- Assess the overall "health" of the market
- Get a sense of where things are with inflation, interest rates, and impact on the market/financing of infrastructure-related project
- Get clarity on what to expect going forward in light of where we have been in the past months
- Take a look at what Congress has done/might still do that may impact the muni market
- Understand how 2024 elections may impact the muni market and infrastructure-related developments
Transcription:
Kevin Roberts (00:09):
Good afternoon. Good afternoon. There we go. All right, so we're going to get started here. This is the infrastructure market overview and regulatory outlook panel. We have a solid group of panelists here to discuss some topics, which should be good. I'll just get right into it and introduce the panelists. To my left, we have David Sanchez, Director at the Office of Municipal Securities. For the USS SEC's office. We have Leslie Norwood, Managing Director and Associate General Counsel at SIFMA , we have Paul Creedon, Managing Director and Head of National Infrastructure at Janney Montgomery Scott. And then last we have Rob Dailey, Executive Vice President and Head of Public Finance at PNC. So we'll just jump right into it. We're going to give a general market overview, talk about what we've seen so far in 2024. Then we'll go flip the page to some regulatory topics, talk through those, and then come back and discuss what we see going forward for the rest of 2024 and into 2025. So Paul and Rob, if you want to kick us off, so 2024 has been a strong year, year to date. We've had a really good pace of volume in the infrastructure market. Do you see that as a long-term sustainable investment for infrastructure, or do you see this as more of a temporary blip that will subside at some point?
Paul Creedon (01:47):
Yeah, I think it's interesting. I, you're right, it's been an extraordinary year by any measure. I think it's coming off an extraordinary time as well. The backend of COVID, a global pandemic and sort of the distractions, not only the funding, but the distractions that meant for our governmental clients, what their priorities are. So I think in a nutshell, I think it's hard to know year to year whether these types of things are sustainable, but I do think it's for at least the rest of this year, I think you're going to see this trend continue. I don't think it's necessarily going to stop because of the election. I think it depends on a lot of factors, but I think this year has a momentum that's extraordinary. I don't think it's any surprise to either me or Rob that we're seeing all these revisions by the pundits of volume in the market that it's going to be maybe close to 500 million.
(02:53):
I mean, the run rate right now is somewhere in 475 billion if you just take run rates. I'm not necessarily a huge believer in run rates, but it's interesting math. So I think it is, as Mike Ballinger mentioned at the beginning, it's probably going to shatter a lot of records, no doubt about it. And I think the drivers of that, I will say as market participants, I wouldn't say we're shocked or surprised by it. I think you started to feel this momentum sort of in fourth quarter 2023 that people were back to their priorities. People were back, government issuers were back to refocusing on their core sort of business. Now that the distraction of both the dollars that were spent in Covid being spent and dedicated as well as the distraction of their staff, the distraction of them from their core purpose. And I think a lot of that refocus is driving a lot of this.
(04:05):
I also think we've talked a lot about bipartisan bills, the IJA and the IRA and they've hit a tipping point now we've started to see that money spent, whether it's just on the formula side or the grant side. And even though the grants and there have been some hefty grants with their mega project program and the feds, even though they may not result directly in bond transactions, they're certainly the catalyst for a lot of infrastructure being built around it. So I think that trend is going to continue throughout the year. I think an interesting by the numbers, look at the year, if you look at new money issuance, which is up about 27% on the year, that's just straight new money without getting into SDC categories of how you split the world up. But you can also see that if you look at refundings and refunding and new monies, a category like that, that's up 80 some percent. So I think the year is not just about new money infra, it's also about taking advantage of some of, I'll call them new refunding tools like the proliferation of tender programs or BAB extraordinary call provisions being triggered. I think those have all added to that volume. So I think if anything, the municipal market has proven to be adaptive and creative as either the tax code changes or the infra landscape changes as far as federal subsidies of how to put those dollars to work. So I think that's my take on it. Great.
Rob Dailey (05:55):
Yeah, I think agree with Paul. I guess I might even go a little stronger on the increased supply. I was more cautious going into this year than maybe Paul was on what the outlook looked like. And in the beginning of the year, we had kind of month on month off of what volume was going to do in relation to 23, but the second half has come back, has been much higher than I was expecting. And I think that it's a result of and being driven by some things that have been normalized now. So people are getting used to rates above zero. We've worked through supply chain disruptions, we've got and gotten used to project cost inflation and people have kind of gotten their arms around some of these issues that need managing, and it might've taken a bit longer to do that, that might've slowed or delayed some of the starts of projects.
