously and providing enhanced access to the public market with low upfront costs. Eligible projects include classroom equipment, portables, school buses, computers, land purchases, remodeling, building additions and refinancing of existing leases and loans. Each issuer enters into a financing agreement and is responsible for only their share of the financing.

FlexFund issues take place on an as needed basis, with interest rates set just before each sale. We currently have several districts interested in a sale which is anticipated to close this summer. Applications are available at: http://www.osba.org/en/Services/Service/Financial-FlexFund.aspx.

Please direct questions Carol Samuels or Lauren Foote at 503-275-8300.