- Assess the overall "health" of the market
- Talk through the implications of inflation, interest rates, and potential recession on the market/financing of infrastructure-related projects
- What's happening — or not happening — in Washington that may affect the Muni market (advanced refunding's, bank-qualified limits, private activity bonds)
Matthew Neuringer (00:08):
And so now without further due, introducing the State of the Union, an overview of the state of the Muni industry. Thanks very much.
Sharone Levy (00:16):
Thank you. Do we have to turn these on?
Sharone Levy (00:24):
Okay. Good morning. I'm Sharone Levy. I'm a Counsel at Nixon Peabody here in Chicago. I work with issuers, borrowers, and underwriters across various sectors. Next to me, I'll just introduce our panel quickly, is Kevin Hoecker. Kevin is Managing Director at Wells Fargo in Chicago where he co-heads the 24 State West region for infrastructure and heads, the Bank's Limited offering group. In addition to his vast experience as an investment banker, Kevin also spent six years as a Financial Advisor working with soon to be Hall of Famer, Lois Scott, and currently serves on the board of Chicago's Auditorium Theater as the finance committee chair. Next to him is Barry Fick, Barry is the Executive Director of the Minnesota Higher Educational Facilities Authority, which is the Conduit Financing Authority, assisting the state's institutions of higher ad in accessing the capital markets for their capital projects. The authority also offers his borrowers assistance with continuing disclosure and post issuance compliance.
(01:31)
Next to him is Aaron Heintz. Aaron is the Capital Finance Director for the State of Wisconsin and has been involved in the state's debt issuances for almost 20 years. Aaron recently oversaw a $1.8 billion tender transaction that was so successful that the state had to reject numerous offers and delay a plan. Forward next to him is Paul Chatalas. Paul is the Director of Capital Markets for the State of Illinois, so we've got a friendly rivalry right next to each other. Paul oversees the state's debt issuances and during his tenure, both Moody's and S&P have returned the state's credit rating to the A level bracket citing buildup of reserves and pay down of debt among other improvements. Last but not least there at the end we've got Omar Daghestani, who is the Managing Director at Stifel, where he heads its national pension practice and manages the firm's Chicago and Boston offices. Pension liability management is a passion for Omar and he was recently named as a notable leader in finance by Crane Chicago Business. To start us off, the 2020s have been interesting in the world of Muni Finance and 2023 is no exception amidst news of inflation yield volatility, fluctuations in demand and ESG controversy. I want to know what keeps each of you up at night. Kevin, you want to start us off?
Kevin Hoecker (03:02):
Sure. Thanks Sharon and good morning to everybody. For me now, especially more than ever, it's that period of time between posting a POS and bringing a bond deal to market. It's always stressful. We always want to deliver for our clients, but with this market it's increasingly difficult. We as Bankers, FAS, Issuers, Lawyers spend months, sometimes years putting together transactions. We have what we think is the perfect structure, the perfect documents. We take those and we hand them over to the whims of the market and we all know the market can be a really awful babysitter at times can't. It was reminded of this recently, especially with inflation and rates rising. The present value of a basis point I believe is worth more now than ever. It was on a call and many of I can somewhat see with the lights shining on me, but I can see some familiar faces.
(03:56)
We were all on a call with the state of Michigan and Treasury Eubanks was on the line and we just went through this in a diatribe of the markets are very difficult, week volatility ratios are off, we're not getting reads from investors until the day of pricing and she called us all to action and said this is more than just a bond transaction. This is furthering the governor's initiatives. This is building roads, this is fixing bridges, et cetera. This is creating jobs and it really does put this level of stress and anxiety on you leading to a pricing that I think we all felt and 2023 has been marked by significant volatility in the interest rate environment, significant economic events, bank failures, Silicon Valley Bank, we remember that name. Now we probably won't 10 years of course UBS buying Credit Suisse, we all saw that rate hikes, we had seven last year for this year.
(04:54)
Hopefully there's not going to be one in September. The odds are that's not going to happen in November. There's a one in three shot of a rate hike happening, but we could be at the top of the interest rate cycle. Right? High fives all around Fed president in Chicago. Austin Goolsby said something recently and it was something along the lines of it's not so much about when the Fed is going to hike rates next, it's how long is the Fed going to keep rates at the current level? So are we going to run into a market where rates are higher for longer? That's something that is certainly on my mind. Inflation a bounds. Of course it does. The federal government gave everyone their preferred birthday present cash, 1.2 trillion of it, 550 billion to Muni issuers. That's going to cause inflation because it has an end date in which we have to spend it and then of course changing expectations around a recession is going to happen or not.
(05:44)
I'll leave that to the experts. I certainly don't know, but topics of conversation around pricings and there have been quite a few of those this year despite issuance being down 15%, it's to ratios week to week volatility and it's the topic of whether or not MMD actually functions as an index anymore. So in terms of rate movement, we all have lived through this, but I like stats and so went back and looked since the start of 2022 and remember rates started hiking in March of 2022. One year is up on the MMD side, 316 basis points. 10 year is up 212 and 30 years up, 258 basis points. That certainly does a number on refunding's and it also causes our issuer clients to have to go back to the drawing board on certain projects and decide can we actually go forward with this?