(06:54):
But now that they've started, I think they're off and running and I think the rest of the year looks strong. We probably are looking at people being a bit more careful post-election, so November and December. But my guess is we will still have an attractive issuance environment, and I think that this is a trend that we've begun now that's probably a 2, 3, 4 year upcycle in terms of issuance for new money projects. I think on the second half of what Paul was talking about in terms of refinancing volume, I would add that as we get to a more normal yield curve environment, we get a normal positively sloped yield curve. You're going to see more floater issuance, you're going to see more note issuance than we've seen. So I think we're going to get to a point where we've gotten more and more tools coming out of the toolbox, and at the same time there's more and more of the federal money continuing to get spent. And so we're seeing some of the companion projects now being picked up that we're going to wait a year or two until after the federal money got going. And so I look at this as being long-term, something that's going to build toward a fair amount of momentum for issuance in the bond market, but just generally infrastructure spending.
Kevin Roberts (08:16):
When you talk about tools for financing, can you just elaborate a little bit on what the bank's roles are in this market? Where do you see those banks playing roles in infrastructure financing and what are the appetites for banks in these types of projects? Financings?
Rob Dailey (08:36):
Yeah, I think in terms of the yield curve, normalization a normal yield curve slope, we're going to see more issuance. Some floaters. Banks obviously can step in there to enhance liquidity and provide liquidity support. I think there'll be more note issuance than there has been, and this is going to take some time. We're kind of at a flat yield curve now, but it will take some time to get to a point where dailies and weeklies are significantly below where they are now. But I think we're headed there. In terms of infrastructure financing, I think banks are open for business and there is a fair amount of appetite to provide both short-term construction lending. I don't think there's as much capacity or interest in doing some of the long-term bank financing that had gotten done in years past. I think we're kind of out of that. Most banks really are focused on that three to five year maturity range, but they're certainly open to doing business.
Paul Creedon (09:41):
I think on the back of that, I think if you look at some of the mega projects that have been rolling out, not just us just generally in 24, but 23 into 24 or even 22 right through to 24, they look like new deals when they come to the muni market. But some of those very sizable deals like New Terminal one had significant bank financings starting those deals off and sort of being the core of that. And those transactions are now being taken out in the muni market through long-term fixed rate debt. But there is without a doubt, that continued role, I think particularly for those types of infra projects.
Leslie Norwood (10:27):
It probably is related at least somewhat in terms of the shrinking of balance sheet across the industry and whether that is some players getting out of the market or the players that are still in the market struggling with current regulation, including Basel three, I think that has certainly impacted bank's willingness to take on some of these larger deals long term.
Rob Dailey (10:53):
I think ultimately that's going to drive some of the attractiveness of some, the stuff that I was talking about in terms of floaters. It's more expensive for a bank to support that. So it's going to probably turn into greater issuance, greater appetite for products that don't need quite as much bank support.
Paul Creedon (11:13):
Because you're right, the bank support is going to be driven by how they're going to view it in their total capital stack, their constraints, what their reserves have to be for those types of projects.
Leslie Norwood (11:24):
We do believe there'll be a proposal of the Basel three end game in the short term sometime hopefully this week, but hopefully some of our advocacy will have been successful there. So we'll keep an eye on it.
Kevin Roberts (11:39):
And it seems, we talked about a number of different projects. It seems as if the definition of infrastructure has broadened over the last couple of years. We've seen projects in water, sewer, broadband power. Have you seen an uptick in projects in different spaces that would be more traditional infrastructure? And how are those finance projects being financed or how are you seeing that?
Paul Creedon (12:05):
Yeah, I think we've seen, particularly in the jobs act, you've seen that broadening of definition. And Devin mentioned it in his opener, and I think some of the questions he laid out that ORIC had considered, I think we as investment banks have been considering as well, what does it mean? What does infrastructure mean? It's no longer sort of the classics, the water, sewer, toll, roads, roads. It's much broader than that. And I think you see in the Jobs Act, and particularly in the IRA, this attempt to sort of target that new definition of infrastructure, I'd argue it was always there under the definition of the infrastructure's role is to connect people, to connect them to their jobs and to make their daily lives more manageable. That all of these more modern things like telecom, broadband, EV space, I think it's taken a lot longer with regard to the federal programs to roll out the rules around that.
