- Derivative products and calls attached to them
- Return of variable rate?
- Tender offers
- Forward-delivery bonds
Jeff Lindquist (00:06):
Good afternoon everyone. We'll get started. We know you have a lot to do. I'm Jeff Lindquist with RBC Capital Markets. I sit in the municipal products group. I really have one foot in the banking side and the other foot in the sales, trading, underwriting and derivative part of the bank. And so I work with our capital markets bankers on a whole bunch of different products. We'll talk about some of them today. This is really meant to be an interactive, it's a little hard to see you since we're sitting in some blinding light. So if we don't call on you, just shout out. I'm joined by three colleagues. I'll let them introduce ourselves. We have a little time clock up here, so we'll try to make sure we pay attention. No presentation materials. So really we're going to talk about a few things and then hopefully get some Q and A from you. Great.
Frank Doyle (00:56):
I'm Frank Doyle. I work at Summit Till Mitsui Banking Corporation. Been there for about four years. We are primarily, my group I'm in is primarily an LLC banking group. We have a portfolio of about $8 billion of high quality clients, of which the Bay Area Total Authority. We support with some of our LLCs, but we also provide other type of facilities. We do revolving credit facilities. We do funded loans, principally taxable, but sometimes otherwise we can purchase loans. So yeah, it's a very national perspective. Most of our book is with our typical geo water, sewer, electric transportation, airports and bridges, et cetera. And I'll pass it on to Derek.
Derek Hansel (01:49):
Great. Derek Hansel, Chief Financial Officer for the Bay Area Toll Authority, BATA and a few other acronyms, all of which I tend to forget. We've got about nine and a half billion dollars of debt on the toll bridge side. We operate the seven state owned bridges in the Bay Area, so everything but the Golden Gate Bridge, I am very fond of our natural monopoly. I tell our investors, if folks don't like to cross our bridges, they're welcome to travel around down through San Jose and back up the other side. But anything good that is associated with BATAs bonds, you can credit to my predecessor Brian Mayhew who's up here and I'll take responsibility for anything you don't like.
Samantha Funk (02:38):
Good afternoon everybody. My name's Samantha Funk. I'm with PNC Bank based out of Phoenix, Arizona. So PNC is similar to Frank but a little bit different. So we have a 22, 23 billion portfolio in public finance. We service all given that we've got a full platform, full banking platform responsible for the origination of credit as well as investment management products and services, treasury management products and services, and really deliver the full suite of products to all of our public finance clients.
Jeff Lindquist (03:10):
So a big part of the topic has really just been the incredible rise in rates over the last year. I had to look back today just to see where was anybody Have a guess where the 10 year treasury was two years ago? I didn't know. I had to look it up and I'm a rate derivative guy, so don't feel bad. It was 1.65, 1.65%. I went back and looked. No one in our group had we do a equity and tenure. So where's the S and P going to be? Where's the NASDAQ going to be? Where's the tenure going to be? That kind of thing at the beginning of the year and whoever wins gets to buy drinks at the end of the year, so it's not something you really try to do. Nobody had at the end of last year that rates would be where they were a year ago, A guess on 10 year treasury.
(04:00)
It's 4% this morning. I don't know. Since you've been here, it actually hit 5%. I think it closed briefly below that, but it's been an incredible changing environment. Even twos, tens, which were a hundred basis points negative were only 15 basis points negative. So that curve is flattening out and that's really to just talk about the incredible changes in the market. SIFMA reset this week at a 4.19. I think some in the room can remember a few years ago when SIFMA was one basis point. So those were some nice times. No one's asking about negative interest rates anymore and how we're going to do that. Again, I bring it up just as a reminder that rates are changing. If you take away anything from, certainly from my portion of the presentation today, I hope it's really that we know you have a lot going on.
