- Managing and monitoring credit risks post-pandemic
- Adjusting to new dynamics in credit-risk management
- Implementing real-time, data-driven analysis and decision making
00:00:08:12 - 00:00:44:11
Kristin Stephens
And thank you, everyone, for joining us here today. My name is Kristen Stephens. I'm part of UBS’ public finance department where I have the great fortune of working with issuers to discuss their credit considerations that are so important and ever changing in this interesting time. We find ourselves very excited to be moderating this panel today. We have a wonderful group of experts here to talk about the new credit landscape that has truly emerged over the past two years.
00:00:44:11 - 00:01:07:00
Kristin Stephens
So together we're hoping to discuss some of the risks and opportunities that this presents. We really do hope for this to be an interactive session. So we are going to leave some time at the end for your questions. But without further ado, I will briefly introduce our panelists today. And certainly you can find their full bios in the conference materials.
00:01:07:00 - 00:01:29:27
Kristin Stephens
But let's dive right in. To my left, I have Nick Samuels. Nick is a senior vice president at Moody's where he is part of the states and high profile ratings team covering credits for names such as the state of Texas for New York City here and for the District of Columbia, among others. And next to Nick. We have Arlene Bonner.
00:01:29:27 - 00:01:56:09
Kristin Stephens
She is a managing director and head of U.S. Public Finance for Fitch Ratings, where she leads a national team responsible for analytics coverage of a wide range of municipal market issuers next to Arlene. We have Omar Daghestani, who is a managing director at Stifel and the head of their Chicago office. Omar has particular expertise in pension and OPEB considerations.
00:01:56:09 - 00:02:22:03
Kristin Stephens
So happy to have you here today. And finally, we have Chris Jumper way down there at the end. Chris is a director for Assured Guarantees Public Finance Group in the Eastern Region. In addition to covering a variety of issuers and sectors located in the east, Chris also brings a deeper concentration on the utility and transportation sectors, both domestically and internationally.
00:02:22:03 - 00:02:59:09
Kristin Stephens
So welcome everyone, and thank you for joining me. As context for our remarks today, I've asked our panelists to think about inflection points that might reshape the way that we approach credit analysis going forward. And I think it's fair to say that it has been become abundantly evident that economic, geopolitical and societal forces are driving more rapid change, leading to the notion that these inflection points are real and something we have to be attuned to when we're thinking about municipal credit quality.
00:02:59:26 - 00:03:34:29
Kristin Stephens
So, you know, I'm going to raise a number of questions today, but we hope to explore more issues such as how will the continued reshaping over time affect credit quality? Who will be the winners and losers in this new paradigm? And just excited to investigate this and much more today, but to set the backdrop for our conversation. I would love to hear first from from Nick and Arlene just to see what Moody's and Fitch have seen from a rated standpoint since the onset of the pandemic to set some of the back converse in the backdrop for us.
00:03:37:04 - 00:04:04:16
Nick Samuels
Maybe I'll I'll start. Sure. And hi. And thank you. It's March one. 20, 22. I have not been in a room with this many people in three years. I'm slightly freaking out. We all I did remember how to tie the time. But you know, I think just indexing I think of the pandemic is starting March 1st 2020 so indexing this to like here we are basically at year three.
00:04:05:00 - 00:04:28:23
Nick Samuels
How much has happened. We'll talk a little bit about how much has happened, what has been before we get to the good stuff which is where we think things are going. And you know from a credit standpoint a lot has happened. I was in my office for the first time this morning in a very long time where I still had a To-Do list from February 2020 on my whiteboard none of those things really were very relevant anymore.
00:04:29:25 - 00:04:56:03
Nick Samuels
So let's just think back to what happened right that in March of 2020 the economy. In reaction to public health measures, public health measures rapidly came to a grinding halt in March of 2020 actually the stock market took a pretty deep dive short but but but deep and tremendous uncertainty for the most part though ratings performed pretty well through the pandemic.
00:04:56:12 - 00:05:16:17
Nick Samuels
And a lot of that has to do with preparation. I work on state and local governments. The preparation that state and local governments had made after the last downturn. So a few things. You know, reserve levels have been built up to very strong levels. And state and local governments have very significant governance powers. They're really able to pivot pretty well overall.
00:05:17:14 - 00:05:56:23
Nick Samuels
When circumstances are different, then add to that what turned out to be $5 trillion of various kinds of federal stimulus and support measures, which really were extraordinarily important for state and local governments, even though the first several measures were not direct aid for state and local governments. All of these economic supports, economic payments to individuals enhanced unemployment benefits, paycheck protection program, child care tax credits, pumped up personal income by trillions of dollars in supported consumption.
00:05:57:02 - 00:06:23:27
Nick Samuels
It kept for local governments. It kept property owners being able to pay property taxes. It helps we all consumed a lot, generally speaking things through the pandemic. It helped people pay a lot of sales taxes and really got us to where we are now. Also, with another federal stimulus measure with $350 billion directly to state and local governments, which is, tax revenues are humming along.
