- How has the market changed: have different firms stepped in as market makers and providers of secondary market capital?
- A buyer's perspective on the secondary market
- An issuer's perspective: how has coverage for major issuers changed?
- Muni advisor's perspective: how has their approach changed and are they expanding their coverage to replace some of the investment banking functions?
Transcription:
Presenter (00:11):
Just start us. Okay. Good morning everybody. Thank you for joining us for our last today or our California Public Finance Conference. We're going to start with our panel on realignment in the muni industry and we look forward to seeing you again next year. But before we end everything, here we are. Beth, please take it away.
Beth Coolidge (00:30):
Thank you. Well, it's nice to see the diehards here on the first panel of the last day of what has been a wonderful conference. And my name is Beth Coolidge. I'm the Head of Public Finance at Oppenheimer, and I'm thrilled to be part of the panel on realignment in the municipal industry a little bit more than a year ago, and coming up on the first anniversary of two large players in the industry completely exiting Marketplace. One was my former employer, UBS and one was Cameron's former employer, Citigroup. And so we're here to discuss what the impacts have been, whether we think this is a trend that we'll continue, and what are the opportunities. So I'm delighted to be joined by Nikolai Sklaroff, who is the Capital Finance Director of the San Francisco Public Utilities Commission. He is also a commissioner on the California Debt and Investment Advisory Commission and a member of the GFOA Debt Commission.
(01:35):
I'm also joined to his left by Lenny Jones, who is the Executive Director and Head of public finance at Blaylock. He's worn a number of hats throughout the industry. I think we've known each other, what now, Lenny, 25 years. He's been on the ratings side. He's been a banker, so we're delighted to have him on the panel. I'm also joined by Chris Roberts, who is the Head of the West Region and National Public Power and Utilities Group at PNC. He is also a former Blaylock banker. And finally, Cameron Parks, who's the Managing Director of Specialty Infrastructure and Government Finance at Truist. And so would love to welcome, have you all welcome these panelists. And we'll start with our first question. I'm going to throw it out to the group kind of in order. And the first question is, why are some firms pulling back or exiting the municipal industry while others are expanding and investing? And will this dynamic continue? Yes,
Nikolai J. Sklaroff (02:41):
Wonderful. Good morning everyone, and thanks for joining us on this last day of the conference. My first panel was right after the SEC director spoke, so I had to be very serious and I'm hoping we can have a little fun with this panel. And particularly since I'm the only one up here who doesn't have a marketing agenda here, I hope you'll indulge me as I have a little fun with this. My message here, I don't want it to be that I'm very old, but I started in this business with what was then a small financial advisory firm in Philadelphia. And the reason I bring that up is way back then we would get underwriting proposals and for a lot of the younger people in the audience back then, underwriting proposals were sent in to the financial advisors, not through email, but through delivery services or the mail. And they came in thick binders where the best clients, they would be leather binders with the gold seal on the outside. And they all had names of firms like Payne Weber, Smith, Barney, bear Stearns, EF Hutton, Prudential Base, a lot of names that we don't hear in our business anymore. And through the years I spent most of my career as an investment banker, including with Citi.
(04:23):
But I think one of the core messages is that we've had lots of change in our business throughout my career, and there's always been that spring evolution, but this has been something quite unique. I keep picturing the airplane shots of the wildebeest running across the Serengeti, so much migration of bankers in our industry, not just from UBS and Citi, but even dating back to the issues at Wells Fargo, the bands that we've seen, we've seen tremendous changes, and particularly in this last year, not just people relocating from those firms, which we're very excited about, but then the follow on effect of people being moved around because other people were being moved around. So as an issuer, this has been clearly an area of concern. We're concerned about liquidity, but we're in the fortunate position that we have. We're here in San Francisco, we have all the best firms calling on us. So the liquidity itself, the financial liquidities, and my most important concern, my most important concern is the liquidity of ideas and the people calling on us with those ideas and making sure that we see as new players come in the market, which is exciting that they also are able to step up their game to provide the same kind of ideas. And I'll share some more ideas later in the panel about how they can do that.
Beth Coolidge (06:17):
Great. Thank you. Lenny, I know you are representing a minority firm here. How are these dynamics affecting your ability to attract new talent to your firm? And what are you seeing? How is this dynamic playing out for you?
