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1
Significant Investment Considerations
This document does not constitute an offering and is meant only to provide a broad overview for discussion purposes. All information provided
herein is subject to change. If and when an investment opportunity is structured, you must obtain and carefully read the related Offering
Memorandum, which will contain the information needed to evaluate the potential investment and provide important disclosures regarding risks,
fees and expenses. All information provided herein is qualified in its entirety by the Offering Memorandum and the related subscription agreement.
Investing in alternative investments is speculative , not suitable for all clients, and intended for sophisticated and experienced investors
who are willing to bear the high economics risks of the investment , which can include:
Loss of all or a substantial portion of the investment due to leveraging , short selling or other speculative investment practices;
Lack of liquidity in that there may be no secondary market for the investments and none expected to develop;
Volatility of returns;
Restrictions on transferring interests in the investments;
Potential lack of diversification and resulting higher risk due to concentration of trading authority with a single advisor;
Absence of information regarding valuations and pricing;
Complex tax structures and delays in tax reporting;
Less regulation and higher fees than mutual funds; and
Advisor risk.
Individual funds will have specific risks related to their investment programs that will vary from fund to fund. Citigroup, Inc., its affiliates
and its employees are not in the business of providing tax or legal advice to any taxpayer outside of Citigroup, Inc. and its affiliates. These
materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the
purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the
transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on
the taxpayer's particular circumstances from an independent tax advisor. Past returns are no guarantee of future results.
While some information used in this document has been obtained from various published and unpublished sources considered to be reliable,
neither CAI nor any of its affiliates guarantee its accuracy or completeness and accepts no liability for any direct or consequential losses arising
from its use. This information is confidential and may not be duplicated without the consent of CAI.
All expressions of opinion are as of the date hereof, subject to change without notice, not intended to be a guarantee of future events, and may
differ from the views of other businesses of Citigroup. This document is communicated by Citibank International plc in the EU. Citibank
International plc is registered with the Netherlands Authority for the Financial Markets.
Investment Products: - Not FDIC Insured - No Bank Guarantee - May Lose Value
alternativethinkingfrom Citigroup
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Table Of Contents
I.
Overview
i I.
Experienced Team
III.
Unique Market Characteristics
IV. Arbitrage Opportunities
V.
Correlation
VI.
Key Terms
Appendices
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a+ternativeinvestments
Overview
Internal spinout
Citigroup has managed the largest municipal
position of any U.S. bank in each of the past 11
years.
• •
Strategies:
Municipal Arbitrage &
Relative Value
Total Citigroup
Co-investment:
$250 million (a)
Fund Launch Date:
May 1, 2006
(Source: The Bond Buyer)
Highly experienced team spinning out of
Citigroup's proprietary municipal bond trading
desk to establish a fund within Citigroup
Alternative Investments.
Attractive yield curve arbitrage opportunity has
existed due to the relative steepness of the taxexempt municipal market compared to the taxable
LIBOR swap market.
The Fund will seek to capture arbitrage
opportunities by purchasing long-dated municipal
debt, funding in the short-term market through a
securitization (Tender Option Bond "TOB")
program, and hedging using LIBOR swaps.
• The Fund will seek to generate additionalreturns
by capturingfrequentrelativevalue opportunities.
- 41
•:
. • -
TOB Program
Long-term
Fixed Muni
Rate .
Long-term
Fixed Swap
Rate
Money
Market
Funds
--------------
Tax-Exempt
Short-Term
Floating Rat
LIBOR
(a) Citigroup intends to invest up to $250 million in the fund and related funds. The money will be invested over a period of time
alternative thinking from Citigroup
citigroup' '
alternative rwstments
Senior Portfolio Managers
Craig Henick
Business Head / Portfolio Manager
Mr. Henick is a Managing Director and Head of Citigroup Municipal Investors, a unit of Citigroup Alternative Investments (CAI).
Prior to joining CAI, Mr. Henick was a senior portfolio manager for Citigroup's Municipal Proprietary Trading Desk where he comanaged a program of approximately $20 billion in municipal bonds, including the $14B Citibank TOB since January of 2005.
Previously, Mr. Henick was a member of the team of Citigroup's municipal secondary trading desk when it achieved a #1
ranking in Institutional Investor's 2004 survey. Prior to joining Citigroup in 2003, Mr. Henick managed municipal positions at JP
Morgan and Lehman Brothers. Mr. Henick received a B.S. in Economics from the Wharton School at the University of
Pennsylvania.
Edward Sun
Portfolio Manager
Mr. Sun is a senior portfolio manager for Citigroup Municipal Investors. Prior to joining CAI, Mr. Sun was a senior portfolio
manager for Citigroup's Municipal Proprietary Trading Desk where he co-managed a program of approximately $20 billion in
municipal bonds, including the $14B Citibank TOB since August of 2003. Mr. Sun joined Salomon Brothers' Financial Division
in 1991, covering fixed income derivatives within Salomon Brothers' Proprietary Fixed Income Arbitrage and Analysis Group.
For the past five years, Mr. Sun has been directly involved with Citigroup's municipal proprietary trading in several capacities
including as a portfolio manager since 2003. Mr. Sun graduated from New York University with a B.S. in Economics.
alternativethinkingfrom Citigroup
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aiternati ve investments
5
Large, Fragmented Market
Market Size : $2.3 trillion; ranking as fifth largest U.S.
debt market.