00:06:24:22 - 00:06:48:18
Nick Samuels
The economy is beginning to come back. I don't know how we describe this point of the pandemic if it's over where we are, but it's springtime and things feel a little bit more positive. But and we'll talk about this later. I wouldn't be a rating agency analyst if I didn't say, but inflation is high there is a lot more geopolitical risk, even just over the last couple of weeks from from where we were.
00:06:48:22 - 00:07:11:02
Nick Samuels
Right. Oil prices have gone up precipitously over the last couple of weeks. So also some headwinds. But I think really remarkable considering that of all of the kinds of downturns that we might have considered in February of 2020, a pandemic probably wasn't one of them. Really, how resilient things have been through that period.
00:07:13:06 - 00:07:45:18
Arlene Bohner
I would echo a lot of what you said, Nick, and I think that when we look back at our experience of ratings in the pandemic, for a lot of those reasons that you cited, we didn't have as much rating action as I think we originally anticipated we would have. So it's a little bit surprising to us, too. I think in a typical year, upgrades and downgrades are roughly even and in 2020 that that ratio was a little bit skewed.
00:07:46:06 - 00:08:15:21
Arlene Bohner
We had about twice as many downgrades as upgrades in 2020, but where we really saw the rating action or the rating impact was more in rating watches and rating outlooks. So we tried to identify credits that we thought could be vulnerable to the trends that were sort of embedded in that coronavirus. And many of those ended up being resolved ultimately.
00:08:17:13 - 00:09:01:06
Arlene Bohner
So now we're in 2022 and two years later we still, as Nick said, don't really know where we are in this pandemic. We won't know it's over until it's over or will it ever be over. I don't know. That's probably not even the right way to talk about it, if it will become endemic. And what does that mean for our credit we do have some headwinds inflation, labor pressure, wage pressure, or now geopolitical pressure we've seen that certain sectors within our market are recovering at a different pace than others.
00:09:01:07 - 00:09:41:21
Arlene Bohner
So just to talk about that, for a minute, we've seen, you know, some of the we've done a lot of research on employment recovery and we've seen that in general. About 80% of the jobs are back to pre-pandemic levels a little stronger in the South a little weaker in the Northeast. And we think that, you know, that's going to continue to recover the credits that are dependent on travel, particularly for, you know, business or leisure, will probably be a little slower to recover.
00:09:41:21 - 00:10:17:07
Arlene Bohner
They'll still be vulnerable to any future waves if we have them knock on wood. And we've seen transportation mixed experience there. Seaports and toll roads recovered very early. You know, airports are still making their way back. Higher ed is still recovering. We're seeing a lot of students on campus, which is great. But then that's against the backdrop of some preexisting negative demographic trends for that sector.
00:10:18:05 - 00:10:56:05
Arlene Bohner
And they will also continue to be vulnerable to future waves if there's a move to remote learning. Again, also, international enrollment is a factor for some of those schools, hospitals very hard hit with in terms of their operating expenses. And also on the revenue side with postponement of elective procedures. These, you know, will also continue. You know, they've withstood the pressure thus far.
00:10:57:02 - 00:11:24:16
Arlene Bohner
Hospitals are pretty low margin business to begin with. So it is difficult, but they've been able to make their way through, by and large at this point. But they will also continue to be pressured going forward. So on the whole, I think we're expecting, again, more even upgrades and downgrades this year. But we don't know really what the future will hold.
00:11:24:17 - 00:11:52:11
Kristin Stephens
No one has a crystal ball, but it's very helpful. And, you know, hopefully we are moving into this endemic phase of the pandemic. But what I'm hearing from you both is that it certainly doesn't do away with the number of headwinds that are in place both on the macroeconomic, the geopolitical and plus we've got our preexisting credit challenges, the legacy challenges that many issuers have been struggling with for some time now against all of that.
00:11:52:11 - 00:12:15:01
Kristin Stephens
We've also got an incredibly resilient sector here in public finance with very limited rating volatility a real reflection of that. But certainly all these changes underway and maybe some of them would spend some time talking about future trends and what potentially could be an inflection point going forward next five years, ten years, whatever the horizon we want to talk about.
00:12:15:01 - 00:12:19:06
Kristin Stephens
But Chris, I'd love to hear some of your thoughts. What's on your mind these days?
00:12:19:13 - 00:12:41:25
Christopher Jumper
Yeah, so working for a bond insurance company, it's a little different than the rating agencies because once we ensure a deal, we're on it for the entire life of the TransACT and as long as that deal is outstanding, we're sort of like the last of the buy and hold investors. So we really have to you know, we we only share in the downside a lot of times.
00:12:41:25 - 00:13:23:27
Christopher Jumper
And as a result, we're very, very careful. You know, we are the guys that can find any gray cloud in a silver lining yeah. It's very true. So, you know, what do we see? You know, we talked about the pandemic, you know, that kind of caught us by surprise. As with everybody, we quickly focused on modeling and, you know, looking at balance sheets and you know, do they have the wherewithal to survive a five year, you know, three or five year impact, you know, and gradually recovery going forward, what are the things that keep us up at night?