(13:15):
I mean, a lot of those grant programs, we really just got the rules in March, and I think that's still being digested in a large way. So I think some of the, what we'd call new definition of infrastructure is a little tied in with that concept of how are those tax credit programs direct or not direct going to roll out? How do those grants roll out? And I think part of it for us as bankers is these are different sponsors and they have different goals than, I'll call it the traditional in for goals. So they come to this with sometimes not steeped in the not-for-profit world, the governmental world, what the government's role is in developing their projects. So I think there's a whole learning side on that side of it as to how we as investment bankers and lawyers and practitioners of public finance are going to structure those transactions.
(14:20):
They're not going to be the way that you would've structured heavy infrastructure transactions, whether that's in the airport space or the toll road space. I think it's a lot different, but that's the name of the game for the people in this room, right? We're harken back to an old boss of mine where we're in the solutions business. That's our jobs, that's what we're supposed to be doing. So I think it's going to be interesting to see how that has rolled out, but I think that's been a lot slower than what we would traditionally call infra and where that has gone.
Rob Dailey (14:57):
Yeah, agreed. And I would just to build on that, maybe there are categories of assistance that still have not really been rolled out under the federal program. So there's private activity bonds for broadband financing. There's tax credits available basically as direct pay for governmental entities. People are still, and I think are going to be taking a fair amount of time to roll these things out, figure out how they work, what the constraints are. There's some tentativeness now people don't know exactly what the constraints are going to be. Do I want to buy into the rules around the project funding or sourcing or any of the scaling in the project that the feds put on it? And so there's a little bit of kind of tiptoeing around it, but I think that as these products get rolled out, as they get used, as people get more comfortable with them, they're going to find their place in the capital structure. So it does seem like, and this is part of why I look at this as a five-year thing, I think we're going to see a bunch of new techniques and products roll out over the course of the next two or three years that we discover where they're going to work best.
(16:17):
So that to me, the sort of toolbox question is still very much in evolution, which doesn't get to, I think maybe the other side of your question, Kevin, which is about all the various forms of what might be called infrastructure. So social infrastructure, et cetera, is a huge amount of money that has not yet even begun to be spent for things like environmental equity and how that stuff plays out. We have yet to see the biggest single category of other infrastructure that we're seeing a huge amount of activity in is housing affordable housing. We haven't run into a client yet who isn't making a big high priority out of this, and we're they, everybody wants to know what we're seeing across the country. So we're seeing governments doing things to spur development activity that they hadn't done before, whether it's providing equity or promoting fast track of projects or becoming equity players paying for funding loans. Straight up we're seeing Reddi diversion of TIFF revenues towards affordable housing. You're seeing sales tax referendum for affordable housing in Denver. We did a deal in LA where the central player was a nonprofit. We're seeing other models in the southeast where the city wants to get behind a central player nonprofit player really driving the housing activity. So that to me is one of the more dynamic places where there's no shortage of interest across the country
Paul Creedon (18:08):
Or issues to solve. Frankly,
Leslie Norwood (18:10):
You bring up a lot of these things that have a private component, but we are still constrained by the private activity bond caps. And so you can have the need, but if you're hitting the cap on the coastal states, which they pretty much always hit their cap, even just in the low income housing space alone, we're going to continue to have constraints on the market there. So certainly something to look forward to in terms of the tax act is coming in 2025. I know we're going to talk about that a little bit later, but there is definitely need there. And these new types of projects definitely do have a private component to the money,
Rob Dailey (18:50):
A lot of energy around preserving right reserving volume cap that you could dispense with.
Paul Creedon (18:57):
There was a lot of push prior to 24 for the implementation, particularly in workforce housing or student housing. I know it's not exactly the same thing, but to address that issue by coming up with structures that were very creative and were accepted by the market for quite a while, that basically utilized the community contributions in a variety of ways, as Rob said, but used a not-for-profit sort of wrap on them so that you weren't in that space. So I think it's frankly, lowering, lowering of rates, more normalization of the yield curve could make those attractive. Again.