Leonard Jones (06:34):
Yes, thanks a lot Beth, and thanks for everybody for coming out. I think that this whole realignment is beneficial for firms that stay in the industry. And so I manage public finance at a minority owned firm, and as the big bulge bracket firms get out, that's a lot of room that the regional and minority firms can kind of get in and try to take up that space. And so I really do think that doesn't really hurt the rest of the industry as a couple of these big firms have gotten out of the industry because the US municipal finance industry is actually not that large. I really think that's why we have a lot of this realignment. If you look at big banks these days, global banks, I think cities groups revenues are something like $80 billion. And then they'll look at the US market, US municipal finance market, which is a whole lot smaller than that, and try to decide how they can make tweaks to increase their revenues. And so I don't think this is the last time it'll happen. I know when UBS left the first time they came back, now they left again. But I think a lot of the big firms will go in and out depending on what the new CEO wants to do to make their name. The CEO's there six years maybe. And so this is a part of the industry that is probably going to have change going forward.
Beth Coolidge (08:27):
Chris, I know you recently joined PNC from Barclays. Do you have an opinion on what was going on and why and how you ended up at PNC and the exciting things that are happening there?
Christopher Roberts (08:43):
Sure. So good morning everybody, and just like everybody else, we applaud you being here. It's tough to be here on the last day, I think for all of us. I saw many of you on the 39th floor late last night, so I applaud you getting up and sticking it out. We as panelists, truly appreciate your attendance, makes it worthwhile. So yeah, I think there's many different opinions and different reasons. Two main points I think I wanted to focus on a little bit more finite from my perspective, and they're both where the municipal finance group sits within an overall firm where you have maybe some of the larger firms have full services, but the municipal department may sit in a somewhat isolated island area within the firm and where you'll have services that you can provide, they may be somewhat limited in terms of revenue production. So if you have a true investment bank on the public finance side, you may from a revenue standpoint be focused on either the trading account or the placement, the issuance, the primary market issuance, either that through fixed rate, long-term bonds or available rate bonds through the placement of those or the remarketing.
(09:49):
And with the volatility we've seen in the marketplace different cycles including coming out of covid and the additional funds that issue clients got from the federal government, there was a lot of issuance. And then now we've gone through a cycle. The fed increasing interest rates and just the daily volatility in our marketplace makes it somewhat challenging from a trading book standpoint. So a lot of capital at risk, looking at revenue being market risk and not necessarily annuity type revenue makes it somewhat challenging. And as we've seen, the fees from primary placements decline over the years through competition, which is fine, but it just reduces the revenue. And so when you look, as was talked about earlier, the overall firm where public finance sits and those revenues, there may be a thought to allocate that capital in other places of the firm which are more profitable.
(10:42):
So that's one reason I think in my mind where some of the firms may have pulled back or got out of the business or have shifted the team that they have and the focus of the areas that they're covering. The other point I wanted to make is just thinking back and Nikolai, I don't want to sound old either, but we think back to the financial crisis and the two big to fail kind of philosophy that was going around or just being throughout the nation and everybody's mindset. And I still remember many of the CEOs of the firms that we're talking about testifying to Congress and public finance became very important. Then it was something that people could focus on and hang their hat on of all the good that those banks were doing at the time, which we all were really proud of because public finance never really gets that limelight. So it was a very proud moment for many of us. But that's shifted a little bit, right? They focused their area, the CEOs, the corporate, higher on the top floors of these firms are just thinking and focusing of assets somewhere else. So I think that's faded a little bit. So it's more just the focus on public finance or where it fits within the Oval firm and maybe reallocating those assets in other areas that are more profitable.
Beth Coolidge (11:57):
Cameron, I feel like you're my kindred spirit on the panel having been most recently at Citigroup. Love to hear your thoughts on what occurred there and your new role at Truist. And I know they're making a very large push as well, so love to hear your thoughts.
Cameron Parks (12:16):
Sure. And good morning. Thanks Beth. Beth, I'll start by saying that when I worked at Citi, they said two things when you're on a panel, they said, don't talk about politics and don't talk about other firms. And I think there's a decent chance today that I'll probably talk about both certainly as it relates to Citi. I think to get back to your question, Beth, about why are firms exiting the business, and I think Chris really touched on this, which is where does municipals fit within that bank and institution? And I think when you look at the players in the industry, you can see domestic large domestic banks are already in these communities and they already have other relationships, other activity they're doing. And I think when we think about investment banking and municipal finance, some firms are bespoke, just municipals is all they do. And I think those firms are unlikely to exit the business because Zebra doesn't change its stripes.