00:13:24:11 - 00:13:54:02
Christopher Jumper
And this has been talked about quite a bit in this conference is is ESG, is climate change, hurricane risk, sea level rise, windstorms, fire, wild fires, droughts. You know, these things have been increasing in frequency and severity. So and Abhishek was up here last time he last panel. He helped us greatly. He's a tremendous asset to us.
00:13:54:20 - 00:14:22:01
Christopher Jumper
He helped us build some modeling and some know we're working on with environmental consultants to, you know, address those issues. You know, but they're they're really becoming a lot more frequent a lot more severe and are going to start are impacting, you know, our decisions more and more. The good news is, you know, from what we found and again, we've been studying this probably for the past year is is management.
00:14:22:16 - 00:14:41:24
Christopher Jumper
There's a there's a lot of really good management out there that, you know, they're they're able to adapt. They're able to adjust. They're studying this. They're very much aware of it. You know, the other big issue that we talked about and everyone talks about is geopolitical You know, we're now in a Cold War or, you know, something like a Cold War.
00:14:41:24 - 00:15:15:25
Christopher Jumper
I don't know how many people here remember what the Cold War was like, but it's not fun. It's we're now in a Cold War. Cyber attacks and and cybersecurity is always been a huge issue, especially in utilities. But it's also, you know, impacts ports and airports and, you know, hospitals, as we discussed so those are the focus is that where we're and trends that we see that we're concerned about in it.
00:15:15:27 - 00:15:18:03
Christopher Jumper
You know, on top of all the other trends.
00:15:18:04 - 00:15:28:08
Kristin Stephens
So I think that's great. I mean, you know, how are you assessing and issuer's cyber preparedness, for example? I don't know if anyone else wants to jump in on some of these topics, too.
00:15:28:11 - 00:15:57:06
Christopher Jumper
I can I mean, I could start off. So the first thing we do is, you know, we have the conversation with them. If it's a trans transmission asset or a a distribution system, you know, have they harden their their system? Have they hired a cyber department to, you know, look into it and to test their their employees, you know, do the hiring consultants to look for vulnerabilities.
00:15:57:21 - 00:16:07:07
Christopher Jumper
And even, you know, looking at things like cyber insurance is a new, you know, commercial insurance that you know, can be used to mitigate it.
00:16:10:06 - 00:16:41:29
Arlene Bohner
Yeah, we're we're talking to our issuers all the time about their cyber preparedness. It's it's been ratcheted up for them. The pressure I looked at some data recently going back from 2013 to the present time half of all the cyber attacks recorded have been on in our industry. I have for some reason I thought it would be more skewed towards corporations.
00:16:41:29 - 00:17:12:12
Arlene Bohner
But now it's government, it's hospitals, it's education and the the pace of these cyber attacks is increasing incredibly. So you know, I don't want to overstate it because we we have not as of yet had a case where we've had to change a reading because of a cyber attack. There have been some very serious cyber attacks on some credits that that we don't rate.
00:17:13:01 - 00:17:34:01
Arlene Bohner
And there have been cyber attacks on credits that we do right where we've had to work through with the issuers, how they're handling it. So we do like to have those conversations beforehand so that we kind of understand what their strategy is. And then if they do have a cyber attack, then we talk with them. How did that strategy work?
00:17:35:04 - 00:18:04:14
Arlene Bohner
You know, did you have cyber insurance did it did it pay? We're somewhat concerned that there may be some act of war provisions in some of these cyber policies, and that may take some legal wrangling to figure out whether or not those will be helpful in this current environment. But just in general, we're seeing the cyber insurance is getting more expensive there.
00:18:04:24 - 00:18:42:20
Arlene Bohner
The insurance companies are putting more limits on what they'll pay out for that. So that's concerning as well. But, you know, it's it's really difficult, I think, to be an insurer today and have to deal with that those risks and know that you are you know, such a target. You know, CIA and FBI and the NSA came out with an advisory talking about how, you know, critical infrastructure in particular is a heightened risk for Russian state sponsored cyber attacks.
00:18:42:20 - 00:18:47:06
Arlene Bohner
So this this can't be a very comfortable time period.
00:18:47:06 - 00:19:00:28
Kristin Stephens
I think a lot of change has changed on that in a relatively short time horizon. I mean, I can't recall having these conversations with such intensity even five years ago. I mean, this is more of a recent.
00:19:00:29 - 00:19:13:08
Arlene Bohner
Right. I mean, on a year over year basis, the attacks on local or just governmental entities is up 1800 percent crazy.
00:19:14:19 - 00:19:41:17
Omar Daghestani
And you know, it's interesting you say that on the underwriting side, we've seen things like cybersecurity, cyber attacks. What insurance do you have? What procedures you have in place? Have you had any incidents of it? Have you recovered from it? Those used to be sort of obscure types of things. I can't think of a due diligence call in which I've participated over the last 12 months just to take a time period that hasn't included that topic.
00:19:42:02 - 00:20:00:08
Omar Daghestani
It is germane both for the diligence as well as investor calls. It is something that we hear from investors from time to time wanting to drill down deeper and that and certainly with the current geopolitical environment, I'd be surprised if we don't see more of those questions rather than once.