(04:53)
You have debt part of your jobs and you have a lot of other things in your jobs. I think what you'll hear from us today is a consistent message that bankers want to show you ideas. We know you can't listen to all of them. We know you can't listen to everybody and you can't certainly can't hear the same idea eight times in a row from banks, and I'll steal Derek's line and say it's proprietary. I thought that was great, but hopefully you'll hear some ideas today. Pique your interest a little bit. It's not a sales pitch by any of us. This is just to talk about things that we're seeing. So with that, Derek, I think they'd really like to hear from you a little bit about with that, we know it's a large portfolio, but talk a little bit about what you've been doing, what you've been looking at, and maybe specifically some of the things around tenders as well.
Derek Hansel (05:42):
Sure, thanks. So I've been at BATA for 17 months, Sunday, not that I count very shortly after I arrived at Batta, we started receiving very consistent in regular pitches from many of you in the room, lots of people not in the room talking about tender opportunities. Again, we have a very large debt portfolio, a lot of which was issued on a taxable basis, much of it on-call with kind of the dislocations in the market, the rapid ramp up in rates and corresponding decreases in prices for these securities. There were a lot of folks who didn't really want to carry bonds on their sheets where they were 70, 75 cents on the buck. So we were being shown tender opportunities. I was reasonably consistent with folks last summer that we were going to consider it in the context of our regular debt issuance program. We have a very large variable rate portfolio consisting of FRNs, VRDBs, and put bonds, and we have to maintain that every single year through roles and so we were going to handle it then that has the advantage for us at least, of being able to minimize the number of times we have to go to our board for approval, getting one cut at disclosure, which is a pain to do frankly, and just minimizes the pain and agony on our side, which is always a good thing because lazy.
(07:34)
So we ultimately tendered this spring for about 1.3 billion in bonds. We could have taken somewhere around seven 70. We did fortunately get about a third of the bonds for which we tendered come to us about 485 million and accepted 473. So we picked up 25 million in PV savings. That's great. But another piece of it was getting a lot of optionality that we did not have previously, so that was very nice. And then finally we also have a large BABs portfolio as part of that taxable portfolio and we were able to de-risk about 62 million of that just trying to take some risk off the table of the feds continuing to screw things up, which they seem to have a remarkable capacity to do.
Jeff Lindquist (08:26):
One of the questions I know I would have is how would you evaluate certain proposals in this environment? So we come in with various ideas like bonds for example, that couldn't be refunded for another year. Issuers have certainly gotten nervous for the reasons I talked about. Hey, I don't want to lose my refunding. I've got some five coupons. There are products like rate locks, there are forward bonds which tend to be a little bit more expensive at times, Cinderella, different taxable structures. Talk a little bit about some of the things you all go through when you're considering what to do about future debt that can't yet be refunded.
Derek Hansel (09:06):
For me at least, and I've been in a variety of different seats, I've got the fortune of having been able to be a municipal advisor, an investment banker, and now an issuer. A lot of that really depends on what seat I've been sitting in in terms of what's the size of that seat or what's the size of the client I'm advising, at least in my view, it's very different for a large issuer and a frequent issuer than it is for a smaller issuer. If you're a smaller issuer, you may look at that opportunity as a one-time thing and say, I really better go right now in the places where I've been essentially working as a larger issuer here at the Pennsylvania Turnpike Commission, my view is frankly opportunities are going to come and go, right? We've got a large portfolio, maybe it won't be there in three months or six months, but I've got a lot of time and I've got boards and commissions who have a whole lot of things on their plate and I certainly wouldn't bring them something that was three or 4 million or 5 million of PV savings. It just doesn't ring the bell.
Jeff Lindquist (10:23):
That's actually, and I have some questions I want to ask Samantha and Frank, but when you think about the worst joke I know is SWAP is still a four letter word, a synthetic fixed product, something like a very plain vanilla percentage of swap with VRDNs. You had mentioned your very large variable rate portfolio, so you're rolling things, rollover risk, is there hedge risk is there, you mentioned you have assets that are offsetting your hedge variable rate debt. What are some things you think issuers should consider when comparing? Let's just say I was looking today 2020 year MMD yesterday was 4.25. So someone who's 50 over that's 4.75 a SOFR swap with liquidity and even a 10 year park haul might beat that by a hundred basis points. How would you go about evaluating that?
