Military Housing Privatization Capital Markets Considerations August 7, 2012 Seth Kirshenberg, Managing Partner, Kutak Rock LLP, Washington, DC Andrew

Military Housing PrivatizationCapital Markets Considerations

August 7, 2012

Seth Kirshenberg, Managing Partner, Kutak Rock LLP, Washington, DCAndrew Chintz, Director, National Public Finance Guarantee Corporation,Armonk, NYChetan Marfatia, Director, Guggenheim Partners, LLC, New York, NY Anita Molino, President, Bostonia, Boston, MARobert Helwig, Deputy Director, Office of the Secretary of Defense, Facilities, Energy, and Privatization Directorate

Safe Harbor DisclosureThis presentation contains statements about future results that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that these statements are not guarantees of future performance. There are a variety of factors, many of which are beyond the control of MBIA Inc., which is the ultimate parent company of National Public Finance Guarantee Corporation, that affect the operations, performance, business strategy and results and could cause its actual results to differ materially from the expectations and objectives expressed in any forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements which speak only as of the date they are made. National and MBIA Inc. do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made. Information on National Public Finance Guarantee Corporation should be read in conjunction with, and is qualified in its entirety by, the information filed by its parent company MBIA Inc. with the U.S. Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K, in particular with respect to risk factors associated with National Public Finance Guarantee Corporation.

In addition, the definitions of the non-GAAP terms that are included in this presentation may be found on www.mbia.com.

2012 ADC ANNUAL CONFERENCE| PAGE 4

4

MHPI Program Overview Obsolete housing in poor condition and short supply. Traditional methods (MILCON)

would require $16 billion over 20 years

Military Housing Privatization Initiative (MHPI) authorized under the National Defense Authority Act of 1996 to partner with private sector developers

Existing housing and land conveyed to public/private partnership under 50-year ground lease

Optimal number of end-state housing units is determined based on need and market supply.

Private developer replaces, renovates and manages housing over the 50-year term

Financed primarily through private bond market using long-term financings Leverage Basic Allowance for Housing (BAH) thereby avoiding the need for direct appropriation and replacing it with a debt obligation to creditors

Creditors incur development, construction and operational risk as well as BAH appropriation risk over the long term

5


National’s Role as Bond Insurer

• Provides additional credit support to bond investors by guaranteeing project’s ability to pay debt service

• National is the largest municipal-only bond guarantor with $5.7 billion in claims paying resources and $398 billion gross par insured as of March 31, 2012

• Underwrites project as a lender/investor – creditors are aligned

• Pricing of insurance driven by underlying ratings and capital charges

• Military Housing fits into overall portfolio strategy of insured municipal bonds

• Provides additional oversight through ongoing monitoring to provide early identification of adverse credit trends. Partner with project company.

• Credit deterioration and rating downgrades increase insurer’s cost of capital. Initial pricing does not reflect credit deterioration

6


National’s Underwriting Approach

Military Essentiality Considerations - Primary underwriting driver Function - military value Location Infrastructure - available alternatives & costs to replicate/relocate Community support vs. encroachment Alternative use potential

Real Estate / Project Risk Considerations Market demand/competition – provide 30% of need Project scope – unit quality and competitiveness, geographic diversity Construction risk mitigation – GMP, incentive fees, 90% units on line Developer capability/strength Equity contribution and appropriate leverage levels Reserves – debt service reserve, replacement reserve, reinvestment account Environmental risk