00:20:01:21 - 00:20:17:02
Kristin Stephens
Omar. Well, I have you, you know, you obviously we want to get some of the benefit of your Expertize on pension and Op-Ed rising rates, inflation. Any, any thoughts you want to give us against the backdrop of your work in those areas?
00:20:17:19 - 00:20:44:25
Omar Daghestani
Well, thank you so much, Kristen. And it's interesting because if you think about the space of pensions everything in pensions is a long period of time. I've spent the last 20 years of my career thinking about public pensions and one of the things that sticks out to this day, if you're to think about inflection points, is the fact that there's only, I believe, one, maybe two states that have a fully funded pension.
00:20:45:02 - 00:20:48:04
Omar Daghestani
And I'm smiling. I'm smiling in one of them right now.
00:20:50:10 - 00:21:19:20
Omar Daghestani
Congratulations, Dave. And the interesting thing about that is how did we get there right you know, people. There are many roads and there's certainly situational sort of programmatic failures of the designs of the plans. You know, do they have statutory ramps in there, things of their variety? And we certainly are familiar with those things. I can say, though, having worked from coast to coast over the last 20 years, a lot of those sort of leaky buckets have been fixed.
00:21:20:20 - 00:21:40:05
Omar Daghestani
If you look in Arizona, they used to have this thing called the permanent benefit increase for their public safety pensions, by which excess investment returns over the actual error rate would get half of it would go to a COLA account. Well, obviously that's not a great way to be funded over the long term. A lot of those buckets have been patched.
00:21:40:11 - 00:22:04:18
Omar Daghestani
They're perhaps not perfect, but they're better. And so you look at even sort of the ideal public policy pension plans if you look on a medium basis, I think nationally the funding levels in the seventies, even right now, even with strong equity returns. Why is that? It's largely two things going back to inflation. One, we've had a period of low inflation for the last 20 years.
00:22:04:26 - 00:22:35:28
Omar Daghestani
What does that mean? Among other things, very low bond and borrowing and reinvestment rates. Number two, at least until the last few years, we've seen great increases in longevity which are great news for all of us as Americans, but terrible news for pension math. The only sort of move away from that that we see over the last year is longevity has flattened out, if not even turned back a bit.
00:22:36:06 - 00:22:58:24
Omar Daghestani
One due to COVID to do due to the opioid crisis. And that can be localized in some markets. There's some markets that there's a really big factor in their numbers. And obviously, number two, as we you know, as their friends out, you'd expect the sort of ale side of the equation to start to flatten out and funding ratios to start to come up.
00:23:00:21 - 00:23:34:00
Omar Daghestani
So, you know, when you look forward, those are factors that I start to think more about increasing I think you see investors thinking about that, too. The other thing relative to ratings, because is a credit thing. It used to be 20 years ago doing a pension, borrowing or having any unfunded liability would be a strong negative headwind. And I think relative to the fact that you've seen the sort of growth of the Alcide level off in the fact that there's only one place that has a fully funded pension, at least at the state level.
00:23:35:03 - 00:23:59:24
Omar Daghestani
I think that's moved to a more neutral place where of the last 42 transact pension transactions I've worked on over the last 18 months, all of them have been neutral or positive. There hasn't been any negative feedback on that. So I think we certainly are at a changing pensions take a changing place in the credit landscape for issuers now in a way that is moving to be more constructive.
00:23:59:24 - 00:24:07:29
Omar Daghestani
And frankly, issues have taken a lot more proactive role in a shifting those things such that they can achieve better policy outcomes.
00:24:08:20 - 00:24:17:15
Kristin Stephens
Any any comment on that, Nick and Arlene? I mean, a pension obligation bond used to be more you know, could have some overhang from a credit perspective. And how has that evolved?
00:24:17:20 - 00:24:38:28
Nick Samuels
Yeah, I mean, I was just going to just make a couple a couple of other comments. I mean, you know, for generally speaking, write for governments. When we think about long term liabilities, really bonded debt has not been the credit pressure. It has been pension debt. And you know, while over the last year, a rate market performance has been so strong and returns have been very, very strong.
00:24:39:19 - 00:25:17:25
Nick Samuels
And that that is sort of a that obviously that's a near-term positive for issuers. But as inflation has become high, you know, there are some other pension risks that have emerged. And, you know, one is where there are inflation linked COLAs, you know, that's going to be adding to two pension burdens and long term liabilities going forward. And other issuers that don't, you know, guarantee a COLA or don't regularly do a COLA may feel pressured to do that the same way in localities that that bargain collectively with unions in a higher inflation period may feel pressure, more pressure on wages as well.
00:25:19:00 - 00:25:48:10
Arlene Bohner
Yeah, I would agree with that. We generally consider pension borrowings to be neutral to negative depending on the circumstances. And a lot of it has to do with what steps is the issuer taking to, you know, make improvements or to protect themselves in the future from rising costs? And, you know, are they closing plans or are they, you know, taking other measures?