(06:32)
And then of course they have the harder decision of which projects are we going to pick over others, which caused a lot of political pressure and issues. Also, let's not ignore treasuries. Taxable issuance is down 40% this year. It was down last year as well. Taxable advance refunding's of all but dried up at the start of, and I love saying this to myself and pitching myself at the start of 2022, the one year treasury was at 25 basis points. It's now at 550, 10 year treasury was at a range of one 50 to 175. It's now at 425. Notice the inversion that's occurring there. We have investors that are still sitting on the sidelines and if you look at, everyone knows this chart, but the inflows and outflows into the Muni business, there's a lot of red on there, right? Outflows last year were 125 billion this year.
(07:20)
They're 5.6. It's investors sitting on the sideline because they're uncomfortable with the rate environment and volatility. Doing that of course means that you have significant market reinvestment risk and I can understand why though they are. A stat that I love is that in 2022 alone, the returns in the Muni market wiped away 12 years of returns in the Muni market. So in one single year we wiped away 12 years of returns. That's hard to come back from. That's a big deep scar. Certainly another stressor is week to week market volatility. So looking at MMD at how it performs week over week 2022 was wild. Of course in March of 2022, I'm sure we all remember that week that MMD in certain parts of the curve increased by almost 100 basis points is because the market was trying to figure out where is MMD can end up and later on that year, MMD decreased by around 50 basis points.
(08:19)
So that's some wild volatility this year it's muted a bit more. The largest up was around 45, largest down was around 33. But if you look at the average change in MMD week over week last year it was 12 basis points. This year it's eight basis points. So we've reduced volatility by around 33%, but there's still a lot to go there, right? Creates a little less stressful pricings than 2022. We actually have a functioning market, I'm sorry, in 2023. Yep. We have a functioning market in 2023 whereas in 2022 we really didn't. And so that's a thing. It makes it slightly easier for investment banks, advisors, clients to get the right pricing. I put that in quotes because everyone is different in terms of right pricing. Then lastly I'll talk about ratios. Ratios are just simply looking at a maturity of MMD and maturity of treasuries dividing one by the other and coming up with ratios and for example, 30 year MMD is at 392 30 year treasuries at a 438.
(09:23)
That creates a ratio of 89.59. That's a lot better than where we've been as of late because we've seen rate sell off since August 2nd of this year. But at certain points in time in the year ratios were really bad and I'll bring up one week and look at Paul as I bring up this week, the week of April 17th, 2023 ratios in certain maturities were at their absolute worst during that period of year. As a matter of fact, for example, the 30 year on that week was an 84.91. The 10 year was a 59.63. I bring that week up because that is the week of course that Paul brought his 2.5 billion geo transaction to market. It caused a lot of stress in conversations with investors because investors are saying we expect ratios to go back to their norm. Maybe it's the six month, maybe it's the one year for ratios return to the six month average.
(10:16)
At the point in time Paul went to market, that would mean MMD would have to increase around 40 basis points for ratios to normalize to the six month, to the one year or two year. You'd have to double that. So this causes a lot of conversation and headbutting back and forth with investors. So I should say all of this taken into account, how do you deal with volatility and higher rates in the market? We're still trying to figure it out. Of course it's not a perfected craft, but issuance timing is very important and it may not just be about finding a week that doesn't have a fed date, right? We all avoid fed dates this year. That certainly happened. It may be about doing things like having a document ready to go or putting it out to the market and waiting for the market that you want.
(11:06)
Aaron, who's on the board, who's done that at the State of Wisconsin? I'm sure Dave Erdman is out there. I can't see through the lights, but that was a trick that they've used. Put it out to the market. Wait, if the market's right hit the bed, maybe more issuers will start to do that. Couponing, particularly on the long end. Throw out a few different options for investors to chew on, right? It's four handles, 5, 525, 550. Even in this market, if you like the yields comparable to each other, maybe you bifurcate some maturities and then if you can, especially on multiple year capital projects with multiple issuances, try to move around par to meet demand on the curve. This is something that PFM has done for quite some time, for example. And then lastly, it's not all doom and gloom, right? We talked about the inversion in the curve. Take advantage of the positive arbitrage that you earn your escrows on refunding's due to treasuries being so darn high in media being lower than that. So I'll stop there.
Sharone Levy (12:08):
Thanks Kevin. Paul, I think that was a nice setup for you. You had a stressful pricing. Do you want to talk about that and some other things that might be stressing you out these days?
