Industry and regulatory outlook from the leaders in public finance

Join our panel of top industry leaders as they discuss their expectations on regulatory developments, market performance, bond issuances, credit conditions, and potential challenges and opportunities for the year ahead.

Transcription:

Kevin (00:09):

Thank you Treasurer Goldberg. That was really great. Some great examples of how state finance teams can really rise to meet big challenges with thoughtful and energetic management. So appreciate that. We'll go right now into our first panel, which is Industry and Regulatory outlook from the leaders in public finance so we can come on up. So our moderator, Brian Garone, is one of my partners in the Washington DC office of Hawkins, Dell Field, and he's our chief securities law partner. So I'll turn it over to him to introduce our esteemed panelists. Thanks.

Brian Garzione (00:57):

Good morning everyone. I'll let everybody settle in for a second here. Thanks for joining our panel. So what we're going to talk about today we're going to discuss some of our expectations on regulatory developments, market performance, bond issuances, credit conditions, potential, challenges in opportunities for the year ahead. So I'll start with myself. I'm Brian Garzione, partner from Hawkins Field Wood. As Kevin mentioned in the DC office of our firm. I'm a securities law and disclosure practitioner and I'm going to be the moderator. So we have a great panel today. I'm going to give brief Bio's here of everyone. The agenda on the conference website has more detailed information about each of the panelists. So just briefly I'll go in this order. So from UBS, we have Kristen Stevens, she's a managing director and the head of credit strategies for the UBS public finance department. We have from the New York City Office of Management and Budget, we have David Womack. He is the Deputy Director for financing policy and coordination and is responsible for managing New York City's capital financing programs from RBC We have Glenn McGowan, he is a managing director and the co-head of the municipal underwriting, municipal underwriting at RBC. And finally we have Mark Kim from the MSRB. He is the president and chief executive officer of the MSRB, the principal regulator of the Min Municipal Securities Market. Before becoming CEO, mark was the MSRB's chief operating and a member of its board of directors. So let's start with a look at the markets perspective and the credit environment. I think we'll start with Kristen and then we'll hear from Glen.

Kristin Stephens (03:14):

Thanks Brian. I think we're going to kind tag team this, which would be fun, but I think as treasurer Goldberg just said, there's nothing more than a lot of uncertainty ahead. So I thought what might be very fun this morning, given the difference in perspective on all of these topics, how fast inflation will come down, what's the pace of rate hikes? What's the jobs market look like? Is to maybe pull the audience a little bit for your opinions on this. I'm kind of curious to see where the majority sits, but if we take the Fed for example, we know that they decided to slow the pace of rate increases to 25 basis points yesterday, which was consistent with expectations. But with a show of hands here this morning, how many people think that the Fed is going to lower rates this year? Okay, and how many people think we're going to do the higher for longer approach? Okay, so vast majority is on the higher for longer side of the equation, but what we can all agree on inflation certainly drove down bond prices in mid 2022, the worst year since the eighties for municipal bonds and these smaller increases we've seen today in the Fed yesterday, I apologize in the fed's policy rate followed by what I think people are agreeing will be at least a pause in some of these relentless rate hikes. It doesn't constitute a pivot in monetary policy. That's kind of the big point here, but it does, and hopefully this will be a good harbinger for 2023. It does offer some breathing room for some of the more traditional factors in our market to assume greater importance, be it new issue volume, be it fund flows, or be it fundamental credit quality. So that's one of the things I'm looking forward to in 2023. But to go back to you, if we talk about recession, there's just a tremendous diversity of a opinion on that. By a show of hands, how many people think we're going to see a hard landing? Not one per. Oh, we've got one. We have one for the hard landing?

Glenn McGowen (05:27):

Is there an intermediate option?

Kristin Stephens (05:29):

Well, yeah, I'll do a hard landing. A soft landing. Soft landing. Do we have a pretty good majority on soft, but what about other? We've got the other. All right, want to tell us about your other I'd be curious.