Derek Hansel (11:19):
Yeah, again, I think it's for a Finance Director, CFO, Treasury Manager, a lot of it's going to be dependent on where is your board on that, right? You are going to have boards who are simply allergic to the word and if that's where it is and you're just not going to be able to convince them. It's one where your credibility on other things may simply be contaminated by the fact that they just won't do it. And so I think you've got to be able to read the room very carefully. First, we are fortunate enough to be in a position in this particular case, a, we've got a large derivative portfolio already. So we've got about 1.4 million or 1.4 billion in a swap portfolio already. We've got a pretty sophisticated board. Some of them might be allergic, probably more of them are not allergic and yet more have no idea what it is. And so there would certainly be an education campaign, but again, in aggregate it's just going to need to be worth the time and agony to explain it to them and kind of go through all the mechanics and stuff.
Jeff Lindquist (12:37):
So I'll take a quick step back. I think I certainly won't speak for other banks. We're still very active in new money transactions. They primarily focus on what I might call cash settled or rate. So a transaction that's meant to be a future fixed rate bond transaction. So you have a capital plan, you're building the second dorm, you're building the runway, you're building the new school, you can't take all the money at once. And so issuers come to us and P three world, things like that, healthcare higher ed, how do we preserve a refunding? So they'll use a forward starting swap or a rate lock may have a SIFMA index, SOFR index, US treasury, even an MMD rate lock, very plain vanilla. The goal is not to sell in that case variable rate debt, but just enter into a transaction that if rates go higher, they receive a payment to help offset the cost of that new debt service.
(13:31)
Presumably they sell less debt, but it's albeit in a higher rate environment. So that's a very, very common transaction that we see. Another one that's a product of the last several years is issuers buying that call option that I mentioned. So one of the things I think many issuers who did interest rate swaps in 2004, 5, 6, 10, 12, early years of municipal finance, those swaps were not callable. They had a make call attached to them. So they effectively were non callable. And so what we see certainly in the housing sector for example, are issuers embedding a five, a seven or a 10 year par call, they'll still have to roll the debt once or twice whether the liquidity or debt facility is there. But by embedding that call option, if rates go lower, they can terminate the interest rate swap and not owe a payment. If rates are higher and they're in the money, they can still receive a payment.
(14:28)
So it protects them, allows them certain amount of flexibility in how they do that debt. Again, I use that as an example of innovative ideas I think is not really due to the higher rate environment. Just something that interest rate, excuse me, municipal issuers have seen, and I want to say they've learned from a big part for us is also around that suitability doing a 30 year trade with someone who in high rate environment rates could certainly go lower if that issuer has some concerns about the ability to refund that debt in the future. Frank, maybe?
Samantha Funk (15:03):
I was just going to say, I'll jump in Jeff, that I think more broadly, I mean I know what we're seeing at PNC. We are a lot of engaging with a lot of clients on how do we consider our capital structure now in a higher rate environment and how do we position, what are the things that we should be thinking about? To Derek's point, not all issuers are created equal. So it comes down to knowing client knowing risk tolerance. And there's a lot of considerations with it in different products. I mean, whether it's VRDB's, commercial paper, I know Frank's going to talk about that, revolvers for example. What is a product? What's the best, what are capital plans? How do we think about this more broadly? For those that are willing to take on variable rate risk, I think it's really an opportunity to monetize a yield curve in a normal yield curve environment.