Issuers: States, cities, counties, school districts and
other governmental entities issue municipal bonds to
raise money for infrastructure, cash management or
debt refinancing.
Market Fragmentation : There are over 87,500 (a)
state and local governments that can borrow in the
tax-exempt municipal market. There are currently
over 1.5 million individual securities.
•
.
I
- •
Trillions
Outstanding
Instrument
Security Type: Either general obligation - supported
by the taxing power of the issuer; or revenue backed by a defined revenue stream.
-
•
• Tax-Exempt : Interest income is generally exempt
from U.S. federal income taxes.
•
(a)
(b)
(c)
(d)
(e)
2002 U.S. census
Flow of Funds Accounts of the United States (through Q3), as of December 7. 2006. Board of Governors of the Federal Reserve System
Includes Agency- and GSE-backed securities
Includes ABS. REITs, and holdings of foreign issues by U. S. residents
Based on 2005 Issuance. Thomson Financial Securities Data. All securities with maturities of 13 months or longer
alternative thinking from Citigroup
$13.0
11.4
8.9
2.4
2.3
2.1
1.8
1.6
1. Mortgages
2. U.S. Government Securities (C)
3. Corporate & Foreign Bonds (d)
4. Consumer Credit
5. Municipal Securities
6. Commercial Paper
7. Other Loans & Advances
8. Bank Loans
1
•
Geni Purpose/ Public Imp
28.2%
Education
26.3%
Health Care
8.5%
Transportation
7.9%
Water, Sewer & Gas Facs
7.1%
Student Loans
4.4%
Single Family Housing
3.6%
Electric & Public Power
3.3%
Airports
2.8%
Multi Family Housing
1.9%
Pollution Control
1.7%
Other
4.2%
citigroup'llsk
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Ir)vPStlnt!rltS
6
til +f:i!
Low Municipal Default Experience
Many financial institutions have adjusted their internal risk weightings to reflect the lower default
experience of the municipal asset class.
• Low Default Rate: Rating agency studies have consistently shown that given the same rating, U.S. municipal bonds
have had significantly lower default rates than corporate bonds.
• Highly Rated Bonds: Based on S&Ps study's data parameters, no defaults of "AAA" or "AA" rated debt occurred
during the 1986 - 2005 period. (a)
• No Historical Defaults of G.O.'s and Essential Services Rev.'s: No Moody's-rated General Obligation or
essential service revenue bond has defaulted from 1970 to 2000. (b)
• High Recovery Rate: The historical recovery rate for municipal bonds that have defaulted is 66% of par versus 42%
of par in the corporate market. (b)
• Corporate Equivalent Rating: In recognition of the exceptional credit quality of municipal bonds, Moody's
established a "corporate equivalent rating" for municipal transactions in April of 2003. (c)This corporate equivalent
rating is significantly higher than the underlying municipal rating.
Moody's (1970-2000) rot
Standard & Poors (1986-2005) tat
Municipalities
Corporates
Municipalities
Corporates
Aaa I AAA
0.0000%
0.6750%
0.0000%
0.4400%
0.8100%
Aa / AA
0.0327%
0.8029%
0.0000%
A IA
0.0084%
1.4721%
0.0400%
1.8300%
Baa I BBB
0.0590%
4.8649%
0.3100%
5.8200%
Ba / BB
1.3390%
21.2927%
1.3500%
18.2900%
BIB
3.9760%
47.3825%
9.0400%
32.3800%
Caa I CCC - C
10.5455%
76.7930%
34.3100%
53.0500%
(a) Standard & Poor's, Research, "Municipal Rating Transitions and Defaults", Mar 2005. "Annual 2005 Global Corporate Default Study and Rating Transitions', Jan
2006. Corporate defaults cumulative from 1981-2005.
(b) Moody's Investors Service, Special Comment, "Moody's US Municipal Bond Rating Scale". November 2002
(c) Moody's Investors Service. Special Comment. "Moody s Introduces Corporate Equivalent Ratings for Municipal Obligations Under Swap and Taxable Cross Border
alternative thinking from Citigroup
cltlgroup5i
alternat ive nvestments
Consistently
Steep Municipal Yield Curve
--•
Curve maintains its steepness due to the
following :
-
Supply and demand characteristics: Issuers
tend to sell long-term debt and retail investors
typically buy shorter maturities.
•
•
_
i
4.50%
4.00%
3.50%
---Tax Law Risk : The risk of tax law increases
over longer periods of time, therefore the
market discounts longer dated maturities.
- No ability to short : U.S . tax law prohibits
investors from efficiently shorting municipal
securities, thereby eliminating the ability to
arbitrage pricing inefficiencies.
tn 3.00%
(n 2.50%
N
2.00%
rn 1.50%
0
m
1.00%
0.50%
0.00%
co
00
00
co0
O)
6)
6)
6)
O)
O)
O)
0)0)0)0)0
6N)
(3)
O
O
O
N
N
N
-
Treasury Inversion(2's to 30's)
MMD Slope (2'sto 30's)
Source: Citigroup and Bloomberg
alternativethinkingfrom Citigroup
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alternative jnvetfnents
8
Supply vs. Demand Mismatch
.
.
.
.
.
5
.
-
.
.
-
.
In 2005, the municipal market had 3x more long-term than shortterm debt. In contrast, U.S. treasury market had the opposite profile
with only 1/6h as many longer-term treasury notes and bonds as
treasury bills.