(13:06):
If you're a municipal firm, it's hard to decide, oh, we're going to just become something else. Whereas when you look at UBS, which was obviously a Swiss-based bank who've been in and out of the business a couple of times, clearly the pain Weber involvement there really boosted their franchise at one point in time. Citi really is an oddity. It's one of the top largest banks in America. And really as we kicked it around, those of us who left, it's hard to think of what the next largest bank in America is that doesn't have a municipal finance practice. So while I was near and dear front and center in the city shutdown, I don't see city leaving the business as the telltale sign that's sort of canary in the coal mine that US banks are going to exit. And I don't mean this to be disparaging against foreign banks, but notably, you have a couple banks out of Europe, you don't have any Asian banks doing investment banking.
(13:56):
So you have a Sumitomo providing credit and other banks out of Asia providing credit. But from an investment bank perspective, you don't see those banks doing it. So I think it gets to what Chris was describing, which was where these municipals fit in the organization. So I personally don't see it despite having a life-changing experience. I don't see cities exit as a telltale sign. I do think that the banks are trying to figure out, again, getting back to where Chris fits is how much revenue is really attainable out of the investment banking side of municipal finance and what other opportunities are there. So I think that also relates to are there new entrants or are players going to see this as a growth opportunity? I mean, the other thing I'd say about Citi is if you go back to the big short Liars poker, all these books about finance generally taking the other side of the trade from Citi is a profitable one.
(14:47):
So city's exit, this becomes the record volume year, right? 2024 is the highest volume year. So their timing on that probably wasn't that great. And I think in terms of new players or people seeing it as a new opportunity, I'll try to avoid the truest commercial, but I think you see firms like the MB firms who are being recognized for their capabilities and you're seeing investors showing more appetite for working with 'em. You have regional firms who have activities in their community. So certainly some of the large players will grow. But I think when you look, I think the other comment I would make when you look at where the city folks went, interestingly, I think a lot of people think about doing something other than municipal finance and almost to a person, everybody ended up in municipal finance from an analyst level to an MD level, almost everybody stayed in the industry.
(15:28):
So I think that tells you that people can have a lifestyle that they enjoy, they enjoy the work, feel like there's some career development opportunities from a 22-year-old just out of college, our first year analyst primarily still stayed in the business. And these are people that had worked for literally two months. They had the summer intern, they had the summer training program, and then November comes around with the rumor December was shut down and those folks stayed in the industry. Now maybe it tells you about the job market away, but I don't think so. I think the job market for college educated folks is pretty robust. So I think that if you see what's happening, there are certainly opportunities. And I don't see it personally as a doomsday situation. It's not just because I have young kids and I need to work for a lot longer, but I think that you can see how the banks are acting.
Beth Coolidge (16:11):
Great. So I think I'm going to move on to what was, I think a year ago, the big fear, how does realignment affect liquidity in the marketplace? And I know Truist was recently in an article about stepping into the competitive market space. I know Oppenheimer has done the same. So I might start down there and move back this way. What are your thoughts on how realignment affects liquidity in our marketplace?
Cameron Parks (16:39):
Sure. No, I think that's a great question. And all of us bankers at Citi thought we were great, but clearly a Citi's market capability was certainly among the best in the industry, one of the largest, most active players. And so I think that's really been a big question. It is interesting to see with all this volume, we were talking with the young analysts yesterday and they said, well, how does all this volume always get? How do the bonds all sell? If you look at fund flows and redemptions and so forth, how does this all work? And clearly you have market participants helping make that work, but we've got record volume and yields generally have actually traded pretty well relative to treasuries, for example. I think by what I'd say, and certainly on the Truist commercial, we've had a fortunate build out on our capital market side and been pretty successful in the competitive market.
(17:24):
But I think the other thing I would note about this is, I'm not sure this has fully been resolved because 2024 has actually been relatively, there haven't been much volatility on the up. So there haven't been rates rising. There's been three times where rates have gone up by 10 basis points or more this year every time it was followed by a flat market or a down market flat in yield or lower in yield. So we haven't seen one of those weeks where MMD just rips higher, and that's when you need market participants to come in and step in and provide some stability. So I didn't look at all the statistics for years past, but in the course of a week, the most movement we've seen is 18 basis points higher in yield. I think those of us sitting here know that you can get that in a single day. So I don't think that the volatility, that liquidity that Citi was providing and other firms were providing, I don't think that's truly been tested yet this year. And frankly, I think Chris alluded this, but capital markets participants don't want to lose more money on a competitive sale that they win relative to the money they make. And so that I think is still to be played out a little bit.
Beth Coolidge (18:28):
Yeah, so Chris.