Glenn McGowen (05:42):

Well, what I find, first of all, good morning everybody. Great to be with you all and thank you to the Bond Buyer for having me and great to be included in this group. What's fascinating to me is the huge disconnect between the fixed income markets and the equity markets in terms the outlook. If you think about last year we had coming into this year, 425 basis points of rate hikes yesterday made that 450. So we started last year, fed funds rated zero to 25 basis points and now we're four and a half, four and three quarters during that timeframe. It took a good six months to see inflation start to moderate, but sure enough, CPI topped out around 9.1% annualized in the summer end of the year at six and a half. And by all accounts, if you look at PCE, which is the fed's preferred inflation metric, if you look at PPI, you look at the slowing pace of wage gains inflation is moving lower and it's moving closer at least to the fed's objectives. But Powell made it very clear yesterday it's seeing moderation and inflation. It's still too high. They sell more work to do. Last year was a challenging year for every financial market. The total return of pretty much everything except for a couple commodity sectors was decidedly negative. And to Kristen's point, the worst year in the Bond market in decades really since the eighties, what was kind of fascinating is, you saw the S and P lose 19% of its value. You saw the NASDAQ lose a third of its value and fund to outflows in every single fixed income asset class that you can point to certainly in the us. But now you look at the outlook and you have the equity markets year to date recapturing a third of their losses from last year. And the equity market seems to be okay with the idea that hey, we're still at full employment. We've got three and a half percent unemployment rate that is the lowest in just over 50 years, and at the same time inflation is moving lower and making progress towards the fed's goal. It took a little while to get there, but the equity market seems okay with the idea of a soft landing being the base case. The bond market couldn't disagree more. We've had a fully inverted treasury curve now for the better part of six or eight months. You've got a 70 basis point two's, ten's inversion as we sit here. You've got a fed fund's futures market pricing in close to 50 basis points of cuts by the end of this year. So how do you rectify that? Do you envision an economy that is still at full employment that's adding on average 375,000 jobs, non-farm payrolls per month over the course of the last 12 months and steer to our toward rate cuts that that's basically what the bond market is predicting here. So you have the soft landing being predicted by the equity markets and the risk markets. You've got a hard landing being predicted by the bond markets and at the end of the day, we don't really know and we didn't get a lot of new answers out of Fed Share Powell yesterday. What'll be very interesting, my mind is if the Fed puts out its dot plot, its summary of economic projections, the things that economic kind of armchair economists like me, basically economic nerds really focus on we'll get the next dot plot in March. It'll be very fascinating to see what the Fed's forecast is for its own rates. But the bottom line is this huge disconnect can drive further volatility even if interest rates remain range-bound and bottom line there is that you can see pretty violent swings in the flows in and out of various asset classes of capital based on divergent views. And that's exactly what we have to learn more on. That was a very long-winded answer to your short question though.

Kristin Stephens (09:23):

I was just going to add a little bit to the jobs market. Pointed really has been the resilient pillar of the economy, but I do believe that more recently you are starting to see these pockets of slowing and these pockets of weakness layoffs are back to roughly running at the 2018, 19 pace and the number of people collecting unemployment insurance benefits is rising. So that's one vector surveys, I think you mentioned the PMI, but that does suggest that the outsized surge that we've seen in adding employees is slowly coming to an end. And another big factor that really took a big pause if you think about it during the pandemic was immigration. It really came to a halt. But that's actually now showing signs of normalizing. So you do see these pockets of labor pressure. They really are remaining in certain specialty areas. I mean I think any of the public finance people in the room might point to healthcare to nursing for example. That's still an area of pressure. But as some of these labor market imbalances ease this eb and flow of job gains going forward, it should be more closely linked to the broader economic growth trends rather than what many would argue has just been catch up of the last 18 months. And certainly we'll have an important data point coming out tomorrow that will be interesting to see.