Annual Su
.
.
.
.
Lon g -Term
350
$257
$343
$328
$306
$245
250
$197
$190
200
$163
100 $61
$128
$64
77
$64
$68
1997
1998
15.5%
m Mutualfunds
14.3%
$83
$123
$111
$116
$102
2000
2001
2002
2003
2004
2006
2.2 %
enterprises
bonds with final maturity of 13 months or longer, short-term comprised
than 13 months T-bills have maturity of 1 year or less
of Governors of the Federal Reserve.
funds, and bank personal trusts and estates.
2.0%
Businesses
1.6%
Brokers
anddealers
1.6%
2006
(a) Thomson Financial Securities Data Long-term comprised of all non-variable rate municipal
of all variable rate municipal bonds and all other municipal bonds with final maturity of less
(b) Flow of Funds Accounts of the United States (through Q3). as of December 7, 2006, Board
(c) Retail consists of household sector, money market mutual funds, mutual funds, closed-end
alternativethinkingfrom Citigroup
3.8%
Other
Government-sponsored
1999
7.2%
banking
Closed-endfunds
0
1996
38.6%
15.1%
m
1996
HouseholdSector
M Money market mutual funds
$159
$100
e (b)
Insurancecompanies
Commercial
$138
. .
Retail investors and retail proxies (c)= 70%
$331
$303
300
- .
b Investor T
Short-Term
400
1 .
Since the interest received on municipal bonds is tax-exempt for
individuals, the demand is primarily from retail investors. Since retail
investors tend to have short to intermediate term investment focus,
there is greater demand at the shorter end of the curve.
Munici als Ownershi
I of Munici al Debt (a)
Market dominated by issuance of 30-year bonds
150
I -
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9
Yield Curve Arbitrage
The relative steepness of the municipal yield curve can provide a persistent arbitrage opportunity.
•
• Theoretically, AAA municipal yields should trade at
65% of the LIBOR swap curve (1 - 35% tax rate).
• However, longer term municipal bonds historically
traded at levels significantly cheaper than the 65%
theoretical break-even.
-
-
.
Å
- .
•
D-
-
•-
.
..
##.
LIBORSwap Curve
5.5%.
5.0%
• The Fund seeks to take advantage of this
inefficiency by purchasing long-term municipal
bonds, funding the position in the short-term tax
exempt market through a TOB program and hedging
the interest rate exposure in the taxable market.
77.1%of
LIBOR
asi6
a.0^/6
Actual Muni Curve
ArbitrageOpportunity
3.5%
• The objective is to monetize the relative steepness in
the municipal yield curve while minimizing the markto-market volatility.
f --Hypothetical Muni Curve
(65% of LIBOR)
3.0
2.5%
2.0%
0
5
10
15
20
25
30
Source: Citigroup and Thompson Financial Data
(a) Assuming 35% marginal tax rate, an investor should be economcally indifferent between receiving 100% of LIBOR on a taxable investment and 65% of LIBOR on a
tax-exempt one.
alternativethinkingfrom Citigroup
cltlgrouPJ
alternative investments
10
Consistency of Yield Curve Arbitrage
Even when the treasuryyield curve has inverted,a hedgedtenderoptionbond positionwould have
generatedsignificantpositivecarry.
• The consistent carry is a function of the
steepnessand low volatility of the municipal
yield curve relative to taxables.
MuniHedgedin LIBORCash Flows(6-MonthRollingAverage)
Historical
MuniHedgedin LIBORAverageCashFlow
• A hedged tender optionbond positionhas
consistentlygenerated positivecarry even in
times of treasury inversion.
TreasuryInversion(2's to 30's)
3.00%
1.00%
Average = 1.10%
0.00%
(()
O
O
(O
O
O
rO
O
-
W
o)
O)
O
O
O
0
0
0
N
O
O
N
N
0
0
N
(•)
O
0
N
V
0
O
N
V7
O
O
N
(O
0
0
N
Source: Citigroup, Thomson Financial Data, and Bloomberg
(a)
(b)
Assumes (1) 55% hedge ratio, (2) carry of MMD + 10bps and (3) finding of 100% of the municipal notional at BMA + 25bps
Data as of 12/14/06
alternativethinkingfrom Citigroup
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alternative investments
11
Strong Relationship Between Municipals and LIBOR
• The correlationbetween municipalrates and LIBOR has been strongover time.
• However, at times, municipalpositionsmay underperformor outperformLIBOR hedges for several reasonsincluding:
Perceivedor realizedtax reform
Supplyof municipalbondsin the marketplace
Cyclicalfactorsthat impact retail demand for municipalbonds
Additionaltechnicalfactorsthat affect the municipal/LIBOR relationship.
• These dislocationscan cause mark-to-marketvolatilityin a hedged municipalposition, but they can a Iso presentrelative
value opportunitiesfor skilledasset managers.
•
Regression Analysis:
30yr Municipals vs 30yr LIBOR
I
• .
- • • - •
I
(a)
7.50
7.00
!.
fkv
','r`•,.