Christopher Roberts (18:30):
Yeah, sure. So piggybacking on what Cameron said and kind of the first question, I think there are a lot of firms willing to step up and to take that role. I think we are having a record year in 24 and some of the procrastinators fascinators looking forward and kind of predicting what 2025 is going to look like. There's also some thought that we may actually hit 500 billion next year in terms of issuance just given the pent up need for infrastructure within the municipal finance group. So for PNC, we're very eager to fill that role. We're looking to grow. Coming out to the west coast was through an acquisition of BBVA and created opportunities for myself to come out and really start spreading the word in terms of other players Truist, us TD that are now coming out onto the west coast through the movement of a lot of the city people moving to Raymond James.
(19:26):
There's firms that we've all known about, have friends with, have grown up together in terms of the banking industry are now stepping into those roles. So from the liquidity standpoint, I think you have a lot of expertise in terms of bankers who are still in the industry that can provide value to their clients and they can also provide value to the firms that they're out now, me personally, just going in and talking to people within PNC, we're very flat in terms of an organization. So I do have direct communication with the president. So those kind of conversations are very encouraging where they're, what type of capital do you need? What type of investment do you need to really build out, particularly California, but the whole western region. And so we're getting in, we're seeing a lot of other firms getting into the competitive business to the secondary market, developing those relationships to help our issuing clients so they know that there's a market for their paper.
(20:22):
When they do a primary issuance, there's something there to step in. So those are all relationships and developments, but I think they're firms that may not have the experience here on the west coast. So we're all kind of learning and teaching each other about that. But the commitment is there in terms of firms. So I agree with Cameron, I don't know that city and UBS getting out, we haven't skipped a beat and we've had a very favorable market though, right? We've had fun flows, record fun flows. And so really if that changes with the dynamic of either the election or the Fed as to what they do, that's probably really where we'll see pressure on the marketplace. Because now even though credit spreads continue to decline and we are having a little bit of volatility on a day-to-day basis, you're still seeing investors with cash to invest.
(21:14):
And so we're all talking about accelerating transactions before the presidential election. We're now talking about deals in November and December, right? Because they just, people either from a timing standpoint or a need just weren't ready to get their financing together. So there's a book, a business that's coming after the fact, and I don't see a dearth of firms willing to come up and step up on buy competitive bids or whether it's liquidity for a letter of credit for an infrastructure project on an interim basis. I see a lot of firms getting in into that space. And I think it's probably good for an industry in terms of having exposure to the marketplace for an issuer in particular letters of credit or standbys, having other banks get into that market, into the VRDB market to help spread investor exposure to different banks and us supporting each other. I think it's all a good thing. I think it's very positive for our industry today and moving forward.
Beth Coolidge (22:19):
Any your thoughts?
Leonard Jones (22:21):
I certainly agree with both of these gentlemen. Not sure what I can add, but I think the biggest negative effect of these bigger firms leaving is liquidity in the market. And we saw it and stood back and said, okay, what's going to happen here? And as my colleague said, I think we were somewhat lucky that the rate environment didn't require banks to really utilize that much liquidity. So you can kind of ramp it up, but the remaining firms in the industry have all increased what they do to help provide liquidity to the market. At Blaylock, we did very little competitive bidding, very little secondary market trading. And when Citi got out, we went and doubled the size of our sales and trading desk and are now on track to do 4 billion of secondary market trading and 6 billion of competitive bids up from pretty much zero. So that's us trying to step up and provide some liquidity to the market. And I think, as my colleagues said, the firms that are trying to step into what Citi and UBS left behind are all doing that Truist and the PNC. And so with the other firms stepping up, I think our industry's okay and it's going to continue to thrive.
Beth Coolidge (23:56):
Love to hear the issuer's perspective.
Nikolai J. Sklaroff (23:58):
Yeah. Well, and as someone who spent most of my career as an investment banker, the largest portion of that with Citigroup at a time when Citigroup was consistently number one, I'm not going to try to connect those two, but it's really hard for me to fathom that firms go from number one to gone. But we've had that happen multiple times in our industry in prior years. But I am interested in this other kind of liquidity that's really precious to us, and that is bank liquidity. And what is exciting it, it's easy to be down about this whole topic, but what's very exciting is to see new players, new very hungry players who are interested in expanding in this marketplace. Citi and UBS were incredibly important in terms of bond liquidity. They were not important to us in terms of letter of credit and liquidity, facility liquidity.