Glenn McGowen (10:41):

 I think you're a hundred percent right about that. I mean if you look at the ISM surveys very, very closely watched gauges of the manufacturing sector of the economy and the services sector of the economy. We've had a consistent decline in activity in both of those those gauges for the better part of six months. You referenced the headlines on job losses. Look at the bank earnings. We're in the heart of earning season right now. The banks for the first time in a long time are increasing their loan loss reserves. You don't do that unless you're expecting some form of a recession. There was an article in the journal this morning that talked about consumers savers withdrawing money from 401ks out of financial necessity or early withdrawals as a result of financial hardship. So there are plenty of indicators that would suggest that we're actually in some form of a slowdown if not an absolute recession. But I think from the Bond market's perspective, the Fed basically has to completely crack the labor market with that three and a half percent unemployment rate to start to anticipate some sort of a cut. So that's why I think we're somewhere in the middle. I don't think it's nearly as rosy as the equity market would suggest. It's hard to envision with full employment seeing that we could possibly have cuts at the end of the year to the tune of almost 50 basis points. There's got to be some sort of a middle ground. But I do think a lot of these indicators that we look at, they are lagging indicators and I think the big risk here is that you're not really going to know how good of a parent you are until your kid's out of college. You're not really going to know if the Fed, I say that with a four and a six year old at home. So knock on wood but you're not going to know how good of a job the Fed did until we get a year or so out of this.

Brian Garzione (12:28):

Okay, Thanks. Are there any factors, credit conditions or anything like that that may be impacting the market or impacting supply? How, maybe the good question is what is supply like right now?

Kristin Stephens (12:44):

Sure. I think coming back to the technicals, taking on a bit more importance here, we've had a pretty strong start from a performance standpoint in January with there being light supply as well as Muni fund inflow is really breaking a strong pattern of outflows in 2022. So that's giving the market some technical oomph and momentum behind it. But I think that uncertainty about the outlook is going to be elevated here. And we're watching a lot of these factors we're discussing here. We're watching obviously any switches and projections on recession, on rates and inflation, but always mindful of any potential legislative issues coming up. And I would say right now arguably the biggest threat to market tranquility is probably the debt ceiling negotiations. So that should become a potent issue once again in a divided congress. But as in 2011, we would expect that to be ultimately be resolved.

Glenn McGowen (13:43):

I might just add quickly on the supply front, obviously last year was a very light year in terms of supply. The bond buyer numbers came out at 384 billion, down about 20 odd percent from 2021. The interesting thing is that includes about 24 billion of private placements. So if you strip that out and you look at what was actually sold to investors in the public markets, 360 billion is a pretty light number. Our forecast for this year, assuming fairly stable long-term interest rates, which is the street consensus right now is to be right around that number 385 billion all in. I'd love to be proven wrong and see that number move higher but I think stable expectations of rates, I think we'll see quite a bit of volatility within a 20 basis point ban been. I see some underwriters out here in the crowd that's been, that volatility is just a fact of life for us. But I think the overall long term level of rates being somewhat stable kind of ties us into a consistent supply environment. There's just not going to be as many refunding opportunities out there but I think there could be some potential upshot in terms of new money depending on frankly what projects need to be financed and how much help issuers get or don't get from the federal government.

Kristin Stephens (14:53):

So you said you were at about 385 for your supply forecast? We're very close at ubs, yeah, we're between 395, 405 and yeah, it's really the drop in refundings, but new money issuance may be a little bit better here because some of the support you've seen from the federal funding should be waning right at this point. And thank you to everyone for participating with me in the polling. I very

Brian Garzione (15:15):

Appreciate informal poll. I like that, Okay, well thank you Kristen and Glenn, what turning to the issuers perspective, David is here representing New York City, one of the largest issuers in municipal debt in the country. David, I'm going to jump right in. How has volatility in the market an overall interest rate environment impacted New York City's bond issue with this?