6.50
0%
6.00
5.50
y = 0.5872x + 1.5052
5.00
-MTM
R2= 0.9689
4.50
MTM of LIBOR Swap
4.00
4.00
of Municipal Bond
-200%
5.00
6.00
7.00
8.00
9.00
10.00
O`cp)
N
On)
N
co
M
0
N
N
N
0
N
0
0
0
0
0
N
N
N
N
N
LIBOR (%)
Source: Citigroup and Thompson Financial Data
Source: Citigroup and Thompson Financial Data
(a) 30yr Municipals are proxied using the 30yr MMD yield. MMD is generally considered to be the benchmark municipal scale and is defined as the AAA-rated scale of closing municipal yields produced
daily by Thompson Financial Municipals Group.
(b) Assumes: ( 1) 30-year, non-callable par bonds, purchased on 2114/ 1996, always priced to 30-year maturity date using the MMD yield curve and (2) 55% hedge ratio based on swap notional as % of
alternativethinkingfrom Citigroup
cltlgroup'
07
alternative investments
12
Frequent Macro-Relative Value Opportunities
-Tax-Exempt /Taxable Basis : Supply
and demand imbalances between the
taxable and tax-exempt markets present
relative value trading opportunities. The
Fund will actively manage financing
levels to mitigate mark-to-market
volatility and enhance total return.
100.00%
•Seasonality : Seasonal factors such as
mutual fund flows, bond redemptions,
coupon payments and tax payments
create seasonal trading opportunities in
municipals.
-Curve Slope Distensions : Issuance
patterns, program buying, and retail
demand patterns produce relative value
opportunities in municipal cash and
related derivatives.
•Structural Inefficiencies : Retail
investor coupon preferences, complex
embedded options, and other structural
complexities can present significant
relative value opportunities.
alternativethinkingfrom Citigroup
95.00%
90.00%
85.00%
80.00%
75.00%
70.00%
65.00%
O
0)
<
N
O)
0)
N
N
0)
(+)
0)
V
O)
U)
(3)
co
O)
r
0)
co
0)
O)
w
O)
O
0
O
O
N
N
N
N
N
N
(V
(V
N
N
m m m m m
O
O
N
N
O
O
N
C<)
O
O
N
V
0
O
N
in
0
O
N
(0
0
O
(V
N
N
N
N
N
(V
: Citigroup and Thomson Financial Data
Source
cltlgroup'''
alternative ;nvestments
13
Frequent Micro -Relative Value Opportunities
•
• Liquidity Premiums: With fewer
liquidity providers than in taxable
markets, individual municipal bonds can
routinely trade at intra-day spreads of 4
basis points. This short-term yield
volatility provides frequent opportunities
for a skilled Fund manager to enhance
returns (see chart at top-right).
•
.
-
.
.
8 bps
6 bps
• •
4 bps
•
2 bps
•
0 bps
;•
Standard Deviation : 4.00 bps
•••
•
M
•
•
-2 bps
:
-4 bps
•
-6 bps
• Pre-Refunding Opportunities: The
propensity of municipal issuers to
advance-refund callable debt creates
the potential for dramatic price
appreciation (see chart at bottom right).
A skilled Fund manager can select
portfolio assets with a greater likelihood
of being pre-refunded.
• Credit Misalignments : Individual
credits tend to trade at historical
spreads to one another. Experienced
Fund managers can identify misaligned
credit pairs, and make relative value
trades to enhance returns.
-
.
.
•
••
•
•
•
•
••
•
•
•
•
-8 bps
•6
-10 bps
••
-12 bps
9/1
10/1
11/1
12/1
1/1
2/1
3/1
.
$110
$109
$108
$107
$106
$105
O
$104
$103
$102
$101
$100
i
i19 11191 1
-
251255K46
575577FF3
151 91
13033WLB7
(a) The MSRB (the Municipal Securities Rulemaking Board) is an independent self-regulatory organization established by Congress in 1975 which is charged with primary
rulemaking authority - under the SEC - over dealers, dealer banks, and brokers in municipal securities.
(b) The AAA-rated scale of closing municipal yields produced daily by Thompson Financial Municipals Group. MMD is generally considered to be the benchmark municipal scale.
alternativethinkingfrom Citigroup
cltlgroup
' '
aiternative investments
14
Low Correlation to Alternative Asset Classes
Historically, the strategy has exhibited low correlation to other asset classes
•
• •
Lehman Bond US Index
S&P 500 Index
Morgan Stanley EAFE Index
Reuters/Jefferies
Commodity Index
HFRI US Convertible Arb
HFRI US Equity Mkt Neutral
HFRI US Relative Value Arb
HFRI US Macro
HFRI US Fixed Income
HFRI US Equity Mkt Neutral Stat Arb
HFRI US Merger Arb
HFRI US Equity Hedge
HFRI US Event Driven
HFRI Distressed Securities
HFRI US Fund of Funds
..
,.
-
.
• .
-0.22
-0.13
-0.05
0.15
0.20
0.21
0.84
0.17
0.06
-0.13
0.33
0.28
0.21
-0.09
0.06
-0.03
-0.02
0.14
0.40
0.63
0.39
0.66
0.65
0.30
0.04
0.00
0.33
0.37
0.52
0.54
0.42
0.73
0.70
0.06
0.12
0.43
0.46
#
, I
.