TRANSACTION ORIGINAL

PAR INSURED SERVICE DEVELOPER

Fort Carson $137,405,000 Army Balfour Beatty

Fort Hood Phase $275,075,000 Army Actus Lend Lease

Pendleton/Quantico $1,117,900,000 Navy/Marines Hunt/Lincoln/Clark

Fort Drum Phase $355,680,000 Army Actus Lend Lease

Army Hawaii $1,347,500,000 Army Actus Lend Lease

Fort Leonard Wood $101,000,000 Army Balfour Beatty

Navy Mid-Atlantic $583,795,000 Navy/Marines Lincoln

AMCC Camp Lejeune $692,075,000 Navy/Marines Actus Lend Lease

McGuire Air Force Base/Ft. Dix $274,000,000 Air Force/Army United Communities

Navy Ohana $921,235,000 Navy Forest City

Pacific Beacon $307,220,000 Navy Clark

San Diego Family Housing $1,034,495,000 Navy Lincoln/Clark

Tierra Vista (Tri-Group) $254,050,000 Air Force Actus Lend Lease

Navy Northwest $225,985,000 Navy Forest City

Navy Southeast $587,415,000 Navy Balfour Beatty

Total $8,214,830,000

National’s Military Housing Portfolio

• Average rating ‘A’ to ‘AA’• Top Tier Operators • Focus on essentiality

National insured $8.2 Billion of Military Housing bonds across 15 transactions


8

Program Performance• Minimal effects on occupancy from housing crisis

• Strong demand, wait lists, occupancy is not employment driven

• Debt service coverage - generally in line at essential bases

• Granular – diversified by locations and neighborhoods

• Rental waterfall used

• Consistently stable Basic Allowance for Housing (BAH)

• 2012 BAH increased 2% despite housing market weakness

• BAH decreased in 2011, but only a 0.59% decrease

• Compounded early increases in BAH mitigates occupancy fluctuations

• Many projects at IDP completion stage. Construction risk declining and loan amortization is beginning. First 10 years of initial development completed; next 40 years of redevelopment and property management

• Accelerated out year development in strong performers

• Generally high ratings concentrated in the “A” – “AA” range. Ratings based on essentiality, market demand, construction risk mitigation, sophisticated management, military partnership support

Not without Pitfalls…. Project scope challenges – changing strategies and demographics

resulting in “down-sizings”

Leverage Housing market stress in select locations -- rising BAH could be a double-

edged sword

Construction funding deficits due to investment performance Actual operating expenses and development challenges not uncovered

during project planning stages

Increased utility expenses. Solar energy implementation

Risk of loss of property tax exemption Challenges in accessing the capital markets due to financial crisis. New

phases have proceeded with equity only

Program Performance

Program Performance

….But proven military support Pitfalls successfully addressed by Government, Operators and Creditors

Aided by flexible project scope and structure

Tools used to address pitfalls:– project downsizing / deleveraging by purchasing bonds– additional equity– defer project scope to out years – sale of under utilized assets – bondholder representative and creditor oversight/ strategy

Continued focus on project success maintains credit quality for bond insurer

and bondholders

Conclusion• National is a partner in the privatization with interests aligned with the

project company

• Direct funding appropriations have been exchanged with debt obligations. Responsibility to maintain credit strength and value to creditors (bond insurers and investors)

• Sector has performed well with challenges addressed by project company when necessary

• BRAC decision makers need to be well-informed about the financing obligations the military services have incurred as partners in privatized housing projects. The potential effects on outstanding bonds (or future bond issues) from closures or downsizings should be made a part of the BRAC assessment process.

• GOAL: Maintain credit quality to maintain interest from the credit markets to fund new projects!

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

13

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

14

Military Housing – Historical Issuance by Service

15

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

9454.68; 39%

6737.655; 28%

5548.05; 23%

2215; 9% Army

Air Force

Navy

Marines

Military Housing – Historical Issuance

16


96-00 01 02 03 04 05 06 07 08 09 10 11 12

Series1 421 587 668 2266 1750 5802.65 3887 5804.2 1216.83 207 437 396 512.705

$500

$1,500

$2,500

$3,500

$4,500

$5,500

$6,500

Military Housing Issuance $mm (1996-2011) Total $23.436mmMilitary Housing Issuance $mm (1996-2012) Total $24 Billion


17


96-00 01 02 03 04 05 06 07 08 09 10 11 12

Insured 252 421 585 2266 402 4478.65 3419 5804.2 486.83 0 0 0 0

Uninsured 169 166 83 0 1348 1324 468 0 780 157 437 396 512.705

$500

$1,500

$2,500

$3,500

$4,500

$5,500

$6,500

Uninsured

Insured

Military Housing Issuance $mm (1996-2011) Total $23.436mmMilitary Housing Issuance $mm (1996-2012) Total $24 BillionMilitary Housing Issuance $mm (1996-2011) Total $23.436mmMilitary Housing Issuance $mm (1996-2012) Total $24 BillionMilitary Housing Issuance $mm (1996-2011) Total $23.436mmMilitary Housing Issuance $mm (1996-2012) Total $24 Billion

Phase 1

Phase 2 Phase 3

Phase 4

Military Housing – Structuring Dynamics

18

Changes in Structuring Dynamics

Four distinct eras in a relatively short time frame (1998 – 2012)