Kevin Roberts (19:44):
Dave, I wanted to get your thoughts. You hear about these new projects being financed and new creative solutions and new participants being introduced to the market. What are you thinking about when it comes to that and what should market participants be thinking about and how they should be preparing themselves?
David Sanchez (20:04):
Yeah, thank you mean, so obviously we look at all this stuff in a very big picture way, and particularly these comments about new tools in the toolbox and the kind of solutions that people are looking for, particularly on things like affordable housing. These are all things that are of big interest to us because I think what everyone has to remember is that the same rules apply to all these products, and I think people forget that a lot. So I want to talk about something real quick. First of all, I'm going to give my standard disclaimer, the views I express today are my own not reflect views. Anyone else with commission informed by my role as director of the Office of Municipal Securities. And also to say, I'm going to talk about one thing in particular, then I'm going to talk a little bit more in general with everyone else.
(20:48):
But because we feel so strongly about this particular topic, you might look for a little more formalized presentation of these remarks on our website later in the week. But what it is is we're talking about new tools in the toolbox. And one thing in particular with federal legislation et cetera, is just this continued and potentially higher use of P threes. And as we have looked at this market, we are seeing a high volume of unregistered municipal advisory activity in the P three space. So everyone remembers what municipal advice is, it's advice regarding structure, timing terms, and related matters for municipal securities. But importantly, it includes consideration of municipal bonds as a financing option. So if you're looking at these ways to cobble together these various grants and private activity bonds and you've hit your cap or whatever, and you're considering municipal bonds as an option, that is municipal advisory activity.
(21:47):
This is the place where we're seeing a high volume of unregistered activity by various types of entities. You have these global P three experts that are not registered in the United States. You have accounting firms, you have other major firms active in the space that are engaged in this type of activity. And you always hear these jokes at these conferences. Like you've seen P three, you've seen one P three. So you have this complex and highly varied instrument with financing packages that run the gamut, right? They're cobbled together from all types of sources. And so there's always in that, because we're talking about governments, municipal bonds are always at least a potential option. And that is why when you're operating in the space, the question of whether you're complying with municipal advisor rule is a question that should be in your mind and it should be in your mind with respect to the rest of your financing team.
(22:42):
And the reason why we care so much is because concerns about p threes have been raised by various entities. So it's not just because one P three goes bad or two three p threes go bad. I mean, that's not the only concern. Obviously those are concerning, but just more mundane issues that you hear about all the time where you have, again, folks who are not municipal bond experts, and so they're not always using the most efficient financing for that municipal entity. Right? Saw some comments about it from earlier Bond Buyer conferences that I thought were very good, but yeah, why are you going to use more expensive debt than you need to use second misstating? The effect on the balance sheet for the municipal entity. You have people going around saying, these are all off balance sheet transactions, these kind of comments getting made that are inaccurate.
(23:30):
You have inaccurate statements to municipal entities about the risk transfers involved in these projects. And then you occasionally have these really costly long-term impacts to fix short-term budgetary solutions. We see conflicts of interest in value for money analysis where the thumb is always on the scale to go for the P three procurement process, even though there might not be accurate evaluation of all the financing options that the municipality has. And then just real quickly also mentioning in the space that it's very common to have unsolicited proposals. So you see a lot of governmental entities put out this thing. It's not an RFP, it's an invitation to unsolicited proposals. So under the municipal advisor rule, there is an exception for, it's not advice if you're responding to an RFP, but we've put out guidance on what an RFP means and what an RFP needs to look like.
(24:20):
It's on our website under Municipal advisor FAQs. And if you're responding to an RFP, like these unsolicited proposals that do not meet that guidance of what RFP is supposed to look like, then you really have to think about whether your submission is municipal advisor activity. Again, these are not hard things for us to track down. A lot of them are very public, and what we're seeing is that people are operating in the space without being properly registered. And then, so just to pull it back a little bit, big picture, when we talk about some of these other things like workforce housing and some of these other things, a lot of the structures creative as they may be, may not be paying accurate attention to people's responsibilities under existing federal securities laws, not even new federal securities laws. And these are things like agreements that get put in place in these projects that people are not properly evaluating whether this is security or not, whether it's a municipal security or not. As well as, again, in every kind of governmental issuer has heard this, I worked for views of the city of San Francisco. You get these pitch where pitches, where people promise things that are too good to be true, and that can always be a violation of securities law. So to me, there's a lot people have to do, and it's great that people are thinking solutions, but don't forget that the rules still apply even to new things. That's basically the message.