- •
0.06
0.01
0.23
0.16
0.74
0.24
0.10
0.15
0.23
0.21
0.10
0.16
0.28
0.16
0.36
0.25
0.33
0.26
0.15
0.05
0.26
0.32
0.19
0.10
0.25
0.46
0.38
0.63
0.52
0.58
0.59
0.14 0.30
0.22 0.32
0.56 0.60
0.50 0.69
0.54
0.44
0.47
0.53
0.65
0.65
0.50
0.62
0.02
0.23
0.36
0.34
0.03
0.15
0.48
0.58
0.46
0.70
0.59
0.66
0.20
0.32
0.37
0.48
0.37
0.48
0.80
0.81
0.74
11
e 1
1 1.
I
i
I
11
1
!
/
I
I
I l
I
I
I
.
Source Citigroup and Bloomberg
Note: HFRI represents Hedge Fund Research Index.
(a) Correlations to municipal strategy are based on nominal monthly returns (including unrealized gains and losses) of a hypothetical position in 30 year municipal bonds. hedged
in LIBOR. usin a 55% hed e ratio. Past correlations ma not reflect future correlations.
alternativethinkingfrom Citigroup
cltlgroup'~ '
aiternat ve ,nvestments
15
Fund Terms
The following terms are indicative and may be subject to change . Prospective investors should refer to the Private Placement Memorandum for final details.
TOB Capital Municipal Portfolio
rr.
Ireland
Diverse, long-term (20- to 40-year) US tax-exempt municipal bonds with a minimum rating of AA-/Aa3
The Investment Manager of the Fund intends to maximizethe positive carry of the investmentsof the Fund and to capitalize on
macro and micro relativevalue opportunities. The InvestmentManagerwill seek to accomplishthis by: (i) purchasinglong-term US
tax-exempt municipal bonds, (ii) financing the municipalbond investmentsat short-termtax-exempt rates (% of LIBOR) using taxexempt securitizationvehicles,and (iii) hedging the municipalbond investmentsusing taxable instruments
Citigroup Alternative Investments LLC
•
$5 million minimum
•
Private Placement
•
Quarterly
Monthly; 10% gate
•
2% in Year 1; 1% in Year 2
60 Days
••
30 Days
Monthly NAV
USD
2.00% per annum on capital
If Annual Return < Hurdle Rate, PerformanceFee is 0% of total Annual Return
If Annual Return > 125%x HurdleRate, PerformanceFee is 20% of total Annual Return
Betweenan annual return of HurdleRate to 125% x HurdleRate, PerformanceFee increasesapproximatelylinearlyfrom 0 to 20%
of total Annual Return
The Incentive Allocation will also be subject to a high watermark
Average of 1 Month Libor set on the first U.S. business day of each month
The InvestmentManagerintendsto distributethe net interestreceivedby the Fund on a quarterlybasis
w
alternativethinkingfrom Citigroup
citigroupi
aitPrnatwe +nvestmer!s
6
1
Appendices
Fund Structure
•
Fit Within Citigroup
•
Portfolio Investment Guidelines
Key Risks
•
JurisdictionalConsiderations
w
alternativethinkingfrom Citigroup
citigroupi
aiternahve !nvestmentti
Fund Structure
• Limitations make it difficult to take advantage of municipal bond arbitrage
US tax rules require that investors treat the interest income from municipal bonds that the investor has shorted as fully taxable, i.e., the
person that lends a municipal bond to be shorted cannot continue to claim tax-exempt income;
In accordance with US tax rules, interest expense from direct financings of municipal bonds (e.g., repo agreements) is not a deductible
expense; and
Market fragmentation has impeded the development of a liquid municipal futures contracts market.
• The structure of the Fund (using a Tender Option Bond program), however, permits the capture of these arbitrage
opportunities.
•
-
-
.
•
- ••
•
-
•-
S.
Step 3. Trade execution - after cash is
Step 1. Proceeds from issuance are invested
in high quality short-term investments
transferred.the following occur simultaneously:
a. Raise money from money market funds
through the issuance of floating rate
certificates
b. Purchase municipal bond with proceeds
c. Execute interest rate hedge on each bond
Step 2. Eligible investments must be
pledged to the TOB dealer as collateral
to support leverage
InterestRate
Hedges
Fees
Tax-exempt
(c) - $80
Residual Income
Investor
(a) $10 million
.
I
(a) - $10
million
---I
P(b) Nominal
Investment
a.
I
Tax-exempt
Variable Rate
I
V (c)$80 million
Collateral
"Eligible
Investment"
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Fit Within Citigroup
a •
Cards
Smith Barney
Consumer Finance
Citigroup Private Bank
Retail Banking
Citigroup Investment
Research
3 Investment
Centers
Citigroup
Private Equity
Citigroup Venture
Capital
International
CVC Equity
Partners
•
Citigroup
Managed Futures
Citigroup
Municipal
Investors
Hedge Funds
Transaction Services
8 Investment Centers
Citigroup Fixed
Income
Alternatives
Private Equity
Capital Markets
& Banking
Emerging Market
Special
Opportunities
Funds of Hedge
Funds
L
Real Estate
Structured
Products
I Investment
Center
2 Investment
Centers
Citigroup
Property Investors
Citigroup Alpha
Strategies
Global
Credit
Structures
Leveraged Loan
Investments
Tribeca Global
Corporate Special
Opportunities
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Portfolio Investment Guidelines
The following guidelines are indicative and may be subject to change. Prospective investors should refer to the Private Placement
Memorandum for final details.
US tax-exempt municipal bonds, Residual Certificate of a tender option bond program, or a Forward
Delivery Municipal Bond
AA-/Aa3 (Uninsuredand Insured)
40 years
. .