Phase 1: 1998-2003

Phase 2: 2004-2005

Phase 3: 2006-2008

Phase 4: 2008-present

Phase 11998 – 2003

Phase 22004 – 2005

Phase 32006 – 2008

Phase 42008 – present

Credit Execution Insured Senior / Sub Insured Uninsured

Min. Underlying Rating A BBB BBB AA

Stabilized DSC Ratio 1.25x 1.10x 1.15x 1.50x

Growth 5-years 3% / 3% 3% / 3% 2% / 2% Mkt. DependentMax 2% / 2%

Primary Structured Developer/ Credit Enhancer

Investment Banker/

Rating Agency

Investment Banker/ Rating

AgencyInvestor

Military Housing – Historical Issuance & Spreads

19


96-00 01 02 03 04 05 06 07 08 09 10 11 12 $-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$421 $587 $668

$2,266 $1,750

$5,803

$3,887

$5,804

$1,217

$207 $437 $396 $513

00 01 02 03 04 05 06 07 08 09* 10* 11* 12*0

50100150200250300350400450

175125

10070 50 50 40 30

400350

250275

365*Underlying AA-rating


20


18114.68; 76%

5840.705; 24%Insured

Uninsured


21


9683.68; 40%

7753; 32%

540; 2%

138; 1%

5840.705; 24%

MBIA/National

Ambac Assurance Corp.

CIFG

XL/Syncora

Uninsured

Military Housing – Color on Issuance History

22

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

23

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 2010. Beginning Jan. 2013 additional $50bb in savings to be enacted per sequestration.

Per announcement by Administration on August 1st – 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.

o This document is confidential and may not be reproduced or redistributed. The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest or any financial instrument. The offering circular of each security or the respective fund’s confidential offering memorandum contains important information concerning risks and other material aspects of the investment and must be read carefully before a decision to invest is made.

o The illustrations are intended solely as tool to assist in consideration of various potential asset allocations for a client’s account. Guggenheim Partners, LLC makes no warranty that the asset allocations discussed in this presentation will be used to manage your account. Asset allocations may differ between clients based on their investment objectives and financial situations. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis.

o Past performance of indices of asset classes does not represent actual returns or volatility of actual accounts or investment managers, and should not be viewed as indicative of future results. The information contained in this presentation has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information.

o The views expressed in this presentation are the views of Guggenheim Partners, LLC and are subject to change based on market and other conditions. In discussion of any strategy, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether such services in general, as well as the products or strategies discussed in this material, are suitable to their needs.

o This material is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. In discussion of any strategy, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether such services in general, as well as the products or strategies discussed in this material, are suitable to their needs.

o The benchmarks used are for purposes of comparison and should not be understood to mean that there will necessarily be a correlation between the portrayed returns herein and these benchmarks.

o The information contained herein is given as of the date hereof and this does not purport to give information as of any other date. Neither the delivery of this document nor any sales made hereunder shall, under any circumstances, create an implication that there has been no change in the matters discussed herein since the date hereof.

© 2012 Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners.

Disclosure and Legal Notices

24

Military Housing PrivatizationCapital Markets Considerations

August 7, 2012

Anita Molino, President, Bostonia Partners


26

INVESTMENT CAPITAL

Abundant supply but still risk averse Long terms heighten risk Limited supply of deals – affects liquidity Fewer investors for structured product Limited investor universe for unique

contracts Acquisition and contracting poorly

understood


27

DEAL STRUCTURE

Complex analysis Structure Mixed credits Unique terms

Often “one-off” Often lacking “bright lines” Requires substantial due diligence Trouble meeting new disclosure

requirements


28

ISSUES

Often no single point of contact No clear process for resolving problems Late/missing payments Early termination or “buy down” Rating downgrades Lack of uniformity within asset classes Limited adjustment to changing financial

terms or market conditions


29

MATCHING ASSET & LIABILITY

Liabilities

100% of principal

and interest

Assets

INVESTOR’S EXPECTATION EARLY TERMINATION SCENARIO

Liabilities

Assets

Assets

Initial Investment

70% of principal

and interest

Reinvestment at lower rate -

20% of principal and interest

TERMINATION

Documents

Military Housing Privatization Capital Markets Considerations August 7, 2012 Seth Kirshenberg, Managing Partner, Kutak Rock LLP, Washington, DC Andrew