00:25:48:22 - 00:26:13:29
Arlene Bohner
So, you know, if it's part of a whole strategy, I think, you know, that would be more on the neutral and on the negative. And, you know, we've seen some issuers come to us and, you know, expect to pay their normal cost with some of the bond proceeds. And that doesn't seem particularly sustainable. When you look at it from a credit perspective.
00:26:13:29 - 00:26:51:11
Arlene Bohner
So, you know, similar to what Nick was saying, you know, pension debt and in that we treat them similarly in our ratios and in our criteria. But, you know, there is some you know, timing risk which doesn't seem huge right now at this point in time. With rising rates. But, you know, it is something that we have to treat holistically and look at it holistically and understand really from the issuer.
00:26:51:11 - 00:26:55:15
Arlene Bohner
What is the strategy here and what are you trying to accomplish? All right.
00:26:56:27 - 00:27:24:15
Kristin Stephens
Well, let's let's shift gears a little bit here. We only have so much time. The other big topic I'd like to spend some time on here together is just the behavioral shifts that we've seen over the past two years. Thoughts around where we're going, what it means from a credit perspective. But, you know, it could range from this evolution of hybrid work or different modes of space utilization, you know, smaller retail footprints, so on and so forth.
00:27:24:16 - 00:27:28:24
Kristin Stephens
But I'd love to get your feedback on your thoughts on all of that.
00:27:29:26 - 00:27:51:21
Nick Samuels
Yeah, I mean, this is not entirely my original statement, but, you know, the question is, do central business districts have long COVID you know, because obviously the pandemic really accelerated a technological shift to being able to work remotely. And, you know, there's a lot of benefits to that. And for central business districts, there have been a lot of negatives.
00:27:51:21 - 00:28:22:18
Nick Samuels
It's negatively impacted commercial property values in some places, at least temporarily. It's negatively impacted a lot of small businesses that primarily that serve office workers in in in central business districts. But for a lot of people and could be you know, it really has introduced a significant amount of flexibility I think increased productivity, I would argue for me, of course, and definitely increase productivity.
00:28:24:11 - 00:28:49:26
Nick Samuels
And, you know, I think that the genie has been let out of the bottle. And when when we hear companies and government officials talking about return to work or back to normal, it's not necessarily going to be the back to normal of of the of pre-pandemic period. You know, workers have gotten used to this in part. I think they see a lot of value in it.
00:28:49:26 - 00:29:14:07
Nick Samuels
And there's going to be for quite some time, I think, some tension between how much flexibility to work from where you need to work for or be back in the office and the benefits of collaborating and onboarding new people. There's going to be a lot of tension. Right. And we've seen already the sort of the back to the office shift to be delayed by all the crime already from where we thought it was going going to be in the fall.
00:29:14:07 - 00:29:22:08
Nick Samuels
So it's still a lot of headwinds for central business districts from from remote work. And in these enhanced technological capabilities.
00:29:22:28 - 00:29:26:06
Kristin Stephens
Any opportunities from these behavioral shifts we're seeing?
00:29:27:25 - 00:30:05:10
Arlene Bohner
I, I do think it's a little too early to call on this You know, we've the agglomeration effects of having, you know, people work together and share ideas together. It, it does feel different when you're in person. I was telling my team how, you know, we we went back to the office in a hybrid schedule in October. And then when Omicron hit, we, you know, weren't enforcing that.
00:30:05:10 - 00:30:37:16
Arlene Bohner
And then now we're, we're back in the office. And I was struck in October when we went back by we had gotten so efficient at working from home and it was working so smoothly that I had forgotten that there was a cost to it and that when we were in the office, it was different. It felt different. And, you know, I think there's a balance to be had there on the office space.
00:30:38:23 - 00:31:16:14
Arlene Bohner
You know, the class-A office space seems to be holding up fairly well. You know, some places like, you know, New York City Revalue, that kind of took that hit up front for their commercial office space that may sort of, you know, be a more extended effect in some other credits. But, you know, in my company, we actually expanded our footprint because we wanted to have six foot spacing, which we didn't have prior to the pandemic.
00:31:16:14 - 00:31:36:19
Arlene Bohner
So I think it's interesting, there's a lot of people talking about, you know, repurposing office space and, you know, doing different things. So I think, you know, the story hasn't been told yet. And it will be really interesting over the next several years to see how this all shakes out.
00:31:38:06 - 00:31:40:02
Kristin Stephens
Thanks, Chris. Do you want to jump in with anything?
00:31:40:13 - 00:32:01:21
Christopher Jumper
This is our first day back at the office so, you know, Jerry still out. It seemed to be, you know, a lot of fun catching up with everybody and, you know, comparing notes. But there's a lot of new protocol. There's a lot of new you know, just having a credit committee meeting now. You know, half the people are on Zoom still.
00:32:01:21 - 00:32:15:27
Christopher Jumper
You know, so it's there's a lot of it's clunky. You know, it's it's a little clunky still. And it'll smooth out, you know, do I like commuting now? But, you know, that they tell me where to be and I'll be there, you know, so. Well, I know.