At least 70% of the aggregate principalbalance of the portfolioassets shall consistof AAA/Aaa rated US
tax-exempt municipalbonds
.
I
•
•
.
. 1.
8-10x
No more than 7.5% of the aggregate principal balance of the municipal bonds will be issued by any single
issuer
•.
No more than 70% (General Obligation);
No more than 20% (All other IndustryClassifications)
•.
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Taxable and tax-exempt assets, includingmoney market fund investments; Minimum rating of A-/A3 or A1/P-1; Maximum maturityof 5 years (AAA/Aaa) and 1 year (less than AAA/Aaa). Investmentswith put right
exercisablein 1 year will have a maximummaturityof 40 years
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Key Risks
The following is a list of key risks attributable to the investments in the Fund"'.
• Basis Risk
Although the Fund is employing a hedged, leveraged strategy in U.S. municipal bonds, the Fund may experience substantial
volatility due to dissentions in the relationship of the municipal bond investments and the hedging instruments ("basis risk").
Additionally, fundamental tax reform could result in a significant change in the relationship between municipal yields and
taxable rates that could result in underperformance of municipals relative to the hedging instruments used by the Fund.
Investors must thus be prepared to lose all or substantially all of their investment in the Fund.
• Flattening or Inversion
Flattening or inversion of the tax-exempt curve (the difference between short and long-term interest rates), relative to taxable
yield curves, would reduce the positive carry that the Fund generates.
• Leverage
The use of leverage will magnify the gains and losses experienced by the Fund and could cause the Fund's NAV to be
subject to wider fluctuations than would be the case if the Fund did not use leverage.
Further, to the extent that TOB financing is unavailable, the Fund's performance could be adversely impacted.
• Limited Operating History
Because the Fund has no operating history, there can be no assurance that the Fund will achieve its investment objectives.
Target returns of the Fund are based on historical analyses of similar, hypothetical municipal strategies. Past performance is
not an indication of future results.
There exists a possibility that an investor could suffer a substantial or total loss as a result of investment in the Fund.
(a) The list of key risks described herein is not a list of all risks. For a more detailed discussion of the risks attributed to investing in the Fund see the private placement
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Key Risks
Reliance upon the Investment Manager
All investment and risk management decisions with respect to the Fund will be made by the Investment Manager. As a result,
the success of the Fund will depend largely on the ability of the Investment Manager.
- Investors will have no right or power to directly take part in the management of the Fund.
Lack of Liquidity
There will be no secondarymarket for interestsin the Fund, and none is expected to develop.
Interestswill be redeemable on a pre-specifiedbasis and may be assignedor otherwisetransferredonly under limited
circumstances.
As such, participationin the Fund will generally be an illiquidinvestment.
Substantial Redemptions
Substantial redemptions by investors within a short period of time could require the Investment Manager to liquidate positions
more rapidly than would otherwise be desirable, which could adversely affect the value of interests in the Fund.
Furthermore, the resulting reduction in the Fund's assets could make it more difficult to generate a positive rate of return or to
recoup losses due to a reduced equity base.
• Conflicts of Interest
Affiliates of Citigroup provide various types of services to the Fund and the Investment Manager. Certain conflicts may arise
within the Citigroup organization.
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A
Jurisdictional Considerations
Disclaimer - Introduction
The introduction to this disclaimer is relevant to all recipients of this communication. In addition country-specific sections are also relevant to recipients in those
jurisdictions.
This document is intended to provide informationabout investments and investment services to professionalinvestorswho are familiar with and capable of
evaluating the merits and risks associated with investments of the kind described. The productsand services to which this document relates are only available to
such persons and any other persons should not act on it or rely on it. Nothing in the disclaimer excludes any liability, which CAI is not permittedto exclude by
applicable law.
This document is not to be construed as an offer, invitationor solicitationfor any investment productin any jurisdiction, and is not being and will not be made
available to the public. Any future investment will be subject to and made on the terms of the legal agreements relating thereto. Investment products referred to in
this document have not and will not be offered to the public, and any investor commits himself not to offer the investment products to the public upon resale and to
contractually bind any other investor not to offer the investment productsto the public.
Any investments referred to may not be registered with any regulator, regulatory body or similar organizationor institutionin any jurisdiction. Potential investors
should verify whether productsare listed on any stock exchange. Before making an investment, you should consider taking independent professionaladvice
about the unregistered and potentially unlistedstatus of any product.
The information contained is based upon a number of sources and believed to be correct, but cannot be guaranteed. Any opinions and estimates are judgments
as of this date and are subject to change without notice. Indications of the potential return of the investment have been given in
good faith but are not guaranteed and are subject to uncertainties beyond control and should not be relied upon by investors in forming investment decisions.
No representation is made regarding the legal, accounting, regulatory or tax treatment of an investment in any jurisdiction relevant to a recipient of this document.
This document contains proprietary information and is confidential to its recipient and, subject to applicable law requiring its disclosure by the recipient. may not be
reproduced or redistributed by any recipient to any person other than the recipient's professional advisors.