David Womack (15:41):

Sure. Thank you Brian. And again, Thank you to Wire for inviting me and to do my panelists for participating in this. There's a lot of fun and very interesting. Certainly we are exposed to the volatility but we have to step back a minute and as New York City as you pointed out, Brian is one of the largest issuers in the market. It we'll need to issue between 10 and 15 billion a year in new money just to keep our capital program funded. So we're financed through good markets and bad high interest rates and low and refund opportunistically. We don't really have the luxury to try to time the market. And there are other and we have windows that we finance in and the fact has certainly introduced a lot of uncertainty in terms of scheduling our issuance. But I will say that the volatility is recognizing the need to borrow and the need to be in the market. We have had to make certain tactical adjustments when we approach the market, the types of things we offer and how we address investors. So for instance, between calendar year 21 and 22, our aggregate issuance actually rose from 13 and a half billion to 16 billion and these are our three core credits GO TFA and New York water. And our tax exempt issuance was up from 10 billion to 14. Our taxable issuance fell from 3.1 to about 1.9, but that had little to do with interest rates. It had more to do with the types of projects we were funding, what needed taxable, what needed taxable debt and the way we use taxable bonds to support our refunding transactions. Our new money borrowing grew from five and a half billion to 10 to 10 and a half million as we came out of the pandemic. You may remember our capital program was put on pause for several months and as we came out of pandemic, it took a while for that program to gather steam and to get up to full speed and that was really reflected into 2022. Our refundings and offerings actually shrunk. This had a little bit to do with markets and with rates, with rates rising, but it also had to do with timing. For example, we had a refunding that we were contemplating for December that we just couldn't get done quite frankly because we did not want to plan, we didn't want to issue bonds in the middle of a fed meeting. And so we lost that week and we've had to delay that financing. And the reoffering we were doing and this is actually kind of interesting with rates, with fixed rates rising, we were doing a lot of refundings when rates were low, we were reoffering our variable rate bonds, converting to fixed rates to take advantage of those low rates and the move down the yield curve in 22 as rates rose, we stopped doing that and in contrast, we started issuing variable rate debt. We issued about 900 million in an additional variable rate debt as the long end became in less stable for us, a less stable outlook and a more challenging issuance environment. And then the way we structure our debt and how we approach the market, those of you who followed us for many years know that we would typically issue our go and TFA debts with two day retail order periods followed by a one day institutional order period. As we spoke with our underwriters, our underwriting partners and our municipal advisors, given the volatility, we shortened that retail order period to one day. We felt it was not in our interest to have a bond have bonds in the market for three straight days and running the risk of rates going up, going down. So, we had to compress that is issuance calendar. We also were trying to avoid competition with other large issuers, state of California, commonwealth of mass, New York state because there with bond funds having outflows, there's a lot of competition for long dated bonds and we wanted to try to have as much flexibility as we could and again, planning around the fed meetings usually just plunk themselves in the middle of a place where we would want to issue bonds and we would have to move. I remember talking to some underwriters back in October and they're saying, well, looking at the calendar, there are three good weeks left. You don't usually hear that in October. You hear that in November. And that's because of the Fed meetings, holidays, Christmas, it just had a compressed issuance calendar. And I think that had something that led to that had something to do with the decline in issuance volume. There just wasn't enough room to issue the bonds that needed to get issued. As rates rose, we saw our investor mix change. The bond funds who were basically net sellers were participating, but in lower amounts, the arbitrage creating accounts were more prominent in, we're putting in large orders and they were the bellweather orders. Retail as rates rose became very predominant. We would typically sell 15 to 20% retail by the end of 22. We were selling close to 40% retail. The retail SMA demand was very strong given the higher rates. And lastly, we responded to volatility by coupon structures. What are investors want? What do they want? When rates were low coupons sub 5% coupons were attractive and given markets and certain buyers wanted them as rates rose, those went away. The dominance of 5%, coupon five and quarter five and a half just a different structure. So we were looking to structure bonds to meet investor demand. So make a long story short, just meet investors where they were because again, we have a need to be in the market and to sell what investors want. So that's a long waited answer.

Brian Garzione (21:47):

Well thank you. So some creative couponing is something that you guys did. Are there any other as a result of the market turmoil, were there any other debt terms, unique debt terms that you saw that you needed to really not really pursue?