Leslie Norwood (25:42):
Dave, I hate to say it, but I think you're largely talking to the wrong crowd. What I see is two buckets of firms that are doing this, right? You've got the group of firms that are just ignorant of the rules for whatever reason that is. They're just not knowing that the product is going to be in a bucket with municipal securities or that you should consider municipal securities. They don't operate in the United States or they're in different areas. You definitely have those firms though, that are always trying to get the regulatory arbitrage going, right? They're intentionally trying to sidestep municipal securities, not considering municipal securities so they don't have to register and trying to pitch it as a different product. I guess all of you in the room are here, you are compliant with the rules and you are continuing to try to learn. But the rule is quite complex. It's an activity based rule. It is not a contractual based rule. And there is a lot of different provisions and exemptions for firms to comply with. I think one of the key points that we feel is issuers really should be taking a proactive stance. The people that they work with should be registered and then the people that are pitching to you say they don't need to be registered. I think that should automatically start to raise red flags for an issuer.
David Sanchez (27:15):
And that's a very fair comment. And by the way, a lot of our outreach has been specifically to issuers about this, particularly in the P three space.
Leslie Norwood (27:23):
So I think clearly as a trade association for regulated broker dealers and their municipal advisors that are associated with this, we appreciate you going through these cases. A lot of the cases that you've pursued recently, not you, but the Public Finance Abuse Unit have been small type entities. We're talking series of charter schools, right? These are not necessarily highly sophisticated issuers, but these cases should hopefully make a mark.
David Sanchez (27:55):
Yeah, I mean it's been interesting because charter school is obviously a place where there's also a lot of unregistered MA activity and a lot of cases been brought by the public finance abuse unit. But as again, one of the reasons to mention this here is folks in this room operate a lot in P three space and have the ability to talk to issuers and also other participants in your deals because a lot of the complaints we're getting are from folks like you about the things they're seeing from people operating in the space who are not playing by the rules. And I guess I would also say just be careful if you really think you're playing by the rules that you're actually double checking it. Because as Leslie indicated, there are a lot of potential pitfalls, particularly on municipal advisor activity. When you start doing deals where it's only a consideration and not the main focus, it still applies. The rules still apply.
Kevin Roberts (28:48):
Great. And so Leslie, I just wanted to get your thoughts. The Tax Cuts and Jobs Act is expiring at the end of 2025. What are your thoughts on what the new tax bill might look like and the impacts on the municipal market? And then I'll just combine the next question. Are there any legislative items that you might want to keep an eye out on or you're looking at that people in the room should be thinking about?
Leslie Norwood (29:16):
Sure. Considering the breadth of the expiration of the TCJA cuts, the total package is estimated to be around 4.2 trillion. With that being the case, really literally everything is on the table. And maybe that's driving some of the issuance now is some of that fear about what potentially is on the table in 2025. This year's election will be the biggest determining factor as to how large or small a potential tax package will be next year. What we do know is neither side really wants to raise taxes, and that will be even more true if there's a split congress next year. We really shouldn't assume that the tax exemption on municipal securities is safe. The issuer community and other trades are certainly preparing to lobby in case that gets put on the table in any explicit manner, but certainly should be a concern for the community. Other legislative items we are keeping our eyes on are the corporate income tax, which would've a marginal impact on the demand for munis from crossover buyers discussions about salt, which is of course the cap on the individual state and local tax deduction as that also has a downstream impact on state and local government finances.
Kevin Roberts (30:32):
Alright, so we have a few minutes left, Rob and Paul, maybe we just want to wrap it up. Rob, you mentioned, or Paul, you had mentioned that you think the pace in the infrastructure market, you expect it to continue to be strong throughout the end of the year. Do you have any opinions or thoughts going into 2025 as to any big ticket items that you're thinking about? Looking forward to wrap up the market overview and outlook?