(25:06):
And a number of new players are now joining the fray with that, with hungry investment banking teams. So we're very excited about that. Particularly we have, for those of you who are familiar with our program, we have four different entities at the Public Utilities Commission. We serve not only San Francisco, but we have regional customers. We cover seven counties. So we have incredible capital needs, about 10 billion of debt outstanding now 11 billion over the next decade. And we have a billion and a half in our three commercial paper programs that we're going to expand by another billion. So bank liquidity is key, and it's not just about short term interest rates, it's about fundamentally understanding how within the city and county of San Francisco, we let contracts, we need to be able to release contracts prior to actually having the funds needed. And so those facilities are a much more efficient way for us to do that. And then of course, we aggregate that and take out the borrowing with larger bond, more efficient bond transactions. So I am optimistic about these new players coming into the market. We're excited about players here on the dais and others who are bringing new liquidity in terms of credit facilities to our marketplace.
Beth Coolidge (26:49):
So I think that follows on nicely to my next question, which will be somewhat of a jump ball. So whoever wants to take it first, do you believe the realignment has been a net positive or a net negative in our industry?
Nikolai J. Sklaroff (27:03):
Well, if you'll forgive me in trying to have a little fun with this, I think we always have new bankers coming to the marketplace, but I think we have a lot of new bankers coming to the marketplace and we've recognized that we're not a typical issuer. I just alluded to the fact that we're really four different entities. And so it takes understanding us to be effective as a banker. And I think a lot of the newer firms will need to spend much more time with clients. And a lot of it is very basic investment banking. We're experiencing a lot more drive by investment banking from new players. My boss is in town, so now we're going to come visit with you rather than calling effort. I can't tell you how many times I get two three page case studies on geo bonds. I'm sure there are great bonds. We don't do geo bonds. And if you're not going to tell me why you're sending me that particular case study, I'm not going to have the time to spend to read it to figure it out for you. So I do think just a lot more fundamental investment banking.
(28:41):
I'm unusual, but my entire team is here, Edward, Dan, Eric, and our newest member, Giselle. We all embrace investment banker meetings. We take lots of investment banker meetings, but the successful investment banks who call on us are the ones who actually bring us something. I have all sorts of examples of emails I get about help me look good in front of my boss, help me. I need to shine for them. We have four entities. We're looking for so many solutions to different problems. It's the firms who are able to demonstrate that they have a solution. And credit can be a powerful one, but firms who don't have the credit bring us ideas, understand us. How many people in the room are investment bankers?
(29:52):
We've got a fair number. I bet every one of you can tell me where the market is and give me a scale maybe even thanks to Bloomberg. Tell me what the fed's going to do. Every one of you can do that better. People come in and show me, okay, you've got a refunding analysis. And on a generic basis, the better ones do it specifically for given enterprises. But the very best bankers are the ones who take the time to read our agreements with our wholesalers and can tell us and give us insights on the savings that will come to our rate payers from those specific refundings. And it's the bankers who take that time to understand us who have the success. I know there are a lot of bankers who say, and I had a banker say this to me not too long ago, but you're a low takedown issuer. And my head snapped back on our last RFP. I can assure you takedown had absolutely no role just based on where everyone was bidding. We quantified as 5% of our criteria. We're looking for ideas, we're looking for people who are bringing us solutions. And I would challenge the new players to spend time with your clients and avoid drive-by investment banking.
Beth Coolidge (31:35):
I love that term. I'm going to use it with my team on Monday. Anyone else? Net positive, net negative?
Cameron Parks (31:45):
Probably since I was let go of Citi, I think it's probably worth, I actually genuinely feel like it's a good thing. And the reason I say that is because looking back you can see a number of things happening over time at say we talk about the liquidity. And while I wasn't on the desk talking to folks on the desk, and frankly the sales force was reduced substantially over time. So I think if you don't have the firm's commitment to the industry, which we saw most acutely with the final decision, but there are a number of things along the way. Citi continued to perform in the competitive market, but not to the same level. And so personally, I'm excited about what I'm doing at Truist and it's a life-changing experience, but it's a new one. But beyond that, being a part of an organization that's committed to the business and so with the cracks of the foundation we're there, we didn't all see it. So I don't think cities exit itself was good, but I think now having that resolution is probably a good thing for me personally. But I think also for the market,
Christopher Roberts (32:40):
The only thing I would add is just I think the differences. So the signs were probably there. All these firms in hindsight, you can come back and look at that, but just what I've learned over the many years I've been in the business is the commitment that you see from your partners within the firm or even competitors, having a real commitment from the top level down of wanting to invest into the business and doing whatever it takes to help out. Because ultimately we want to serve our clients. And having the different tools to do that helps us as bankers ultimately deliver for our clients.