David Womack (22:10):

Not really. I mean actually we saw more of a move to more common that terms the tenure park hall stayed the same. There was less interest in short calls in exotic structures. Investors seemed to be looking more for liquidity. They wanted something that they could trade, something that they knew that if they needed to sell, if a bond fund needed to sell, there would be demand for it. So we were looking for more liquid structure and again, the move to issuing variable rate debt, we were fortunate to have some good credit capacity from our liquidity providers and the short term markets were very attractive until December when they spiked up. But they have since come back down. We've noted the disconnect between weekly variables and daily variables. And so there's been, again, reflecting the liquidity concerns of investors if they wanted to exit, they wanted to exit quickly and if they wanted to redeploy, they wanted to redeploy quickly. So bond funds would sell, money would go in short, very, very short instruments and then they'd redeploy. So we're trying to move where the market is again, keeping the markets open. We've been very fortunate to have strong investor demand for most of our paper.

Brian Garzione (23:35):

Quickly, Kristen and Glen, do you have anything to add on seeing more of variable rate in the versus where perhaps that may have been a number of years where it was perhaps the shift away from variable to more fixed?

Glenn McGowen (23:58):

The old 80 20 rule thumb has obviously kind of gone by the wayside for a lot of issuers, but I do think if you get into find an environment where the Fed starts to cut rates look at SIFMA, right? The SIFMA index is down 200 basis points since the start of this year. There are pockets of short-term products that could be interesting. I think he already answered one of them are certainly one of them and certainly New York City takes advantage of that. One of the things that's really cool about working with the New York City financing team and their partners is they know markets and they respond to investor trends and understand that they have significant capital needs over time that have to be executed. And so you're dealing with sophisticated issuer that's analyzed various coupons and calls and products and I think that there's a natural flexibility built into how New York City operates that serves the city very, very well. And that flexibility and of all the markets very key. That flexibility could certainly include additional variable. I have been a little surprised at how a liquid the F frn market has become, especially when you and the fact frankly that it never developed in the taxable muni side. There just isn't a taxable muni FRN product. It's issued almost weekly in the corporate bond market. That to me is a bit ahead of a head scratcher and it is a small investor base from Muni FRNs. I'd certainly like to see that expand and see that product become more liquid because that could be another avenue for the issuer base. I think that could be a good tool.

Brian Garzione (25:22):

Great, thank you. So we've heard from the market's perspective and then the issuer's perspective. So let's turn to Mark for a look at the regulator's perspective. So I mean, I'm going to turn this over to you, but I'll quickly just ask a initial question. So just the MSRB's regulatory out agenda or outlook for 2023. What's on your plate? What are the key areas that you're going to be focused on?

Mark Kim (25:54):