Paul Creedon (31:08):
I think it's hard to look into at this point in an election year. I think it's a little difficult to look into 2025. I do believe for better or for worse, we don't wake up on the Wednesday after elections anymore and know exactly who's in what seat and what their plans are. And I think that takes a long, it seems to be taking longer every election cycle to figure out who actually is in power and what their agenda is. And I think that that's going to be a bit of a driver for people to continue to push. I think past the election continue to deals through the end of the year. I think you're right, there's a lot of concern about what could happen to the municipal industry if certain things are on the table in 25. So I think people are going to stay focused on 24. And I think the hope is that rate reductions and a normalization of the yield curve will push us into 25 and keep the market attractive across the board for both new money and for refinancing. But I think it's hard to tell from the project flow at this point.
Rob Dailey (32:33):
Great.
Kevin Roberts (32:34):
Rob, any
Rob Dailey (32:35):
Thoughts? I agree. I guess I would. I think there's a potential for this to be the beginning of what could be looked at as kind of a golden age of infrastructure project financing over the next five, six years. But in addition to all the stuff we've talked about that could bring that down, two other elements we haven't talked about that, I just dunno how they're going to play out. One is the health of state balance sheets. That's a little murky right now. We don't really know what they're going to look like in a year, year and a half, two years. And so you could end up that could drive a have and have nots kind of outcome. And the other point is that it isn't clear to me what happens with rates. Rates, I think in the near term are going down, but will the overhang of debt financing and long-term inflationary trends keep rates up more elevated level than they had been? I don't know that could actually make a big difference over the longer term. So just a couple of things that nobody really knows but that are going to uncover themselves over the course of the next couple of years.
Paul Creedon (33:48):
I mean, it's sort of a last thought on infrastructure finance. I agree with what Rob said, but infrastructure finance in the US from my perspective, has never been hampered by capital market access. The markets, the teams that work with these infra, whether it's a local government doing schools or whether it's a big complicated infra project financing, there's always been an ability and an adaptiveness to the municipal markets to understand complex credits, to understand structures and to actually grant unique credits and complex credits. Market access, which doesn't necessarily exist in every market globally. A lot of other markets are very standardized from a credit standpoint. The real constraint, going back to Rob's comment has always been, what are the revenue sources that provide that credit? And that's where the state's balance sheets, income statements come into play. That's always been the constraint. Can the dollars be found to actually make the project credit worthy or credit worthy within the bounds of which it can exist? And I think that's an important aspect of our municipal market. It's not really about capital market access. We've always granted projects that way. We've always found it. It's about the revenue constraint. So I think that exactly the way
Leslie Norwood (35:29):
The funding, not the financing
Paul Creedon (35:30):
Funding, not the financing. My editor, Leslie, always edits me.
Leslie Norwood (35:36):
And how is the migration of high net worth taxpayers impacted that for different jurisdictions? Do you have a thought on that?
Paul Creedon (35:46):
I don't. I don't have a thought.
Rob Dailey (35:48):
I mean, I agree with Paul.
Paul Creedon (35:51):
Yeah, I don't have a thought on that. Some of those people, people are my clients or I hope to be my clients.
Rob Dailey (35:57):
But yeah, no, I don't disagree with you. People have migrated, but
Leslie Norwood (36:05):
Sorry for pulling that one out.
Paul Creedon (36:06):
No, no problem. No problem. She knows I'm a Jersey resident.
Rob Dailey (36:09):
Everybody's leaving. We're both Jersey residents.
Paul Creedon (36:11):
Everybody's leaving Jersey.
Leslie Norwood (36:12):
Everybody's going south.
Paul Creedon (36:13):
Alright.
Kevin Roberts (36:14):
I think that is all the time we have. We might have time for one question if there's anybody over here.
David Sanchez (36:52):
So yeah, I mean it is interesting. Again, it's not issuer's regulatory responsibility to make sure they have an MA to make sure their MA is qualified to make sure other people are qualified. It's not their responsibility, but it will be a continued message from our office over the next few months, especially about for issuers to know what an MA's responsibilities are to them. And so I think it is important. I don't never want to convey that this is actually an issuer's responsibility not, but it is important for issuers to know, for example, how they're supposed to be protected and also the kind of things they should be looking out for. So we will kind of continue with that messaging over the next few months. Yep.
Kevin Roberts (37:34):
All right. I think that about does it. Thank you all for participating and thank you. Thank you.