(33:16):
I will just, it's calling it repetitive what we're going to say here, but it's just you can see the signs and as issuers, I'm sure you can see the signs from the people as Nikolai, hopefully I was never one of those that came to you and said, please like me look good. But the issuers probably see the commitment and the level and the expertise of the support. So it's not just one person coming on, it's all the different tools that the firm can help them. So it may not just be an underwriting, it may not just be liquidity. It could be the other operational banking facility type things that an entity like the PUC would need or other issuers throughout the country. It's that commitment as the firm to be there. And I am excited about that. And I do think it's a changing environment. A lot of 'em are life changing for all of us, but I think we're all resilient either on the IS issuer side or on the banking side. We've been through a lot over the last 20, 30 years. So it is exciting time and I see a lot of fresh ideas and fresh commitment within the industry moving forward.
Leonard Jones (34:18):
Yep. I'll just add from a big picture perspective, I think it's a positive. I think it's good, but I think change is good most of the time, especially when something's already developed like our market, it's an already developed market. So as the economy changes, as governments change, as ideas change, as people get computers, things have always changed. And so it's an opportunity to figure out what's going on now, have the new players come in looking at it with fresh eyes, adding new products or new structures. And so in spite of the few people who it was a life-changing experience, fortunately our industry's growing and all of those people from those big firms, if you want to stay in this business, you've been absorbed by some of the regional and minority firms that are growing. And so I don't see much negative part of it.
Beth Coolidge (35:22):
Thanks. I know personally it was very heartening to see a number of issuers open up their RFP processes a little bit sooner given the realignment of bankers in the industry. So Nikolai, I'm interested to hear, are you doing things differently given this realignment?
Nikolai J. Sklaroff (35:41):
Yes, we are. And one of the key things we're trying to do is make sure that we understand there's that barrier of entry. I think for me as a former banker, it was always frustrating that the RFP process was a lot about how much you know about a client, and obviously you know more about the client if you're the current banker than someone competing to break in. Now that I'm on this side, and I've said this a lot to folks that I wish I had done this job before I was a banker, I've approached my job a lot differently and I'd encourage everyone who wants to be a banker to spend some time in the shoes as an issuer, all of your proposals will be a lot shorter and more to the point.
(36:39):
And what we're really, all of us in the public sector are dealing with too few staff trying to do too much work and looking for solutions. And if you can help guide us to those solutions, you can add incredible value. One of the things we're seeing right now is an incredible diversity of types of financing. We've done revenue bonds for decades, but now there are opportunities to think about things like gas prepays for our CCA. We're spending an incredible amount of time on the inflation reduction act and taking advantage of opportunities there, particularly since we are in the power business. And each of those is an opportunity for banks that don't, firms that don't have a bank to instead develop a level of expertise that nobody else has in those specific topics. So we're excited about the potential for that.
Beth Coolidge (37:59):
Great. I do have another question kind of geared toward our regional bank friends at the other end of the table here. What opportunities and challenges have you experienced for national regional firms making a push into the market? And also I think we alluded to on this panel that thinking partners are definitely in need. How are you guys pivoting what you had done in the past now that we are experiencing this realignment?
Cameron Parks (38:32):
Well, I think I'll just start, and I don't know how many people are still awake, but who in this room again identify the seventh largest bank in America? Does anyone know who the seventh largest bank in America is? I don't see any hands. It's Truist. And so for me, that's an example right there. The name recognition, there's basically B of A JP Morgan City and Wells are the four big ones. And in our industry, big for a long time. I think after that it gets murky and you have investment banks like a Jefferies and the Goldman and so forth. But I think when I think about challenges and certainly out here in the west where I live and my family is, and I'm going to continue to be just having people understand our scope and scale, we're the seventh largest competitive underwriter year to date as well.
(39:19):
So I'm hoping ultimately we'll be the seventh largest negotiated underwriter. But so I think as a new entrant, certainly in our case the public finance department, we stood up in 2021. A lot of people will say it takes time and I think what we're dealing with internally is senior management who's made an investment in the business. So there is a current commitment, but we have some kind of expiration and I don't know what that is. And so that intersection between recognition, awareness in the market of what our capabilities are and ultimately continued support from the firm. I think in terms of banking partners, I think if I understand what you're getting at, Beth is certainly a Nikolai's. We are a bank that's capable, and I think Chris is as well. I think I can get back to where I was originally and Chris and I started with, which is how does municipal fit within the organization?