(15:45)
Obviously not so inverted, but in California specifically, I think as many of you know for VRDBs tax exempt VRDBs, California issuers trade through typically trade through SIFMA. And I think while there's been a lot of volatility in SIFMA and we can talk about that, it really is an effective cost of capital. I think most issuers resets this week were in the sub 3% range, some down into in California in the one and a half, just over range. So when you look at that, you add liquidity fees, remarketing fees, looking where the Fed is, it really is an effective cost of capital. So just a few stats on the volatility and the SIFMA volatility I pulled down. So in the last 12 months, SIFMA has seen 23 week over week swings greater than 50 basis points, and nine week over week resets greater than 100 basis points. So Jeff had mentioned this week SIFMA reset at a four 19 last week it was at a three 19. So a hundred basis points on the dot. I think in the past 10 years there have been 14 instances where SIFMA moved higher or by more than 100 basis points for more, but week over week and then out of those 14 times 10 have occurred in the past 12 months. So again, significant volatility in the market.
Jeff Lindquist (17:09):
Frank.
Frank Doyle (17:09):
Sure, yeah, thank you. And I'll give a little bit of a national perspective. So what we're seeing from our client base is a much, despite the inversion of the short-term yield curve, we're seeing a lot more interest in variable rate debt of, we just won our first facility for bare annual variable rate, long-term debt issuance. But most of it seems to be focused on the commercial paper and of the spectrum, even if there's some volatility. Bank supported commercial paper is extremely cheap by any standards, and we're seeing mostly in four sectors. Housing, healthcare, airports, some transportation, but mostly in airports as that unmet need for the last two years is starting to have to happen. And also for cities and counties, it's a remarkable turnaround. I remember a few years ago, more than a few years ago, where some of our customers would tell us, oh, we'll never do variable rate debt ever again.
(18:12)
And all of a sudden it's well, times change. And one of the best aspects about being in my job as a banker is when we have customers come to us with, Hey, we have this situation, what do you think? And then being at SNBC, as I'm sure for PNC and also for RBC and other banks, we check around in-house and try to come up with a solution effective for a customer and we can, what I like best though is of course when just like my colleagues up here say, is when we can identify the need for the customer before they even realize it and come up with a solution for them. And more and more, that solution involves a combination of something to include variable rate debt. And I am one of those who I don't expect the Federal Reserve to lower interest rates considerably.
(19:06)
I think given the volatility of the climate in the world, I think interest rates will probably be a relatively, if there is a decrease, it's going to be very gradual. So I think over the next year or so you'll see even a bigger uptick in variable rate debt market. And of course it doesn't have to be LLCs, a revolving credit facility with a used and unused portion. We've seen that coming back. We're seeing, like I said, people interested in loans, taxable loans, et cetera, tax exempt loans, excuse me. So it's a really dynamic market more than it has been for quite a while from my perspective.
Jeff Lindquist (19:48):
Great. Derek, we were talking in the hallway earlier and you had mentioned that idea. I thought it was an interesting question you could expand a little bit about as an issuer wanting to know what banks are looking for. Why don't you talk a little bit about that?
Derek Hansel (20:03):
Yeah, I mean, again, we've got a large variable rate portfolio, as I said, includes the FRNs, the VRDBs put bonds, and particularly on the VRDB side, what take a step back, we have a very good investor relations outreach. We go and meet with institutional investors. We certainly talk to institutional investors, but the commercial banks are also our investors essentially. And how are we as issuers supposed to best interact with you guys when we are pitching you and not the other way around?
Frank Doyle (20:47):
I think you're under Brian and under you. I think you all have done an excellent job of that. I mean, I've been dealing with Bay Area total authority since 1998 and it's, to my mind, it's like a gold standard of how to present yourselves to your customers as a banker.
Derek Hansel (21:06):
How are my peers supposed to, I mean, what does that look like to you when you get that from whether it's us or someone else?
Frank Doyle (21:12):
Sure. And we see it in other areas too. It's the ability for you all the issuers when you need, the banks want to have a possibility of needing banks a please do like what you guys do. You have a presentation, you come to New York City or you have us online for a conference call or go someplace where you all are and you do a great presentation. And if you do it once a year, that's nice. Twice a year is better. That constant knowledge, that constant ability to inform us of what's going on in your world, not only does that sell us on you, it also help us to try and figure out who you are and what your needs are and how we can come up with innovative and proprietary solutions to your needs. And that is, again, that's been a hallmark of battle for quite a while.