Sure. Good morning everyone and thanks Brian for monitoring the panel and for the Bond Buyer for inviting the MSRB to participate. It's a pleasure to be here. The MSRB is in the midst of a robust rulemaking phase. Our regulatory agenda is focused in two areas in particular. One is a coordinated rulemaking initiative with the S E C and FINRA examining fixed income market structure broadly. And the second is an effort that the MSRB is focused on modernizing our rule book. And I wanted to touch on both of those to give you a sense of what you might expect from the MSRB and the year ahead. With respect to our coordinated examination of fixed income market structure, looking at treasury market, corporate asset backed and municipal securities market with the S E C and finra, our approach for the municipal securities market has been to look at our market structure from the perspective of pre-trade, time of trade and post-trade. In post-trade. The MSRB issued a request for comment on proposed amendments to our rule G14, which addresses the time of trade reporting requirement. The MSRB in concert with FINRA proposed amending our respective rules to shorten the time of trade from 15 minutes to one minute, we received a very robust response from the industry. I believe it was 52 comment letters 50 of them were strongly opposed to the proposed rulemaking. Interestingly, that rule has been in place for 17 years and has not been changed in the meantime over the last 17 years. There have been significant changes in our market and our market structure, including the increasing prevalence of electronic trading, ATS's looking at the ways bonds get straight through processed or settled and cleared. Today over 75% of all the bonds that are traded are reported within one minute already, even though we're under a 15 minute reporting rule. So really the question, obviously this proposed rule wouldn't impact three quarters of the trades that are already happening in the market. So the question then is who's in that 25%? And that is the phase that we're in right now is doing additional analysis, the trade data, doing extensive outreach to the broker dealer community to make sure that we understand the concerns that were raised around the types of trades or the types of firms that are not potentially may not be able to comply with the one minute reporting requirement. So, the MSRB is in the period right now of engaging with the industry and making sure that we understand the comments and the concerns that that were raised, as well as considering alternatives to a one minute reporting timeframe. So that's on time of trade. The MS MSRB will be proposing amendments to its rule G47 this year on the disclosures that are required to be made to investors at the time of trade. And I would expect that that rule will be proposed in the first half of this year. And then pivoting to pre-trade the MSRB's, examining again together with FINRA and the scc, the types of pre-trade data that are available and are respective markets and the potential value of that information for market transparency and market liquidity. So the first regulatory initiative is an examination of market structure and the second regulatory initiative that I mentioned was focused on modernizing our rule book. And what I mean by that is examining our rules, making sure that they reflect current market practices, that they remain relevant and also with an eye towards promoting greater consistency across the regulatory framework and reducing regulatory compliance burdens on regulated entities. And just two examples of rulemaking that I expect to happen this year for municipal advisors. There are proposed rules on MSRB rule G 40 on advertising by municipal advisors with an I towards making those requirements consistent with the exist, making those requirements consistent with existing requirements on investor advisors and the types of restrictions that the SEC has on their advertising as well. So that aren't two different sets of rules for regulated entities that have similar fiduciary duties to their clients. With respect to broker dealers, we continue to look and examine MSRB rule G 27 on the supervisory responsibilities firms particularly with respect to remote work and remote offices. It's very clear that the pandemic had changed some firm's business models and again, our rules need to change with the changes that we're seeing happening in the market. So I would expect that the MSRB will be proposing amendments to our rule to reflect the way business is done today and to make sure that the affirm's supervisory responsibilities are clear in this new market. So those are two kind of important initiatives that the MSRB will be focused on this year.

Brian Garzione (32:21):

Okay, thank you. So one thing that did happen in 2022 was that the MSRB issued a report summarizing the comments it received in connection with its request for information on E S G practices in the municipal securities market. Mark, does the MSRB have anything else on its agenda regarding ESG?

Mark Kim (32:47):