(40:02):
When you think about if you want to get a home loan, typically if you're doing something else with that bank, even if you boil it down to a checking account, very few banks are going to give you a checking account for free. They're going to want direct deposit, they're going to want some other business. And so I think when we think about credit, and as Chris described, the bank as an institution has a number of different opportunities to deploy credit. And so when they make a decision about where they're going to use credit, it's going to be done in part with what the other revenues are for that entity. So I think Beth, quite frankly, one of the challenges that there has been quite frankly, fee compression. And so for us in municipals when we're, if you will, fighting for capital to deploy toward our municipal clients, we're fighting against other parts of the bank. So we certainly have been able to deploy credit, but I think that's going to continue to be a challenge given that the fee wallet on the other side of the business isn't as high as they are corporate finance colleagues who are going to go do an IPO and make a whole lot more money.
Christopher Roberts (40:57):
It's very similar. I think the structure of the two firms at PNC in Truist are very similar in terms of their entrance into the public finance market. PNC has been very much involved in the public finance market in the Pennsylvania and the southeast area for a number of years, and they're moving out to Texas and now to California with my hire, I think what may be unique about PNC is that both the commercial bank and the investment bank on the public finance side report to the same person. So when we go into a meeting, I do bring partners with me on the commercial bank side. So I was brought in to build up the investment bank, the traditional bond underwriting and VR DB and letters of credit from that standpoint. But we do have the commercial bank side that does the traditional banking operation stuff that Cameron talked about.
(41:45):
So that does report to one entity and it goes all the way up the reporting line. There's been a lot of support there, but I agree with Cameron, it's where primary placement underwriting is not necessarily moving the needle in a lot of these firms. It's just a part of another tool that the firm can provide their clients. But we want to be a full service provider to our clients in terms of that. So where maybe some of the firms that a lot of us on this dais were before were the investment banking bond underwriting was the primary goal of what we were looking to achieve. Cameron and I are now just a very small piece of a bigger pie in terms of what we're providing our clients. Personally. I'm very excited about that, and that's primarily the reason why I chose to go to PNC because of those different opportunities and not being worried about where I started this whole conversation about where's the trading book and what's the revenue for the firm?
(42:40):
We've got other areas within the firm to absorb a good market or a bad market because we do have the other services to provide. So that's what I'm most excited about on the west coast because I personally have not had experience in my history. So new firms like we have coming into our space and on the west coast is a great thing for us. And there are all the other services that we can wrap in for our clients and make their lives easier, which is what Nikolai really wants and what he's been hitting on the whole time.
Leonard Jones (43:13):
I would say that the challenges are a little different for the minority firms versus some of the regional firms. It's probably more external than internal since we don't have the other parts of the firm to deal with an internal placement. I've been here about a year and a half and I've really been focused on external talking to people like Nikolai and the things that he just said that he wants to see, making sure that internally we have the resources for all of our bankers so that they can do that on a regular basis and provide that kind of information. Looking at the credit side, I was at Moody's for eight years before I came over and we focused on make sure we're providing credit information to issuers as we go along, trying to add value. And as I mentioned earlier, even on the sales and trading side, we've been looking at it and added the secondary and competitive to add more value. So the change or challenge has really been making sure that we figure out what issuers and investors need and then give our bankers the tools to be able to provide that to the issuers and give our sales and trading desk the tool to be able to provide it to investors.
Beth Coolidge (44:44):
I know you shared your thoughts around how those that aren't in banks can still participate and add value to you as an issuer. Do you have any additional thoughts before we go to questions?
Nikolai J. Sklaroff (44:57):
Yeah. One of the things that we have been doing is because of that barrier of entry, excuse me, is giving more people an opportunity to serve in a co-manager role? We understand being at the table is important to understanding how we work. We allow our co-managers to participate much more than perhaps other issuers throughout the transaction, but it's still incredible to me that we give people those opportunities. They send an analyst and associate, we love analysts and associates that're really important to us, but we don't need people to show up just for the sake of showing up. I think we're really trying to give people an opportunity to learn so that you can come back and do better banking the next time. I think our industry has undergone some really transformational changes. I appreciate that it's really difficult to pay the bills just doing co-managed work the way the order flows occur these days, but if you're going to give me goose eggs on the order book and you're not going to show up and participate and give us ideas, then why did you spend so much time begging me to be a co-manager?
Beth Coolidge (46:29):
That makes perfect sense. So I think we're coming up on the end of our time. I think we have a few minutes for questions.
Audience Member 1 (46:48):
Good comment on a situation with certain states are banning banks or giving banks essentially a hard time because of policies they may have about fossil fuels or armaments or ESG. And we could talk broadly in certain states like a Texas and if anything could happen like that in California as well, or what the situation is here broadly and then locally.