00:32:16:26 - 00:32:24:05
Kristin Stephens
I know you do a lot of work, too, in the utility and transportation space. Any trends there that are, you know, a top of your mind that.
00:32:24:29 - 00:32:58:11
Christopher Jumper
You know, again, we saw when the pandemic hit, the first thing we did was come up with some modeling just to test liquidity because that was a big issue with us. You know, did they have the the wherewithal to survive with no revenues coming in? And, you know, again, the federal government grants helped significantly looking at airports, you know, just stressing it because a lot of the initial consultants were coming out with, oh, it's going to be you know, it's going to be six months, it's going to be year.
00:32:58:20 - 00:33:24:24
Christopher Jumper
And we're like, well, what happens is it's longer what happens if there's a recession after it? So we you know, again, because we only share in the downside, you know, we looked at a five year recovery and again, happily, a lot of the a lot of the entities that we look at went into the pandemic very well. You you know, with very strong balance sheets, that strong liquidity levels.
00:33:25:02 - 00:33:55:05
Christopher Jumper
And that's that's always been a trait of public power and the electric utilities is that, you know, they it seems like every eight years they go through, you know, another crisis or challenge. They went into this, you know, with a very strong balance sheet. You know, they typically always have, you know, strong balance sheets. So they were able to make it through, you know, some of the the aha moments were you know, we would our our previous analysis would always be up.
00:33:55:16 - 00:34:19:02
Christopher Jumper
You know, passenger traffic is the important thing. And if it's a wealthy community, that's a great thing for a toll road, let's say, not so much. You know, those are the people that are going to stay and work from home, you know, and if it's just if it doesn't have a commercial component, you know, maybe it doesn't have the revenues coming in as much as, you know, they need.
00:34:19:07 - 00:34:27:27
Christopher Jumper
So so those are coming the tweaks that we've been making and the revelations that we've had, as far as I.
00:34:29:02 - 00:34:52:19
Kristin Stephens
Well, you know, with all the uncertain uncertainty we've seen over the past several years here, you know, when we think about how to best position as an issuer preparing and positioning, I think what I'm hearing, it's all about balance sheet and liquidity, not all about it, but it's a it's a significant driver. And how much more weight if any, is that taking into taken in your rating analysis at this time?
00:34:52:19 - 00:35:07:29
Kristin Stephens
Is there what's the right amount? How do you reconcile federal aid was obviously very constructive, but you know that it will be we're going to reach a more normalized environment. So maybe just some thoughts as to how issuers can best prepare and position.
00:35:08:03 - 00:35:27:28
Omar Daghestani
In actually along those lines. Christine, I just want to add, events like this I think are key to the economic activity of large cities, whether it's New York or Boston. Or Chicago or you think any number of large areas. There's been a lot of discussion and we've gone through discussion of Back to the office, our firm is with you.
00:35:27:28 - 00:35:50:12
Omar Daghestani
We've also increased our office space both in New York City with a thousand employees in the state. And we keep growing. So we're increasing with you. We've done the same in Chicago. But if you look at the value of having events like this, whether it's for industry conferences of this Friday, Chicago just hosted its first full auto show last week.
00:35:50:12 - 00:36:17:06
Omar Daghestani
And Mayor Lightfoot, as well as the CEO of Mapua and others were there to celebrate the was a great success my son's ten, so we had we have fun there. But if you look at things like non-profits, right, try raising for a fundraiser for a nonprofit. I serve on a number of nonprofit boards and okay, the first time you do the Zoom fundraiser, everyone's saying, okay, yeah, you do it after the first one.
00:36:17:06 - 00:36:41:19
Omar Daghestani
People like God, please, no, I'll just write a check. Please don't ever talk to me. Don't make me do that again. And when we moved this last fall, we one of the organizations I work with, Chicago Children's Advocacy, we held it was an indoor outdoor venue with 360. We raised 360,000. We had probably over 250 people show up.
00:36:41:19 - 00:37:02:22
Omar Daghestani
It was a great success for us. I work with other organizations and again we see the value of people coming into the city to participate in the community, driving other activities. And I think that's key, whether it be New York or Chicago or wherever you know, as we move back to that normal and find what that looks like.
00:37:04:12 - 00:37:08:15
Arlene Bohner
And so important for people just starting out in their careers too.
00:37:08:16 - 00:37:09:00
Omar Daghestani
Yes.
00:37:09:22 - 00:37:16:00
Arlene Bohner
So critical that they have the opportunity to be in the office yeah.
00:37:19:14 - 00:37:46:22
Kristin Stephens
Well, I think we've reached a nice point to open it up to our audience for any questions you might have for this group. Certainly, we're happy to take any other any questions. Otherwise, I have a few more up my sleeve as well, but we'd love to hear from you know, we have a mic thank you.
00:37:49:14 - 00:38:03:09
Christopher Jumper
In the last 20 or so years, there have been four big events I can think of the in US history that really surprised.
00:38:04:07 - 00:38:05:17
Omar Daghestani
Not only the rating agencies.
00:38:05:17 - 00:38:17:28
Christopher Jumper
But people in the US government and really in it affecting the fiscal and economic reality. Evening of September 11th you think of.