Samantha Funk (22:08):
I think the transparency of information, that information flow, that ongoing dialogue is always very helpful. There are times where in the thick of Covid, just being getting on the phone and having that conversation, what is going on? How are we managing? And then also being timely with documents and the information as financials and all of that that matters to banks. And I think that's an important part of it too. But if you guys are doing investor presentations to your banks, I think that's fantastic.
Jeff Lindquist (22:39):
I will echo that. I'll also say it was very difficult for all of us during covid, the zoom call, not the easiest way to describe an interest rate swap the box and arrows doesn't do so well over zoom. So I would also just echo what my colleagues said, but also the in-person meetings, even if you're not coming to us, but getting a chance to ask you questions, what you like, what you don't like, what you're looking for, are there budgetary concerns? We all know that we look at your portfolios, we look at your debt. We know when issuers have debt coming, maybe they want to restructure some things. So one of the challenges we were talking the other day was a lot of things in interest rate swaps right now are partial suspensions of payments, modifications, amendments, and a lot of those ideas really get generated in talking and finding out, I don't want to say what the problem is, but you go get a physical, you tell the doctor what you're thinking. And so for us sometimes in an RFP, we can answer the questions, but we've all seen the give us your in six pages or less, give us 12 grade ideas. It's a little bit easier to go in and be able to talk to people and really find out what's keeping them up at night or where they see potential for us to help.
Samantha Funk (23:57):
I can also add too that on a lot of banks, not all banks, but PNC for example, is very much a relationship based bank. And so if we're working across different products and services, a lot of times we're engaging in dialogue more closely, whether it's on treasury, operations, what have you. And I think versus just being a commoditized credit provider, and I think having that ongoing kind of dialogue and knowing the ins and outs, that always helps banks too.
Frank Doyle (24:29):
It does. And I have to say that during covid it was so critical for certain customers, BATA, when Covid happened, I'm looking at Brian Mayhew down here and they created a whole deck just to brief us exactly on what's going on, how they're going to mitigate what's going on and what the path forward looks like. I wish every one of our customers did that. Sometimes it was like extracting a tooth and I won't name any of the other customers that were like that. But yeah, there were a few who did what BATA did, and those were when it came time to extend credit, it made the process so much easier. They say, if I show you love, you have to show me love in this context of information. The more love issuer could show the banks, I think overall the more love they'll get back because it'll help us understand. And that's critical for the process.
Jeff Lindquist (25:31):
We've certainly got a few more things we can talk about. Just want to check any questions, anything we've talked about you want us to expand upon. Okay, so one of the things, again, we were talking about this, some of our issuers have come to us and said, Hey, we're interested in more variable rate debt, but I'm having difficulty. I used to have 10 banks that called on me and now it's three or four or five. There was less of certainly earlier this year there was less availability. I'll certainly ask all of you, but I'll start with you, talk a little bit about availability and some of the pressures you've seen
Samantha Funk (26:07):
And Rob actually hit on the panel yesterday, but I think the environment has changed. I think you look at where we were in the cycle a couple of years ago, there was so much liquidity in the system. The Fed had injected so much liquidity in the system that banks were basically giving away credit that, and things have changed, that dynamic has changed in the rising rate environment and I think banks have tightened a bit. Obviously there was a crisis that played out in March, but I think banks are still open for business still lending. I think it's very being a lot of what we see amongst our peers as well is just being very strategic with where we're deploying capital, how we're deploying it.
Jeff Lindquist (26:48):
Anything to add to that?
Frank Doyle (26:49):
No, pretty much echo that. I mean we are obviously open for business. We've done a lot of business over the last year. We are looking forward to doing a lot more. We anticipate that there'll be a large demand for bond issuance over the next few months into early next year. And a good chunk of it, as I mentioned earlier, is going to be variable rate debt. In terms of banks, I think every bank is its own bank. So we are actually, every bank manages its capital base its own way. And we are actually probably better off now than we were a couple years ago. SNBC, it's giving us a unique situation right now. We're very fortunate in that respect.