Paul Chatalas (12:21):
We did have a stressful pricing, but it worked out well for us in the end and better than for many issuers that week and for a number of reasons, one of which is we came with size, we marketed, we did a lot of things that would've worked in a good environment and bad most likely. We frequently say that we would like to be more like the State of Wisconsin and in they're innovative, they're nimble, they get in and out, and they pick the bone clean on refunding's for the state. It's a little more complicated for a number of reasons like many things.
(13:04)
But when it comes back to what keeps us up and relating to an infrastructure conferences that we have a very large capital campaign underway called Rebuild Illinois, and it's a 45 billion plan that was going to be over six years. It can be up to 10, a large portion of which is bond funded. So when we're coming to market with size, and this won't be the only time, I know bankers hate to hear that, but it will be ongoing. It is stressful trying to get the most efficient pricing that you possibly can, especially because it does mean projects. It means roads, roads, bridges, broadband, all sorts of things. And these are tangible things. These aren't just numbers and they matter a lot to us. They matter a lot to the governor. They matter a lot to everybody in the state, and I will admit, the former banker in me wants the best pricing I can possibly get. It becomes a competitive thing at some point, but it's all for the right reason, which is that we have to live with it and our taxpayers have to live with it for the next 25 years.
(14:18)
When it comes to pricing, what keeps us up is one, a lot of the typical things, volatility will the investors show up, things like that, and we can get into that, but one of which that came more clear during our last pricing is that we have an industry that relies on a benchmark that is MMD, which is more art than science is how I would categorize it, which means that, and don't get me wrong, they do a better job than I could do, but at the end of the day, it's almost like pricing with two variables which adds to the stress. And if we had something that were somehow it was refined in a way that was more timely and transparent, I think that would be helpful. It would help us as issuers. I think it would help investors. I think it would help everybody because MMD tends to lag and everybody knows it on certain days, which complicates things and it's a little bit stressful when you've got to make a yes or no decision on a 2.5 billion deal and you don't know if you've got the most efficient deal that you can.
(15:28)
At some point you have to trust that you do and the market will tell you that on the break. So that's one of the big items. There are a number of them, but that's one that's come clear and it's something that we're trying to think about. I mean, I don't know what we do. I mean, and we can look at a number of different things and we'll talk with our lawyers and our bankers or advisors and our lawyers about these things going forward, but at some point it comes down to making the best decision that you can with the information that you have. But better information is always a good thing. So I'll stop there.
Sharone Levy (16:03):
Thanks Paul. When we were talking on our prep call about what keeps us up at night, Aaron, you mentioned tenders and I know you've had a lot of experience with that lately and it's kind of a hot topic, especially where we're sitting, so if you could talk about that.
Aaron Heintz (16:20):
Yeah, thanks Sharone. Yeah, the State of Wisconsin, we've done three tenders across two credits. Our general obligation, our transportation revenue bonds. We went down the path of tenders to fund out some 30 year debt or some 30 year projects for our University of Wisconsin system that were initially financed as a bullet. In year 20, we had discussions with our municipal advisor and then with the bankers that were leading the deal and made some sort of sense to go down the tender path to get at these bonds as opposed to doing a cash to fees, I mean setting up an escrow for the transactions. So we piled on some additional candidates there that made some sort of sense for savings. It worked well there in October of last year, so we thought, well, let's try it again. Did it in March of 2023 on our transportation revenue bond credit, I think we invited 600 million, $700 million of bond holders to come forward and tender their bonds to the State of Wisconsin.
(17:15)
Had relatively robust participation in that tender and to the tune of I think a tender portion of the transaction was maybe 180, $190 million and then we tackled on a Ford delivery portion on that the market didn't move too much, so we said, well, let's try it again. On the general obligation credit this time, as Sharon mentioned earlier in the bios, we invited 1.9 billion of bonds. We had participation in excess of 50% of those bond holders and we actually had to turn away a number of those bond holders just because we had limited refunding authority in place. We like to put break checks in there so we don't have the investment bankers leading billion dollar transactions all the time with the state. It's a good thing for us, it's a good thing for them. We like to sprinkle the wealth out around a little bit for those guys so they can all make a little bit of money.
(18:07)
So we ended up only accepting about $540 million of those bonds that were actually tendered provided $51 million of PV savings for the state of Wisconsin. So that's just no view on the tenders that we've done. The things that about tenders that keep me up aren't the process of the tender and all that goes through it. It's more of are we making sure we're selecting the right candidates? Are we making sure we have the correct metrics thresholds on those metrics? The one thing that we've started seeing on these analysis that we receive from the investment banking firms is savings on the tender versus what they would be if you did a current refunding at today's rates. And that target that we're trying to hit there is at least 75% to make sure we're capturing as much of the current refunding savings that we could. It's similar to a tax exempt or taxable advanced refunding can't do the tax exempt ones right now, but we're trying to lay out a foundation that gives us the best ability to make the most knowledgeable decision on those tenders. That's about all that keeps me up for the tenders. The other thing that keeps me up since Sunday night is the fact that the packers still do own the bears a little bit, even though we don't have a hall of fame quarterback and that poor guy got hurt and his career is probably done. And I have nothing bad to say about Barry Thick and his likings because I have relatives in Minnesota.