00:38:19:06 - 00:38:21:03
Omar Daghestani
The hurricane hit New Orleans.
00:38:21:10 - 00:38:43:00
Christopher Jumper
And that really was hitting New Orleans, really destroying New Orleans and really hit the rest of the United States. But it hit New New Orleans there was you know when you really think about actually is five, there's also the financial crisis really wasn't anticipated in with anyone. There was the COVID crisis and now.
00:38:43:00 - 00:38:52:03
Omar Daghestani
I would say there's you know, Putin seemingly attempting to expand Russian sway over the rest of Eastern.
00:38:52:03 - 00:39:06:23
Christopher Jumper
Europe and how that may play out. So I guess my question is you know, each of these things had major effects on the United States. I mean, the hurricane hit New Orleans really.
00:39:06:23 - 00:39:08:09
Omar Daghestani
Just largely destroyed.
00:39:08:09 - 00:39:10:22
Christopher Jumper
New Orleans. But these are really things that.
00:39:12:21 - 00:39:15:26
Omar Daghestani
Experts should have had some sort of foresight on and just.
00:39:16:19 - 00:39:27:28
Christopher Jumper
Didn't. And then it happened. Then they said after that, well, this was something sort of out of the blue. But actually, if you look at a lot of these things, if you look at it carefully, you could actually have anticipated a lot of these.
00:39:27:28 - 00:39:36:05
Omar Daghestani
Things in advance. So, I mean, I'm wondering how can the credit.
00:39:36:05 - 00:39:37:14
Christopher Jumper
Agencies and the.
00:39:37:14 - 00:39:38:11
Omar Daghestani
Other experts and.
00:39:38:11 - 00:39:44:26
Christopher Jumper
The governments sort of get ahead of the ball and try to anticipate the next big sort of unexpected thing that may happen.
00:39:47:00 - 00:40:23:27
Arlene Bohner
Thank you. So if I take a crack at it and then everyone else can join in. So I think this sort of leads back to the question you were asking before about liquidity. Right. I think in each of those cases, liquidity has been really important for different reasons. And sometimes for whatever reason, we go through these stages where people don't think liquidity is so important, but it's always the thing that really distinguishes the issuers that can make it through a tough time.
00:40:24:11 - 00:40:58:07
Arlene Bohner
And those who can't, whether it's liquidity to deal with repairs after a big storm until their FEMA reimbursements can can come through or if it's a a COVID era, you know, dedicated tax bond where no one anticipated, you know, it might have, you know, 161 12 deposits structure. But because there was enough liquidity in the structure, they were able to to make it through.
00:40:59:11 - 00:41:13:10
Arlene Bohner
So there's just countless examples where liquidity has been so, so important and really helpful to issuers to get through those those tough times. I'm sure you all have.
00:41:13:10 - 00:41:38:12
Christopher Jumper
Yeah, I might I come back to management and the fact that, you know, you you need to have a management team that is adaptive and can respond quickly. And because no one's going to I don't know what the next, you know, disaster is going to be. Crisis is going to be a challenge is going to be. And you need you need to make sure you have a strong balance sheet.
00:41:38:13 - 00:41:58:12
Christopher Jumper
You need to make sure you have the financial metrics. But it's also it's management you know, and it's how quickly can they respond and react to it. And, you know, how how pliable is their board to, you know, enact the necessary actions in order to, you know, protect them and their and their constituents.
00:41:59:01 - 00:42:34:28
Nick Samuels
And, I mean, you know, ratings ultimately speak to fiscal flexibility so are you burdened by pensions and debt? Do you have cash? How how and how willing are you able to use your government's powers to pivot and reduce the budget? You know, we we started off talking about the what was, you know, two of the first states that we took rating actions on in the pandemic are two at the bottom of our of our state of our rated state cohort, Illinois and New Jersey, because they had the least fix of fiscal flexibility to be able to confront and uncertain situation.
00:42:35:29 - 00:43:07:21
Nick Samuels
And, you know, not many states ended up having to use their budget reserves through the pandemic, but all of the ones that did have rebuilt those reserves now and of course, no one is ever going to know will the federal government be willing or able to step in with $5 trillion of support. So, you know, I think the question isn't, will they be able to foresee what the exact events or uncertainty are is how well have their position themselves to be able to deal with some element of uncertainty?
00:43:08:03 - 00:43:35:08
Kristin Stephens
And I love also that you mentioned New Orleans in the wake of Hurricane Katrina, because if we think about at the time, issuers with relatively more or less liquidity versus others in New Orleans was on the lower side of that equation. And it did prompt serious credit degradation, which they subsequently have recovered. But you can compare and contrast that with the example of the City of Houston Post, Harvey, where you did not see that kind of deterioration.
00:43:35:08 - 00:43:38:09
Kristin Stephens
And again, a completely different financial profile.
00:43:38:09 - 00:43:57:12
Nick Samuels
But just to add to that, I mean, you know, Arleen mentioned you need cash, you know, to be able to bridge this gap between what you need to spend immediately and when FEMA starts paying. And Marge, you might remember this, the day that Sandy hit a rainy analyst thing, the day that Sandy hit was the last day that you could apply for a Katrina aid from FEMA.