Derek Hansel (27:34):
I would say we've got proposals due back from banks, so a week from tomorrow, so ask me a week from Saturday,
Jeff Lindquist (27:43):
You can turn it around that quickly. That's impressive. Certainly for the large issuers, I could see that maintaining that program, often smaller middle market issuers, they have 25 $50 million of variable rate debt. And two things we've seen more recently. I wouldn't say we're doing a lot of it, but I give you an idea of some of the things that we've been kicking around with clients. So let's just say an issuer couldn't find, they had a $50 million letter of credit and they just were having trouble getting it renewed or getting it renewed at a price they liked or maybe they wanted to go longer than two or three years. And so some issuers have, and again, whether they have an interest rate swap tied to that or not, somewhat irrelevant for the concept of the idea, but for those that had a fixed pay swap associated with it, they looked to sell fixed five seven, not quite 10 year put bond.
(28:36)
So sell a five or seven year bond, now you've got a fixed leg on the bond and a fixed pay swap. And so they look to replace the letter of credit because they were having trouble in some cases finding one with a put bond and a swap back to floating. Now for some people that's just fixing a swap with a swap is not going to happen. But it's an example of for issuers who higher rate environment, having trouble finding that liquidity earlier in the year when that was going around. And we've also seen issuers just sell that put bond and asked to suspend the swap for a few years. So when I mentioned amending an interest rate swap, you could make the effective date if you were currently paying, you could say, all right, I want to extend it and I don't want to make swap payment for five years and then when I do with the inverted curve, what would the impact be? And the rate was much smaller in some cases than issuers thought, and they then sold that put bond again. So I use that as an example of ideas that when we're talking to clients and we hear, hey, love to hear a little bit more about variable rate or different ideas. Those are some of the kinds of things that we talked about Derek a little bit. We talked about in your portfolio forward bonds, is that something you guys have looked at? How have you evaluated selling bonds forward?
Derek Hansel (29:58):
Yeah, I'd have to, frankly, I would defer back to Brian on whether he ever considered them, but I would've been surprised and he's shaking his head no. Considered yes, I have looked at them well in the past. We are fortunate not to be in the, we won't be in inactive construction process for the bridges anytime soon and certainly lots of rehab. We will be doing a reasonably sizable borrowing program for what is called regional measure three. And so we will be adding a significant amount of debt there. But again, because we're where we are in the interest rate environment, obviously forwards would be pretty unattractive for us. But it's also, we're in the market all the time anyway. So there is a certain amount of averaging we are going to get to do. We'll be in the market in good markets, we're going to be in the market in less good markets.
Jeff Lindquist (31:05):
You had mentioned your asset portfolio and how you correlate that. Maybe take just a couple of minutes and talk about your variable rate portfolio and how you do that with the money that you have in the asset side.
Derek Hansel (31:15):
Sure. So we've got about 2.7 billion in again, a variety of variable rate short-term product, including the puts about a billion for that is hedged with swaps. So I've got about 1,000,000,003 unhedged. We have 2.7 billion of investible assets. About two of that is inside of two years, probably 1000000001.5 inside of 18 months. So when folks refer to our unhedged variable rate debt, I don't have a very constructive view of that term, right? Our assets are repricing all the time. When I think about what we're paying on the variable rate debt that we've got, the true VRDBs, if I look at our VRDB portfolio as an example, first three quarters of the year, fed funds average 492 first three quarters of the year. SIFMA average 322 first three quarters of the year, our VRDBs were two 16. How am I supposed to feel about vdbs? I'd say pretty damn good.
Jeff Lindquist (32:37):
You are in California.
Derek Hansel (32:38):
Yeah, I'm in California.
Jeff Lindquist (32:40):
California. That's exactly right.