Sharone Levy (19:34):
I wish I knew how to turn off your mic, Aaron, but right here, I don't have that power. Barry, how about you?
Barry Fick (19:41):
I think there are a couple of things that keep me up at night, one of which is actually ratings pressure with the diminishment or the ending of federal funding and the use of those items. I see it in both local governments as well as my borrowers from higher education that there's challenges to maintaining your economic and financial adequacy. So we're starting to see a lot of rating pressure from credit rating agencies in terms of there are more factors that could lead to downgrades than there are that upgrades. And so I'd like to try and keep those folks at a reasonable level. We have ratings for my borrowers. It range from low or high non-investment grade to AA two ratings. So we have a wide variety, but virtually every place that I work with is seeing some pressure on the ratings and I want to make sure that we can adequately address that going forward.
(20:36)
Second item that I have that concerns me and kind of keeps me up sometimes at night is disclosure adequacy. I'm never a hundred percent sure that we are disclosing the correct things in correct levels in the offering documents. We obviously have done them for a very long time, but at the same time, things are changing so quickly as we've talked about here already this morning that are we making sure we have the right things in there? An example being that with the recent Supreme Court case regarding Harvard and the use of race-based admission criteria, all of my school borrowers are suddenly looking at that and going, oh my gosh, do we have to disclose anything additional? Are we disclosing the right things about that? Is there something else we should be looking at? And so that's something that obviously will be resolved or at least have a better understanding of going forward.
(21:25)
But for now, it's something that's really kind of changing quickly and it could have long-term consequences for all of my borrowers. The third item that kind of keeps me up at night a little bit is arbitrage rebate. It's been years if not decades since we've had to worry about actually making money on construction fund investments and the like. And now that we have that, there are a lot of people in the finance area that have never experienced that before, so they really don't know how to account for that and how to deal with that. And if you're like me and see that most construction projects you've ever been involved with take longer and they don't spend the money as quickly as they think they will, and if you're running up against meeting exceptions to arbitrage rebate, you could be in a situation where you can be earning five plus percent on your construction fund yield, which is what we got last week for a borrower.
(22:18)
And your bond rates say four and a quarter, four and a half, and you could be earning potentially a lot of money which you could use for the project or for other things. And if you fail to meet those requirements, you could suddenly be having to pay most if not all of that to the federal government. And so it's a challenge for these folks, so we have to be more observant and aware of what we're talking about with them in terms of how do you manage this, how good are you doing on this? How quickly are you making your expenditures? How quickly are you spending things? Because as we all know, there are still supply chain issues and that has a tendency to slow some things down and through no fault of their own, they may have some problems, but it's incumbent on all of us to think keep track of those items as well. So those are the three things that I worry about.
Sharone Levy (23:06):
Thanks, Barry. And it's interesting when you mention arbitrage rebate, I started as a lawyer in this area about 16, 17 years ago and we never talked about our rebate. It was like, you don't have to worry about that. So we can talk a little bit more about that later, but thank you, Omar, I know your passion is in pensions. What else is are you thinking about these days?
Omar Daghestani (23:34):
Good morning and thanks Sharone. And indeed, my passion is in pensions as it has been for the last two decades. But really one of the things as I was thinking more and more about this panel, what keeps me up at night is we've heard a lot from the panelists this morning as well as yesterday about the challenges we face in our market right now and the challenges we face perspectively and it's clear we have a lot of work to do and one of the biggest challenges we have right now is finding smart, innovative, new approaches to new minds. I wanted to ask, do we have any Rising Stars out there today? If you could please stand. I know maybe not all the Rising Stars have risen just yet, but I see at least a few and I'm glad to see them, please give them a round of applause.
(24:25)
I think our rising stars and the fact that we have a mechanism by which we can recognize people in our field that are thinking of those new innovative approaches to things like infrastructure is really what's going to drive us to the most efficient solutions, the most equitable solutions, ones that really move our market into the next century to address some of the topics, Paul, I couldn't agree with you more on MMD. I remember when we were associates, people would say, oh, that's going to be gone in the next few years and I see Jenny out there, we heard that for years and it's still there. So we still have a lot more in the way of innovation. Of course, there's lots of things that we could talk about in the pension space. I would leave you with only one thing because I know we want to get to some conversation, which is when you consider infrastructure investments, you think, well, gee, that's a great asset for the community.