Cameron Parks (47:21):
I'm happy to start. Appreciate that Howard. The situation in Texas was near and dear to city, and certainly something where we saw hurt our market share nationally as we were out of that business felt like there was another policy even if we got out of jail on the one policy they were upset about, there was another policy that didn't come down the line. So you've seen it in other states as well. It's not just Texas, but it certainly has been something that has spread beyond Texas, I think interesting. We never felt like it benefited us on the other states if there was a red blue aspect to this. We never felt like while we were out of business in Texas, we were getting more business in California and New York for example. I would say as a player, both at City and now at Truist, I think what we appreciate is that, and Nikolai certainly seems more open than some places, but in Texas they're very open to considering more firms.
(48:14):
They've gone from pools where they had a number of big players that could operate to having very few, and then frankly, they even through the process didn't know who was going to be able to transact. So the attorney general would be doing a review and the issuer wouldn't know by the time they priced and the utility between pricing and closing whether that investment bank would be able to perform. So they might've already sold the bonds, but they couldn't actually deliver. So I think that the community, however they feel about those given policies, and you can go to certain communities within Texas that have very different politics, but universally they didn't like that environment. And so I think what we saw out of the advisor community and the issuer community was a greater openness to having a wider audience for banks as to whether it could happen in California. Like I said, it feels like if anything, they might be supportive of certain policies but haven't seen it to date. And I'm not optimistic that that's going to happen here.
Christopher Roberts (49:06):
I'll add to that, I agree with everything Cameron said. So Barclays was impacted as well in Texas. And I think some of the things that happened recently with the firm were tied to that because it certainly takes a big chunk of the opportunities away from a national firm like Barclays. We do see, so the issue is a political one versus getting transactions done. So when you're talking to the issuing clients in Texas, they're equally frustrated, at least in my experience of talking to them because it does impact them. As Nikolai talked about, players getting out of the marketplace ends up hurting the issuers, and so I want to get even into pricing or anything like that, but just having more ideas, more firms to underwrite transactions is always a good thing. Competition is always a good thing. So it was a little bit of a conflict between the issuers there that were calling on.
(49:57):
They were equally frustrated and concerned about that. That's something we're all dealing with. In terms of the second part of your question, I can only speak to the people I talk to who knows what. From a legislative standpoint, we have not heard of anything from that standpoint. I think California is the learning where California is the leader on a lot of things. I think here they're looking at what's happening in the country and we haven't seen, well, the red's doing this, or we're the blue and we're going to do just the opposite. They've been open to all firms. They understand competition and liquidity and capital is very important to infrastructure in California. So not predicting anything, but I personally have not seen anything or heard anything that's contradictory to that or that state of California or other New York or other Illinois. You do see them moving away from fossil fuel, but it's not where if you do this or that you're out, you need to either jump on the train or you're going to miss out, but you're not excluded from anything.
Cameron Parks (50:59):
And one thing I'd just add was there was a point in time where the PSF that guarantees the school bonds ran out of money. And in the competitive market, bids got very wide and there were very few bids. So I think it's not really debatable. It's always hard to do the most factual argument, but there weren't bids. And you can clearly see what that's a AAA bond trades in a given market relative to MMD. And so I think people can quantifiably demonstrate in that market that not having, at one point you had B of a JP Morgan out, city out, you had all these big players out, and so there was a quantifiable impact most discreetly seen in the competitive market.
Beth Coolidge (51:33):
Any last thoughts?
Leonard Jones (51:34):
I can just say I think it's interesting the way politics and finance have kind of been combined in the last five or 10 years, and it's a political fight and a political issue. You get Citigroup involved in your political issue because they gave money to a fossil fuel company. It helps move your political issue around ahead. But a political issue where a small firm like our firm, you don't get enough political headwinds. So we see much less effect than some of the bigger firms.
Beth Coolidge (52:12):
Nikolai will give you the last word.
Nikolai J. Sklaroff (52:14):
My quick glib responses. If you're banned somewhere because you're helping to fight climate change or not doing enough for the gun industry, we're happy to sell bonds to you. But my more serious responses, and it's something I've said at this conference before, I've been on the sharp edge of bands when I was an investment banker most recently at Wells Fargo. And I currently work for jurisdiction that has implemented its own bands for various reason. And I think our city has eliminated some of those bands recognizing that that loss of competition was actually self-defeating and hurting us. And so I guess I would just say once again, I would hope that in a marketplace we all understand that having as many players at the table makes markets more efficient and bands have no place in our business.
Beth Coolidge (53:24):
Well, with that, we will end our panel. I'd like to thank all of our panelists and thank you all for getting up early on the last slide.