Samantha Funk (32:43):
And Derek, I think you brought up another point is not just in the context of variable rate debt, asset liability matching, but nowadays too when you are issuing long-term fixed rate bonds, you can actually earn a buck in a reserve fund or investing bond proceeds. And thinking about all of that, thinking about it holistically, how do you structure an escrow? Do you do if it's a 90 day current refunding window, do you fund the full 90 day period to get that extra arbitrage and to make a little bit more money and help boost the savings? So I think there's a lot of ways, and I don't know would love to hear from you guys if you've done anything like that or how you're thinking about any of those different components. But I think something that, again, it's now irrelevant where for so long we were just assuming as we were running numbers, maybe 0% and some of those different funds.
Derek Hansel (33:37):
So the vast majority of those funds that we just talked about are not bond proceeds, so not reserves, not construction funds. They're cash we've generated and so there's no restriction at all. So it's been a good year from that perspective.
Samantha Funk (33:59):
But if you do issue your next big issuance, for example, for capital purposes, well, you just said it's not a big, but how would you think about investing that money and structuring it and just to pick up some extra yield?
Derek Hansel (34:13):
Yeah, I mean particularly with some of the stuff that we'd be looking at as new money early, maintaining liquidity for those balances is going to be pretty important. A lot of this is going to be going out the door money, so it's grant money for projects we don't control. So having a significant amount of flexibility to do stuff. So if folks are coming to us with interesting ideas on investment products that would match up with some degree of unknowability of those draw schedules, we'd certainly look at that. It's very easy in this environment certainly to say we're going to keep it short, what's the harm, right? But we'd certainly look at things and I think Natalie and I have a pretty constructive view of interesting thoughts.
Frank Doyle (35:17):
I have to say that one of the things that we do SNBC, other banks do it too, of course is we accept deposits, especially for long term bond issuance, that's for construction projects. Customers have to park that money somewhere and if it doesn't need to be accessed right away, that is something that we offer our clients that a lot of them don't even know about. So when we go to pitch to them ideas, that's something that a lot of them like.
Jeff Lindquist (35:46):
Very, very interesting. Well, I've run out of topics and I don't want to keep boring you with that. Any other questions? Anything you guys hear on the panel? Want to make sure that we cover? Alma, I don't want to get you in trouble if we end early. I see I have a few minutes left. Anyone, how about you, Samantha? Got anything else you want to talk about?
Samantha Funk (36:08):
No questions here.
Speaker 5 (36:10):
I'd just be interested, Derek, whether or not you're looking at any taxable bond issuance with the short term or with the inverted curve, not having arbitrage restrictions on your proceeds. Has anyone been pitching actionable new issuance?
Derek Hansel (36:28):
On that one? Ask me Saturday. So if you notice a small absence of analysts and associates, they may be back buried in cubicles doing some writing right now.
Jeff Lindquist (36:45):
Any other questions? Well listen, thank you very much.
Frank Doyle (36:50):
We have more.
Jeff Lindquist (36:52):
I'm glad you guys can see. I can't see.
Speaker 6 (36:54):
Can you talk a little bit about the impact of the inverted yield curve on short-term products?
Samantha Funk (37:01):
Sure. So I'm happy to start the conversation off. So I think it depends on what product, what state. For example, again, sort of you look at California paper VRDBs and obviously, and as Derek said, it's a very effective cost of capital right now, just the way it's trading mostly sub 3%, you add liquidity, cost, remarketing. So very effective. I think if you look at CP for example, that could be a higher cost. We've heard of some people sort of backing off of CP issuance. We're a lot of times engaging with clients on, okay, are you better off just going doing a long-term bond issue instead of issuing those that might have used an interim financing facility for a long time and they would draw down on a line of credit, whatever the structure may have been, and then taken that out. So now some of them are just saying, you know what, we're just going to go to the bond market because of the inverted yield curve. I think we're also seeing some issuers look more to put bonds and being strategic where they're putting debt on the curve. So in that four or 5, 6, 7 years sort of thinking about that and thinking about, okay, how do we maximize knowing also investor demand. So I think there's a lot of conversations like that just knowing where we are in the environment, in the yield curve.