(25:17)
Every asset is countervail by liabilities and everyone knows that there's about $4 trillion of municipal debt outstanding at this moment in the market. Much of that, although not all of it is for infrastructure. What not everybody thinks about is the fact that we have 4 trillion of unfunded pension liabilities out there too. An equal weight to the debt out there counterbalancing forcing trade-offs to infrastructure needs more than that, it's not a hard number in the way that debt is. It's a number that an interesting fact where have a lot of our liabilities come from. We could point the finger, but it's really longevity right up until at least 2020 with Covid, people have kept living longer. Life expectancies have increased about 3.8 years in the last 20 interesting factoid for each percent year of additional life expectancy, which is great news for all of us and great news for our families. That's about a four to 5% increase in pension liabilities. So when I think about those challenges and all those that we've discussed today, I really think of our rising stars and those who will be rising stars soon. So I have great optimism when I see that and thank you to the bond buyer for recognizing those folks.
Sharone Levy (26:33):
Thanks Omar. So you brought up infrastructure and obviously we're at a conference focused on infrastructure. To that end, what are each of you seeing in terms of new issuance trends? Paul, I know you mentioned rebuild Illinois. Do you want to start us off there?
Paul Chatalas (26:55):
Sure. It's a little bit hard to talk, for us to talk in terms of trends necessarily because it's, I don't want to say set, but we had a very good plan that was devised by a very good team and enacted into legislation and I actually see our former deputy governor, Dan Heinz, who actually helped very much bring that into creation. So for us, we're primarily financing it. It's a combination of PAYGO Geo bonds, federal funding, so I hate to say it, but it's a very tried and true approach. P three is not a part of it necessarily, but at the same time we want the best bang for the buck. And so it comes back to, for us, an efficient market when it comes to bonding. So it's not a very sexy answer, but that's more or less our reality.
Sharone Levy (27:59):
Thank you. Aaron, do you have any thoughts in that area?
Aaron Heintz (28:03):
Yeah, our legislature decided to cash fund most of our capital projects for the upcoming. So one, instead of having 2 billion of new money needs, we only have 400 million of new money needs on our general obligation side, so there won't be a lot of new money issuance there. We'll focus our strengths on the geo credit on the refunding side, most likely through tenders. Likewise, on our transportation revenue bind credit, the legislature didn't give us any increase in revenue binding authority on that credit, so we will limp along for the next two years with the $60 million of remaining authority we have there to issue any bonds. And then likewise on the state's environmental improvement fund credit, which supports our state's SFS, they gave us minimal funding to supply state match on EPA capitalization grants over the next two years to the tune of, we'll call it $50 million, so there'll be limited borrowing there as well. That doesn't mean we're going to stop and not do a lot of work. We'll have to get rid of all that funding from Bill for our SRF credits, so expect us to do lots and lots of loans for our RSRF's.
Sharone Levy (29:09):
Thanks, Barry. What are you seeing with your borrowers?
Barry Fick (29:14):
We're seeing two things. One, primarily on the infrastructure side involves utilities. Most of the college campuses we work with have their own utility plants, and so we're seeing a extended move into renewable energy. We did a $40 million project three years ago for a university to put in a geothermal field on their campus, and I probably have half of my borrowers have wind turbines on campus that they generate power from. So that's becoming more of a situation where actually a couple of them are turning it into a profit revenue generating facility. They will not use all the power, so they have agreements with the local power utility to sell the excess power when available back to them at a fairly reasonable rate, and that's working out well for them on the local government side. And I should add that I am the chair of the finance advisory committee to the local suburb in the twin cities that I live in, and we are a growing community, one of the fastest growing communities in Minnesota, if not the nation.
(30:18)
And one of the big things we're seeing there in regards to utilities is water. The ability to have adequate water supplies, adequate water treatment for the community is something that we're seeing a lot of even in the Midwest, which is relatively well supplied with water, the current drought notwithstanding. And so one of the things that we're looking at and I've seen there is we need to build another water treatment facility as we get to the capacity of the existing one. How do you do that? Do you do some risk mitigation and locate that second facility at a separate location or do you take the existing facility and try to upgrade it or do you take the existing facility and try to expand it? So a lot of different options that have to be considered, but I'm seeing that many other cases in suburbs, at least in the upper Midwest as well.
Sharone Levy (31:09):
Thank you.
Paul Chatalas (31:09):
Hey Sharon, if I could add one thing, it's not necessarily a trend, but something that was encouraging to see is that with the creation of a rebuild Illinois program was the strong political support across the spectrum for infrastructure and given how much delayed and deferred infrastructure this country has, to see it as an investment, which it is and to really make that want to happen is something that's very encouraging and it's something that we really hope keeps up.
Sharone Levy (31:42):
Thank you. Kevin or Omar, I know we talked a little bit, Aaron mentioned forward, we've seen some return of swaps and other derivative products. Do you have any comments on what you're seeing?
