MAGNY Healthcare Discussion: Collateral, Covenants and Control 5/29/09

1. MAGNY Healthcare Discussion: Collateral, Covenants and Control 5/29/09 Dana Fusaris, Fundamental Advisors, LP Edward Merrigan, B.C. Ziegler Mike Quinn, Assured Guaranty

2. Importance of Collateral, Covenants and Control in Healthcare Historically, not for profit healthcare transactions exhibit a materially greater frequency and severity (post recovery) of default versus transactions in other sectors Operating challenges impacting NFP providers in the current market include: Heightened governmental reimbursement risk pressures due in part to federal and state budgetary constraints Utilization adversely impacted by the current state of the economy Continued growth in bad debt expense Technology risk: fundamental changes in the delivery of care continue to accelerate Competition with physician owned ventures: specialty hospitals, ASCs, diagnostics & imaging

3. Non-Operating Pressures Increasing the Importance of Collateral, Covenants & Control Significant growth recently in non-operating pressures: Erosion of investment portfolios & investment income Pension funding concerns Negative cash flow & marks on swaps requiring significant additional collateral posting Variable rate market distress: ARS market failure in 1Q08 and VRDO disruption in 3Q08 Spike in interest costs related to widening credit spreads The relative scarcity of viable and cost effective credit and liquidity enhancement

4. Rating Trends Source: Standard & Poor’s

5. Recent History for Collateral & Covenants Pre 1998 (AHERF): Restricted affiliate structure prevalent & more liberal financial covenants 1998 to 2003 (Immediately Post-AHERF): Obligated group structure dominates and financial covenants improve as credit spreads remain wide 2004 – 2007: deterioration in covenant levels driven by tighter credit spreads and credit enhancement competition (insured penetration well over 50% in the not for profit healthcare sector during this period) 2008-Present: due to a widening credit spread environment, investors able to command enhanced covenant packages for deals that largely come without enhancement

6. Collateral & Covenant Levels Stronger During Wider Credit Spread Environment

7. Recent New Issue Pricing Results Illustrate Widening Spreads

8. Why Collateral Matters Types of collateral typically found in a healthcare transactions include: Perfected security interest in Gross Revenue/Receipts which typically include a pledge of accounts receivable First Mortgage Lien on Property, Plant, and Equipment Cash Funded DSRF Collateral is what bondholders look to for leverage and security with debtors when covenants are breached Good collateral does not fully protect a bondholder or credit enhancer from a weak credit profile

9. Collateral: Value of a Mortgage Under a defined event of default, deals secured by a mortgage allow bondholders the ability to foreclose pre-petition Pre-default: Leverage against the debtor Threat of foreclosure Bargaining chip Post-default: Events of default can include non-payment, < 1.00 times debt service coverage, days cash on hand and debt to capitalization violations First mortgage puts holders ahead of unsecured creditors including malpractice claimants Value as a going concern dependent upon the asset’s ability to generate operating cash flow (most healthcare facilities valued as EBITDA multiple) Alternatively, the value of a mortgage is contingent upon higher and better uses Decision to close predicated on cost benefit analysis

10. Collateral: Gross Receipt/Revenue & Accounts Receivable Considerations Potentially the most valuable collateral for this asset class Definitions in bond documents important Make sure your UCC filings are perfected Make sure the debtor is properly coding and accounting for patient receivables in order to maximize value Investor may have to relinquish a portion of this collateral if the hospital requires working capital, but could seek some type of replacement collateral Possible set off for Medicaid / Medicare cost reports that will have priority over bondholder collateral

11. Why Covenants Matter Covenants provide bondholder protection Allows for remediation of a deteriorating credit before bankruptcy Conservative covenants can positively impact the obligor’s cost of capital, especially in a wide credit spread environment Inhibits an obligor from engaging in risky behavior that dilutes it’s credit profile Covenant remedies are an important factor More frequent testing of covenants is preferred However, strong covenants do not make a bad credit risk profile sound