Bahrain
For Bahraini residents only this prospectus is strictly private and confidential and is being issued to a limited number of sophisticated investors, and may not be
reproduced or used for any other purpose, nor provided to any person other than the recipient thereof. The fund has not been app roved by the Bahrain Monetary
Agency ("BMA"). The BMA takes no responsibility for the accuracy of the statement and information contained neither in this prospectus nor for the performance of
the fund, nor shall the BMA have any liability to any person for damage or loss resulting from reliance on any statement or information contained herein. All
applications for investment should be received, and any allotments made from outside Bahrain.
Belgium
The offer of investments has not been notified to, and the prospectus has not been approved by, the Belgian Banking, Finance and Insurance Commission
(Commission bancaire, financiere et des assurances /Commissie voor het bank-, financie- en assurantiewezen). Accordingly, the offer may not be advertised, the
securities may not be offered or sold and this Memorandum nor any information circular, brochure or similar document related to the offer may be distributed,
directly or indirectly to any persons in Belgium other than to investors required to invest a minimum of 250,000 euros or the equivalent thereof in another currency
per investor and per transaction. This document has been issued to you for your personal use only and exclusively for the purposes of the offer of investments.
Accordingly this document may not be used for any other purpose nor passed on to any other person in Belgium
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A
¢, f, 1'1C:jEX
Jurisdictional Considerations
Cayman Islands
No invitation may be made to the public in the Cayman Islands to subscribe for Units or to any person resident or domiciled in the Cayman Islands (other than any
object of a charitable trust or power).
Denmark
This offer document has not been and will not be filed with or approved by the Danish Financial Supervisory Authority or any other regulatory authority in the
Kingdom of Denmark.
The securities as applicable have not been offered or sold and may not be offered, sold or delivered directly or indirectly in Denmark, unless in compliance with
Chapters 6 or 12 of the Danish Act on Trading in Securities and executive orders issued pursuant hereto as amended from time to time. Accordingly, this offer
document may not be made available nor may securities as applicable otherwise be marketed and offered for sale in Denmark other than in circumstances which
are deemed not to be a marketing or an offer to the public in Denmark.
EU
This document is intended to provide information about investments and investment services to professional investors or to other qualified investors (if resident in the
EU, qualified investors as defined in the EU Prospectus Directive) who are familiar with and capable of evaluating the merits and risks associated with investments
of the kind described. The products and services to which this document relates are only available to such persons and any other persons should not act on it or rely
on it. This document is communicated by Citibank International plc in the EU.
Germany
The fund units must not be distributed within Germany by way of public offer, public advertisement or in any similar manner. This memorandum and any other
marketing materials relating to the fund units as well as information contained therein may not be supplied to the public in Germany or used in connection with any
offer for subscription of the fund units to the public in Germany and may not be distributed to any person or entity other than the recipients hereof.
Hong Kong
No action has been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis. No interest in the Feeder
Fund will be issued to any person other than the person to whom the offering memorandum relating to the Feeder Fund has been sent. No person in Hong Kong
other than the person to whom the copy of the offering memorandum of the Feeder Fund has been addressed may treat the same as constituting an invitation to him
to invest. This document may not be reproduced in any form or transmitted to any person other than the person to whom it is addressed. CAI and its connected
persons may share any fees they receive with intermediaries, agents or other persons introducing investors or remunerate such persons out of their own resources.
WARNING
The contents of this document have not been reviewed by any regulatory authority in Hong Kong. Potential investors in Hong Kong are advised to exercise caution
in relation to any offer of an investment. If potential investors are in any doubt about any of the contents of this document, they should obtain independent
professional advice.
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Appendix
Jurisdictional Considerations
Kuwait
By receiving this document, the person or entity to whom it has been issued understands, acknowledges and agrees that this document has not been approved by
the Kuwait Central Bank or the Kuwait Ministry of Commerce and Industry or any authorities in Kuwait, nor has the Trustee, Citibank International plc or any
representative of Citigroup Alternative Investments received authorization or licensing from the Kuwait Central Bank or the Kuwait Ministry of Commerce and
Industry or any authorities in Kuwait to market or sell the Investments within Kuwait. Therefore, the Feeder Fund will not be marketed or sold in Kuwait and no
services relating to an offering, including the receipt of applications or this document or both, will be rendered within Kuwait by Citibank International plc or any
representative of Citigroup Alternative Investments LLC.
The Netherlands
In the Netherlands, the units may only be offered, sold, transferred or assigned, as part of their initial distribution or at any time thereafter, to natural persons who or
legal entities which (i) are professional market parties (as defined in section 1-a, third paragraph of the Exemption Regulation pursuant to art. 4 of the Act on the
Supervision of Securities Trade ('Wet toezicht effectenverkeer 1995 ")), as referred to in section 1-c, first paragraph, under (a) of the said Exemption Regulation,
and (ii) trade or invest in investment objects in the course of their occupation or their business, as referred to in art. 1 of the Exemption Regulation of 9 October 1990
pursuant to Section 14 of the Act on the Supervision of Investment Institution, Staatscourant 198 (as amended) ("Vrijstellingsregeling art. 14 Wet toezicht
beleggingsinstellingen "). The shares and/or securities may not otherwise be offered, directly or indirectly, in the Netherlands.
Citibank Internationalplc is registeredwith the Netherlands Authority for the Financial Markets.
Portugal
The offering of the investments has not been notified to or registered with the Portuguese Securities Commission (Comissåo do Mercado de Valores Mobiliårios)
nor has this document or any related materials been submitted to the Portuguese Securities Commission. This document has been prepared for information
purposes only and it does not constitute and may not be construed as corresponding to an offer, or the solicitation of an offer, to buy, subscribe or sell the
Investments or to enter into any agreement, regardless of its nature, and neither does it constitute any sort of recommendation in respect of the Units.