Kevin Hoecker (31:58):
Sure. In terms of forwards, I think they aren't really considered unless it's inside of one year from the call date, that seems to be the sweet spot, but we've also seen issuers do particularly in tenders, and Aaron is very good at this, is threaten the forward to investors. We will pull the trigger on this if you don't participate in our tender and that's driving larger tender participation, but forwards for the most part are still there. I do see though issuers waiting for call dates, that has been something that has worked in the past and so that continues to happen. Some of the larger fas have been really talking about that for many, many years. And then on the swap side in infrastructure space, we are still not seeing swaps get done. There are some differences in swaps now versus in the past, and I have to be very careful because I'm not an associated person, don't want to get dinged, but in generalities, swaps do have call dates now, whereas in the past they did not sue in the past swaps were being issued, there were essentially 30 year non callable debt that was being compared to other results of maybe say 10 year fixed rate debt.
(33:10)
Now you can actually call swaps that causes a lot less swing in mark to markets, makes a lot more sense. However, if that black swan event occurs and we all just lived through covid, so we saw a black swan event occur, that termination payment and how to pay for that termination payment is still always going to be an issue. So starting setting a swap, fuel rates are great. Set a swap for the future if you have to pay a termination payment. I do not see infrastructure clients centering into swaps anytime in the near future. Omar, what do you have to add to that?
Omar Daghestani (33:45):
Of course it's hard to follow Kevin. I certainly don't have a beard like that, but no, no, I had to get it in. I've always admired Kevin's beard and I mean that with love, but no, all
Kevin Hoecker (33:57):
Serious is that word ends so aren't just the beard.
Omar Daghestani (34:02):
Imagine cocktail hour later tonight. So no, but in all seriousness, you look at the challenges we have in the market and there's a lot of issuers, they look at rates for new money, rightly so. Gee, this is very high and the biggest question that we've seen is how do we decide what to issue right now to the extent that you have to make choices, there's a bigger focus right now on issuing more and more of projects tax exempt, even if that requires some budget reprogramming and otherwise considering where ratios are. And that's been a big point of conversation to really optimize sort of the long-term efficiency of debt issuance. The other topic I see is around call dates and to the extent that we can shorten them, flatten them, have a call structure across a debt portfolio across the whole portfolio that puts, and I see somebody here who cares very much about that to the exact bond that you want to be able to have structures either across your whole debt stack or issue by issue that have some levelness between call dates so that you don't have these big ups and downs in terms of future current refunding opportunities, which current with the current high rate environment we're in.
(35:18)
Everybody knows that those will be coming at some point. And so to the extent you can be thoughtful in how you use your call strategy and how you program your plan of finance to achieve as much of it on a tax exempt basis, you're going to get better efficiency out there.
Sharone Levy (35:35):
Thank you. I'll kick this off and anyone can jump in. Who wants to go first? Besides where rates will be, if you were to be granted one wish or the ability to see into the future, what would be at the top of your list?
Paul Chatalas (35:56):
Want me to start? Barry, you want to go?
Barry Fick (35:58):
I'll start. From my perspective as a conduit issuer, the thing that I would really like to see happen is to come back with the ability to change the level of bank qualification so that it's not at the issuer but at the borrower level. And to increase that substantially back, it was $30 million back a while ago for 2, 3, 4 years, and quite frankly, that's inadequate as well. I would like to see that at 50 or even a hundred million dollars and assessed or be available at the borrower issue issue level rather than the issuer level.
Paul Chatalas (36:34):
I think what we would like to see, and I think we will, is a more orderly and less volatile market and especially if rates are approaching a high now, which seems to be kind of a common forecast, my hope would be that one investors, many investors would want to get in now if this is kind of a high point for them from a yield perspective and over time that the investors come back with different compositions that we're starting to already see. I mean, one, we'd like to see more stability with the funds and the long bonds, but we're also seeing more and more growth in SMAs.
(37:28)
We are seeing more international buyers, not necessarily for our issuances, but in good times and bad. We've had both very large orders and pretty wide swath of investors. I mean frequently more than a hundred different accounts coming in for our sales. So it's been good, but it would be much less stressful if we knew where it was going. We're seeing a rise in ETFs. We're seeing rise in outcome-based investors, impact investors. So ultimately, I mean that's what it comes down to is selling the bonds and putting them in the strongest hands that we can. And so the more stability we have in that regard, the better we sleep.
Aaron Heintz (38:13):
And in Wisconsin, we're appreciative of the money that was in Bill, but the money that was targeted to lead service line replacement requiring half of that to be loaned out to people that municipalities that have for the longest time just been provided free money in the form of principal forgiveness. AK grants is a hard pill for those guys to swallow. So for congress to act, and I guess we effectively repurpose that so it can all be free money might help us get that money out the door quicker and get those lead service lines replaced in a more timely fashion.
Kevin Hoecker (38:46):
I would say, and I'll pick up on Paul's point earlier in question, is MMD the right index going forward? We've talked about BVAL for example in the past and now there's actually going to be a push for BVAL. One of the, if not the largest financial advisor has decided that they're going to start pricing transactions based off of BVAL at the beginning of October. This is going to cause quite a disruption, certainly not only with all the poor analysts that have to work 80 plus hours a week, but with investors as well. And I don't know if BVAL is the answer. They were doing a really great job. If you look at how they tracked MMD and then a bunch of the folks that were at BVAL were actually picked off to go to ice, which is another that I can throw out there.