12. Current Market Covenants Legal Covenants for bond transactions have strengthened Permitted encumbrances – ranging from 15% to 30% of the book value of property, plant and equipment Other covenants Liquidity: DCOH 60-90 days: consultant call-in; 40-60 days: event of default Additional bonds test: typically 1.10x to 1.25X historical pro forma/projected coverage test and pro forma debt to capitalization incurrence test of 60 to 70% for enhanced deals Debt to capitalization maintenance test: 65% to 70% Limitations on: Transfers of Cash Transfers of Non-Cash Assets Changes in the Obligated Group Consolidation, Mergers, Sales, and Conveyances MFN Covenants More Typical on Enhanced Deals

13. Key Covenant Comparison for Unenhanced Transaction Example I: A+/A2 rated single-state system

14. Coupon Type Volume Trend Source: Thomson SDC

15. New Variable Rate & Derivative Covenants An obligor’s liquidity and financial sophistication are key credit considerations Limitations on unhedged and even hedged variable rate debt instruments Minimum initial ratings threshold for swap counterparties Limits swaps to true hedges No multipliers on derivatives Limitations on collateral posting; posting by providers to counterparties explicitly limited by cash transfer tests Termination amounts subject to DCOH test and subordinated to bond and regularly scheduled swap payments for enhanced transactions Swap counterparties pushing back with collateral posting requirements for a larger universe of providers and lower $ thresholds for providers

16. Recent Variable Rate Structure Changes Fewer letter of credit and stand-by liquidity facility providers, reduced capacity, higher pricing, ancillary business is required by many banks Shorter facility terms and stricter covenants Unwillingness to renew many existing facilities in the current market Term out provisions more punitive Higher penalty rates Shorter term outs Are Banks & Fixed Rate Investors Interests Aligned?

17. The Obligor’s Perspective on Collateral and Covenants The restrictive nature of covenants and collateral weighed against projected cost of capital Projected P&L performance levels and anticipated balance sheet metrics also play into an obligor’s decision around financial collateral & financial covenants Interest rate benefit from revenue/receipts pledge, mortgage, DSRF in current market vs. historical

18. Covenant Breaches Prevalent in Current Market Primarily driven by non-operating concerns in the current market Providers experiencing covenant breaches including debt to capitalization, DCOH and debt service coverage ratio violations Other violations attributed to antiquated indenture definitions. Example: definition of net revenue available for debt service can include unrealized gains and losses in investment portfolios and swaps in older bond documents which runs contrary to the market standard definition Bondholders & credit enhancers seeing record volume of consents and waivers tied to covenant breaches A credit enhancer’s approach to consents & waivers depends on the root cause of the breach. Violations can lead to consultant engagements and a tightening of covenant levels

19. Why Control Rights Matter Ability to appoint consultant upon the breach of certain covenants Direct trustee and accelerate Are you prepared to offer indemnification? Right to remove trustee, but can you replace trustee? Ability to replace management, Board of Directors Control by ownership level or blocking position Often 25% in a major event of default, but can be overruled by a majority A majority ownership is most reliable, but be careful with how it is defined A majority of each series A majority of one series Role of banks Blocking position – 33% gives you ability to block a Plan of Reorganization (POR) 100% ownership is always best, but may not be feasible If insured, insurer typically enjoys majority bondholder rights

20. Conclusion Collateral, covenants, and control have become increasingly important in the current market environment Vital in the healthcare sector Historically, the strength of collateral and covenants are directly related to credit spreads Good collateral and covenants do not fully protect a bondholder or credit enhancer from a weak credit profile which leads to the importance of control

21. Contact Information Dana Fusaris Fundamental Advisors, LP Managing Director (720) 279 7560 Work (303) 550 2692 Mobile df@fundamentaladvisorslp.com Mike Quinn Assured Guaranty Corp. Manager, Healthcare & Private Higher Education Group (212) 261 5551 mquinn@assuredguaranty.com Edward Merrigan B.C. Ziegler & Company Managing Director/Director of Research (212) 284 5451 emerrigan@ziegler.com 21