The offeror will not directly or indirectly take any action or offer, advertise or sell or deliver any securities in circumstances which could qualify as a public offer
pursuant to the Codigo dos Valores Mobiliårios (the Portuguese Securities Code) and to Decree-law no. 252/2003 of 17 October, as amended ("The UCI Law"), and
in circumstances which could qualify the issuance of the securities as an issuance in the Portuguese market or otherwise than in accordance with all applicable laws
and regulations.
Saudi Arabia
By receiving this memorandum, the person or entity to whom it has been issued understands, acknowledges and agrees that this memorandum has not been
approved by the Saudi Arabian Monetary Agency, the Capital Markets Authority or the Saudi Arabian Ministry of Commerce and Indus try or any authorities in Saudi
Arabia, not has Citibank International plc received authorization or licensing from the Saudi Arabian Monetary Authority, the Capital Markets Authority or the Saudi
Arabian Ministry of Commerce and Industry or any or any other authorities in Saudi Arabia to market or sell CAI products within Saudi Arabia. Therefore, CAI
products will not be marketed or sold in Saudi Arabia and no services relating to the offering, including the receipt of applications or this memorandum or both, will
be rendered within Saudi Arabia by Citibank International plc or persons representing Citibank International plc.
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Appendix
Jurisdictional Considerations
Singapore
The offer or invitation which is the subject of this document is not allowed to be made to the retail public. This document is not a prospectus as defined in the
Securities and Futures Act, Chapter 289 of Singapore ("SFA"). Accordingly, statutory liability under that Act in relation to the content of prospectuses would not apply.
You should consider carefully whether the investment is suitable for you.
This document has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this document and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase, of Shares may not be circulated or distributed, nor may Shares be offered or sold, or be
made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under
Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions
specified in Section 305 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where Shares are subscribed or purchased under Section 305 by a relevant person which is:
(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire
share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an
accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries' rights and interest (howsoever described) in
that trust shall not be transferred within 6 months after that corporation or that trust has acquired the Shares pursuant to an offer made under Section 305
except:
(1) to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevant person defined in Section 305(5) of the SFA, or to any person
pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation o r such rights and interest in that
trust are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid
for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions specified in Section 275 of the SFA;
(2) where no consideration is or will be given for the transfer; or
(3) where the transfer is by operation of law.
Switzerland
Instruments covered by this programme which are characterized as foreign investment funds subject to the Swiss Investment Fund Act of March 18, 1994 ("IFA")
have not been submitted to or authorized by the Swiss Federal Banking Commission for distribution in and from Switzerland in accordance with the IFA. Accordingly,
such instruments may not be publicly offered or distributed in o r from Switzerland, except according to an exemption granted under the IFA or its interpretation by
the Federal Banking Commission. In addition, no publicity may be made for the instruments in Switzerland.
All CAI products do not constitute collective investment schemes governed by the Swiss Federal Act on Investment Funds of March 18, 1994 and are, therefore, not
subject to the supervision of the Swiss Federal Banking Commission.
All CAI products do not constitutecollectiveinvestment schemes governed by the Swiss Federal Act on Investment Funds of March 18 , 1994 and are, therefore, not
subject to the supervision of the Swiss Federal Banking Commissionand may be freely offered and distributed in Switzerland.
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Appendix
Jurisdictional Considerations
United Kingdom
Persons based in the U.K. or dealing with a U.K.-based CAI entity will only be permitted to invest if they are "Intermediate Customers" or "Market
Counterparties" as defined under the rules of the U.K. regulator, the Financial Services Authority, and other persons should not rely or act upon this
document.
Taiwan
The Units are not registered in Taiwan and may not be sold issued, or offered in Taiwan. No person or entity in Taiwan has been authorized to offer,
sell, or give advice regarding or otherwise intermediate the offering and sale of the Units.
Australia
Citigroup Global Markets Australia Pty Limited (Australian financial services licence No.240992) provides all financial product advice in this document. Any financial
products mentioned in this document are available to investors in Australia only by arrangement with Citigroup Global Markets Australia Pty Limited. This product is
not available to retail clients within the meaning of the Corporations Act 2001 (Cwlth of Australia) and so there is no product disclosure statement or cooling off
regime for this product. Citigroup Alternative Investments ("Issuer") is responsible for any offer document and gives any financial product advice provided in it. This
document does not take into account any investor's objectives, financial situation or needs. The Issuer is not licensed to provide any financial product advice in
Australia.
No prospectus or other disclosure document (as defined in the Corporations Act 2001 of Australia) ("Corporations Act") in relation to the Fund or any Shares is
required to be lodged with the Australian Securities and Investments Commission ("ASIC"). The Shares have not been offered or sold and may not be offered, sold
or delivered directly or indirectly in Australia unless: (i) the aggregate minimum consideration payable by each offeree is at least A$500,000 or its equivalent in other
currencies (but disregarding moneys lent by the offeror or its associates) or the offer or invitation otherwise does not require disclosure to investors under Part 6D.2
of the Corporations Act, (ii) such action complies with all applicable laws, regulations and directives and (iii) such action does not require any document to be lodged
with ASIC.
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