(39:38)
But they seem now to track MMD, meaning we're just seeing if MMD is adjusting, BVAL is adjusting to something similar. And I looked into how BVAL and MMD have tracked over the last or since the beginning of the year, and BVAL on average is about two basis points less than MMD at any point in time. I don't know how that'll be helpful in that. Typically what we're hearing is the argument that MMD is off and it should be higher relative to treasuries. And so if BVAL is too lower overall that's kind of an issue. However, looking at averages isn't always the best way to do it. There are some days in which BVAL is spot on and MMD is way off. I'm talking 21 basis point difference from day to day, so I'm very interested in that. Would like to see if maybe something more like BVAL or ICE take over MMD.
Sharone Levy (40:33):
Thanks. Omar, you've got the last word on this before questions.
Omar Daghestani (40:37):
Hey, thanks so much. One of the things I think about in our businesses, there has been a move, a departure in the past years away from making rational fact-based decisions and that some decisions have become politicized or have other policy elements of them and certainly that's incumbent upon any decision maker in government to make those choices. But to the extent that some of those decisions could potentially lead to suboptimal structures, be it in the issuance of debt or in the investment of proceeds. I'll give you a data point 14 states have now included an ESG criteria, pro or con in their pension fund retirement standards. That's an amazing departure from the days of prudent person. And not to say that that departure should or should not happen, but the question is to at least understand the trade-offs that are being made in making those decisions. And I think this would equally be true for green bonds, ESG bonds, whether you label them or not, et cetera. Let's at least understand the trade-offs that we're making if we're departing from anything that is sort of the highest and best use of funds or the efficient market outcome.
Sharone Levy (41:58):
Thank you. We wanted to save time for questions from the audience. I don't know who has our microphone. Oh, there she is there.
Audience Member(Joe) (42:14):
Thank you. Joe Kyriakoza with S&P Global, and I just have kind of a question. There's growing interest for ESG or impact kind of investing when you guys are making pitches or deciding on which projects to address, what are some of the common metrics you're looking at to show your legislators or constituents the value of doing these projects? And is that something that you can provide to the market showing like, Hey, by doing this, when you do a refunding, we get like here the net present value savings of this is going to be X, it's really easy for us to analyze is they're going to get some budgetary relief. But with some of these capital projects, there's not much disclosure on what value this is going to bring to your issuer into the future. What kind of metrics are you guys looking at and is this something you can share with the market?
Sharone Levy (43:12):
Go ahead.
Barry Fick (43:15):
See, that's a really good question and it's also a very big challenge. There are challenges I think initially in twofold areas. Number one, for how long will you have to be able to either guarantee or show that those that benefit however measured exists. And if you have to do it over the entire term of the bonds, that could be a challenge. We haven't seen how that works out in practice yet. For the designated green bonds that we have issued at this point, we have done them primarily for buildings that construction projects that are going to be lead certified either gold or platinum. And we will provide information for investors through the completion of the construction and the acceptance of the building being in service. Beyond that, we just don't know. I think that if you're going to get right down to it, you could somehow hopefully be able to measure savings in utility costs or some other sort of financial benefit to a project, but at this point it's a very big challenge to do that. So it's something that what we talk about with our borrowers, especially with all my college borrowers, their students are very concerned about environmental things. And so you have pressures for divestment from oil divestment, from various things on their campuses similar to what's been going on for 30, 40 years with the old apartheid and anti-Israel, this sort of thing. It's a continuation of that I think. But it's a challenge for the administration to determine how and what they can do and how strongly they can say, yes, we're doing this and here's how we measure it.
Paul Chatalas (44:59):
So we actually have not issued green bonds yet. We've looked at it extensively and given some of the evolution in what needs to happen, it's something we take a very cautious approach to doing and not just in the marketplace, but also internally. I mean we've talked it through back and forth about how best to do it and anytime we hit a snag, that's when we hit the pause and hold up. We're not opposed to doing it. And given that impact investing is not going away as we see it, and in fact it's probably more likely to grow than stop and given that investing dollars are finite, ultimately we would be more than happy to attract dollars. We're always looking for investors, we're always looking for investments in the state. And if it can help us attract those dollars that are not maybe driven away by political static in other areas, we would gladly take them.
Audience Member 1 (46:13):
Lot of green there. But think overall in general, your statements, are there metrics that you're taking your legislators or a roadway or what this is going do to this portion of the state or things like that? Is that something you disclose in official statements so the market has a better idea of the future value that you bond?
Paul Chatalas (46:40):
And that's part of what we've been talking through because our disclosure is very extensive and we are typically funding so many projects at any given time and we want to make sure that either those projects get funded or other projects get swapped in that could be deemed green in a reasonable amount, in an appropriate period of time. So that's exactly what we have been talking through and given the size and scope of what we're issuing, how much and over a long period of time, we want to make sure we get it right, which is why we haven't done it yet. But that's exactly the sort of thing we're talking through.