Frank Doyle (38:16):
Yeah, I think it all depends on the customer. We've actually seen, like I said earlier, we actually seen expansion of commercial paper programs. We've recently competed with a customer outside of Texas for proposals for supplying liquidity for their expansion of their commercial paper program by several hundred million dollars. That's not unusual. And I think it all depends. Again, there's so much need for capital programs, sometimes the customer just has to issue the debt and sometimes given the nature of their capital program, the best answer is commercial paper. And again, it might be on a state by state specific, but from my perspective, again looking nationally, I don't, unlike Samantha, I actually don't see any major pullback from commercial paper.
Derek Hansel (39:12):
It's not quite a yield curve comment, but I would kind of piggyback on Samantha's point about where California paper is trading. We do have an FRN portfolio, we've had FRNs. I liked the product when I was at the Pennsylvania Turnpike. We were a pretty early adopter of using FRNs and there's some real structural advantages to them that would be nice to keep using. It is hard to justify when it would cost us 125 basis points to do it. So not quite a yield curve issue, but it is really a California issue and certainly one I think that's at least partly driven by the yield curve and partly driven just by the huge demand for liquidity in this state.
Samantha Funk (40:03):
And we've not seen a big uptick in FRN issue and it's not just in California, but across the country. It's not been a robust market over the past number of years. And so yeah, it seems like sort of 13 to maybe 2018 there was a decent bit of issuance, but it's not picked up to what it was during that time period.
Jeff Lindquist (40:22):
Certainly one thing we've noticed, and I think if you look at different curves, we keep saying the curve is inverted, different curves are pretty different shapes. I was just looking at MMD this morning, five-year MMD at a 344 10 year, 353, 427 and 20 and 447. So that way we've seen issuers then turn around and look at the SOFR swap curve, and I won't read you all those numbers again, but a little bit more consistently inverted from front to back. So what we've seen often, what I would almost say is typical in the housing structure area is selling bonds 10 years and in fixed rate bonds and then issuing VRDBs for that long dated debt and really splitting it up. And again that along with whatever their liquidity or LC costs or even that par seven, 10 years out significantly better. 70% of SOFR swap rate is 3% in 30 years versus an MMD of 450. So those issuers who really want to take advantage, I don't think that's so much to your question about the inverted yield curve, but the differences between the two. Anything else? Great. Any closing comments?
Frank Doyle (41:46):
Yeah, just I guess my going thing back, what Derek asked about what can issuers do for banks, again, I think even if you don't think you'll be using bank support or needing a bank anytime soon, I think it's important for issuers to develop relationships with as many banks as possible, even if it's for information purposes only, from your point of view, because that allows banks to get to know you. It allows banks to come up with possible solutions to potential problems that either you know about or you don't know. I would encourage the issuers in the audience to do that. Again, the better we know you, the better we can do things for you and lead to a positive outcome for everybody.
Derek Hansel (42:30):
Yeah, I would echo that, Frank. I think, again, I've been at both large issuers and small issuers. We are in a position where we really do need a portfolio of banks to service. I couldn't just go to one of the folks and get everything we need, but even at a smaller issue, having those relationships and then really trying to almost deliver one or two relationships pretty intensely is I think very helpful. It is a relationship business, it's not a transactional business. You guys always want to sell that to us, but I actually think it's true. The reverse is also true.
Samantha Funk (43:12):
And it's an important component. I think it was well stated, Frank, and it is. And we always sort of say once you're in our ecosystem and once we know you and we have that dialogue, we want to work with you. We want to try and figure things out and deliver.
Jeff Lindquist (43:27):
Great. Well Almond, thank you for having us. It was wonderful. So thanks everyone. We'll stick around in case you have questions, but thanks for your time and attention.