00:43:57:17 - 00:44:03:12
Nick Samuels
It takes a long time to be able to draw all those funds down and you might have to front a lot of it yourself.
00:44:04:01 - 00:44:39:02
Kristin Stephens
And I think what we're getting at, at least I'm hopeful with this new ESG has always been a focus in our market. But with the increased attention to just ESG planning, etc., the amount of you can hear from our panelists throughout the whole day, how much is being devoted to this, that that type of planning should hopefully be very constructive going forward as we think about some of these evolving challenges Any other questions that we can take Yes.
00:44:39:03 - 00:44:39:18
Kristin Stephens
Oh, great.
00:44:42:25 - 00:45:09:07
Arlene Bohner
So I was listening to a panel discussion recently on the future of New York City and one of the participants from the Independent Budget Office said that they didn't think business travel would be coming back, which I thought was interesting because how do they know anyway, mama or anyone else? Do you have thoughts on this? Think he's the right person to do?
00:45:09:11 - 00:45:11:10
Kristin Stephens
You were talking about your in-person fundraisers.
00:45:11:16 - 00:45:42:16
Omar Daghestani
So, so much. Thank you so much. First off, I spent I flew 110,000 flight miles last year for work and going from coast to coast. And our office also had a record year. Our firm, a firm, moved up in the rankings, all of those things. And so I think business travel, you know, this discussion of oh, everybody's just going to zoom in.
00:45:42:16 - 00:46:03:27
Omar Daghestani
You know, that's the way it's going to be. I think that could be true for some types of roles. Support roles or it functions. But if you're to look at the municipal bond business, I long thought, well, gee, the moment somebody can get on a plane Well, who who are you? Who are you going to hire for an Asian?
00:46:04:08 - 00:46:26:18
Omar Daghestani
Somebody who's come and visited your office or maybe you've had coffee or lunch with or somebody that you saw on the end of a zoom. And I think that's true not just for our business, but for a whole variety of businesses. And if I was to look at the composition of travelers early on back in 20, 20 when I was flying, that was there weren't many business travelers.
00:46:26:27 - 00:46:49:09
Omar Daghestani
Now you're seeing more and more you're seeing it being harder to get reservations for dinners and so forth. And so I, I don't, I think that's a very shortsighted view of business. Travel is disappearing. And in fact, if, if the attendance at in-person events is any guide, I think people want to be together again. They just need to feel comfortable.
00:46:50:03 - 00:47:20:02
Omar Daghestani
And by the way, the new LaGuardia is amazing. I love it. I hope we can do the same in Chicago. But I've seen time and time again that sort of pick up of activity. Once you see a little bit, you see more in Chicago. We see the same thing. Mayor Lightfoot came to the auto show herself along with the deputy mayor, trying to again encourage people to come into town to do things, to have those activities and so I don't think it's dead.
00:47:20:02 - 00:47:40:14
Omar Daghestani
I think it's I think companies have been a little bit slow to be able to react, especially bigger companies or perhaps more modulated places. But I don't I don't think it's that at all. But in fact, I think it's going to be difficult to get a hotel room here within the next few months. So book ahead.
00:47:41:28 - 00:48:00:17
Nick Samuels
But it will come back after leisure travel. You know, I think that firms you know, have seen savings in their travel budgets. And just in reaction to inflation and higher oil prices, some of the travel costs will be more expensive. And, you know, and I think for myself personally. Right. You'll rationalize, too. I need to go for a week.
00:48:00:21 - 00:48:17:09
Nick Samuels
It be a two day trip, you know, so there will be something some different and it'll be prolonged we're not you know, not everyone is even back to whatever their firm is calling back to the office yet. But I did pay some hotel tax last night because I came in last night to yeah.
00:48:18:14 - 00:48:43:20
Arlene Bohner
Yeah, I agree. I think there's there is no substitute for human interaction. I think we're just wired that way as human beings. And, you know, it may not come back right away, but I, I, I can't see it going in the other direction. I think it will continue to recover and, you know, over, you know, a period of time.
00:48:44:00 - 00:48:45:12
Arlene Bohner
Well, we'll get back to that.
00:48:46:00 - 00:48:59:25
Kristin Stephens
Yeah, we're running out of time on the pace. I was just going to say, I think, you know, we're going to see an incredible transformation in cities in the next five years. Five, ten years isn't to be a very bright future for cities, but that's probably a topic for another panel.
00:49:00:27 - 00:49:06:15
Christopher Jumper
Thankfully, the Obama years ahead of the curve, they're holding a wonderful conference and I really appreciate it. Thank you.
00:49:06:25 - 00:49:07:01
Arlene Bohner
All right.
00:49:07:17 - 00:49:09:28
Christopher Jumper
Thank you, everybody, for this opportunity.
00:49:12:09 - 00:49:19:19
Kristin Stephens
Well, I think we are up with time. Thank you, everyone, for your questions and for joining us today. Thank you to my panelists.