Barry Fick (47:12):
There is currently a POS out in the market for the Washington State Housing Finance Commission, which is a client of mine, well was a client of mine when I was an advisor years ago. They're doing some housing bonds right now, social bonds, and they do in the offering document, have a map and show where the are around the state and what the benefits of those are. So I think similar to what you're talking about for Illinois, it's the same thing in other places as well.
Aaron Heintz (47:39):
Yeah, and Wisconsin, for our environmental improvement fund, we list out every single project that could potentially be funded. Those are wastewater and drinking water projects, so any investor would know the type of projects that they would be investing in if they buy the bonds.
Sharone Levy (47:56):
Thank you. Other questions? We're at time, but we probably have time for one more.
Audience Member 2 (48:12):
Why do you think the municipal market has been so resistant to change in its procedures and we're still using the same wires that we did back in the eighties and early nineties? I mean, why is it when it comes to issuers, bond council, underwriters and the market itself, why are we so reluctant to adapt new technologies, whether it be electronic trading, whether it be different types of disclosure mechanisms and things like that. So I know it's not a FinTech panel, but it's more of an infrastructure panel, but that's the infrastructure of the municipal market that we're reluctant for that to change the BVAL to change the ICE from MMD or what is the new nomenclature of our market?
Sharone Levy (48:58):
You want to take that one?
Kevin Hoecker (48:59):
Sure. Well, I think to start as investment banks, we have a lot of systems already in place that we have spent millions upon millions of dollars on. And we are also, I think are looking for someone to take lead on it in the industry. So changing an index, it can't just be at work at Wells Fargo, it can't just be Wells Fargo saying we're only pricing off of ICE or BVAL. It has to be a larger initiative that gets underway to get that done. And I think it could be one of the prominent issuers. It could be a prominent like is going to happen here in October and then others will follow suit. I think with changing the index, that just creates additional work for all the parties involved at the beginning. It's not system changes, but some of the other stuff, it's certainly system changes and that's an expensive endeavor, especially in a rough market environment.
Barry Fick (49:52):
I think in addition for the market in general, the tax exempt market has traditionally been considered to be a relatively safe and conservative investment for folks. And so the investors themselves probably exert some sort of pressure on borrowers or issuers to go, well, it's working now. It's worked fine for me in the past. I really don't think we need to make any changes to it from their perspective. So that's not a primary component, but I think that's an underlying component that certainly at a local government level with elected city councils, that there's not a lot of pressure on them to go, let's do something different because we can. It's like let's do the stuff that the voters are understanding we've done before.
Omar Daghestani (50:37):
Well, oh, I'm sorry, Paul, go ahead.
Paul Chatalas (50:39):
Well, adding on to what Barry's saying too, and this is just as an observation, I mean this is financing by and for governments, which typically are not the most innovative for better and worse, going back to stability and safety. And there's also, especially now the threat of regulation and enforcement actions that until we know that something is going to be as right as we think it can be, we don't want to do anything that's going to bring adverse consequences later. So we are always looking for ways to innovate. We would love to innovate, but this is an industry around governments that is, to your point, not the most innovative. And it would be nice if it would be as long as it preserves the stability and safety that brings a lot of investors to the market in the first place.
Omar Daghestani (51:38):
Well, and Paul, I agree with you on innovation, but you also have to remember this is a market with many thousands of issuers and the needs of somebody like Paul or Aaron or Barry's issuer organizations that have more resources are bigger and so forth. They can scale to some of the technology solutions where if you go into the local markets, if smaller rural clients I've worked with and so forth, sometimes the finance director is also the deputy police chief and so forth. And so our market has to have ways that are scalable across a variety of enterprise sizes. It's a very different thing to talk to a state, large sophisticated state agency versus maybe a small regional fire authority where if you talk about machine readable format, their heads explode. Right? It is a whole other cottage industry that I think will actually pop up to support some of those needs when you keep pulling up the technological requirements, particularly for smaller issuers. And so I think, I agree with you, I'd love to see more innovation. I'd love to see more efficiency. I think there's nobody in this room who wouldn't agree with that, but in order to do that effectively, we have to have mechanisms that allow us to bring the entire market with to those standards in a comfortable, rational fashion rather than just have it be the large state authorities and cities and so forth that can do it and then leave a bunch behind.
Paul Chatalas (53:09):
I think one more thing too, just to state the obvious is that with any degree of innovation comes a degree of risk, and this is an industry full of parties all around the table who are paid not to take risk, if anything. So I think ultimately it comes down to a lot of that. But that said, it would be nice. It would be nice to have more innovation. It would be nice to have more efficiency. It would be nice. It would be nice.
Sharone Levy (53:39):
Thank you. We're over time, but thank you for your good questions. Thank you to the panel. Thank you to the Bond Buyer and all the other sponsors.