So I think E S G is here to stay in our market just listening to Treasurer Goldberg talk about how important ESG is to the state of Massachusetts and what an opportunity it is. I think the reason why it's such an opportunity for our market is not only because it's a natural fit with the types of infrastructure that our market finances, whether it's higher education and educational attainment, whether it's hospitals and healthcare outcomes, whether it's economic redevelopment and growth. Those are all the areas that ESG investors are interested in. But there's another reason why it's such an opportunity, I believe, for our market and that's because investors are allocating capital to it. We've seen in our market now at least three ETF's that are dedicated to sustainable or ESG or green investing in our market. We're seeing literally hundreds of millions of dollars of investor capital being allocated towards this space. And so there is a tremendous opportunity and we're starting to see that we issued that RFI to make sure that we had an opportunity to hear from market participants on what's happening and how ESG is being integrated in our market and what the trends are with respect to esg. we also received a very robust response to our ESG, RFI with some very colorful commentary on it. I encourage you to all of the letters are available on our website as well as an executive summary that we published of the key themes. One of the key themes that emerged that was consistently that was consistent across all different types of market participants was that regulatory action is premature in our market in with respect to ESG and we agree that said, there are a number of trends and practices that the MSRB is paying attention to with respect to ESG regulated entities submitted public comments that raised a number of potential regulatory concerns about that ESG raises with respect to our rules in the primary market. And again, treasure Goldberg talked about this, the emerging and evolving practice of issuers labeling their bond deals green or social or climate et cetera. And the potential confusion that might generate for investors where when there isn't a uniform standard for what constitutes a green bond or a social bond or a climate bond. Regulated entities also raised a potential regulatory concern in the secondary market with respect to the trading of these types of bonds and in particular, What the compliance requirements would be under our current rule book. For example, if you have an investor that wants to buy a green bond and the green bond was issued five years ago, what are the obligations that dealer may have to ensure that it remains a green bond when it sells that bond to its investor? There's another issue or practice that was called out as potentially raising compliance challenges for regulated entities. And that has to do with providing ESG investors' priority and the allocation of orders. Anytime one type of investor is given preference over another type of investor that raises regulatory scrutiny and it's an area that the MSRB is continuing to monitor and to see how the market evolves. We have MSRB rule G 11, which governs primary offering practices. It defines an established market practice of retail order periods. New York City being at the forefront of that trend and a very sophisticated set of practices has evolved around that to help ensure compliance with retail order periods, whether it involves Providing zip codes or establishing certain size limits of what would constitute a retail order and so on and so forth. There is no accepted definition in the market of what an ESG investor is. And so that has the potential to raise some compliance challenges. So there are some areas that the MSRB is continuing to monitor from a regulatory compliance standpoint that were called out by the public commenters to our RFI. And then also there were some areas of importance that were called out by investors and issuers as well about the lack of standards and metrics and opinions here were varied. We had some issuers submit comments saying that it would be impossible to establish uniform standards and metrics and that they wouldn't be of any value to the market. We had other issuers who said that it would be helpful for them to have uniform standards and metrics with respect to ESG. We also heard from investors who said that they are not able to get all of the information that they would like to have with respect to ESG securities that are being issued in the marketplace. And that for some investors ESG information is important if not material to their investment decisions. So there was a lot of very insightful comments that we received to our ESG, RFI and we continue to watch how our market evolves and develops.

Brian Garzione (39:47):

So David, do you have anything to add on ESG labeling for New York City's bonds or any plans that New York City may have to issue any ESG bonds?

David Womack (40:00):

Sure. Actually I'll point out that we've actually done two labeled bonds. We did our first a year ago in 2021 we did a Hudson Yards were funding and labeled that green tax exempt. Those are the bonds that were issued to for those who you've been over there to fund the construction of the subway, the extension of the subway line, the station and the park. And it kind of went the way our normal issues go. There was nothing really special about it in terms of, you know, ESG investors. No one really stepped up and identified themselves. But in the last year we embarked on our first labeled social bond. We did that in October and wed about 400 million in taxable social bonds, specifically dedicated to housing. The city has a very robust program of funding affordable housing in conjunction with the bonds that are issued by the taxes exempt bonds and bonds that are issued by HDC. We supplement those with city tax levy bonds to promote affordability. So we issued these bonds as taxable bonds, structured them as 30 year index eligible term bonds again on the advice of our advisors and underwriters. That's where the demand was and it fit uniquely into our debt structure. And so we wanted to offer something that would be very attractive and get a very good response from investors. We had the bonds we had a second party opinion, we secured it from S and P because we share your concerns mark about issuers at labeling their own bonds. The standards are not uniform and we would rather have another someone who's in that, firms that are market and understand what the standards are, what we're trying to manage too. We created a detailed framework for which these bonds are being issued that went through the programs that were covered. And actually in the initial disclosure we disclosed details about these projects that we would not otherwise do. We were down to the project, the project addresses so people could go and actually see where they were in HDC and HPD had other information on those projects. The issue was very well received. It was about four times oversubscribed and about a quarter. The indication interest came from identifiable socially responsible investors banks with needing CRA eligible investments. And we asked for investors to identify themselves and through the sales coverage to identify the specific investors because we wanted to know what the incremental value was. So if that added another level of subscription, that certainly helped. That certainly helped our pricing. So we did the framework with the intention of trying to access that market. Again for us, housing was one of the unique areas where we could make a specific identification of what projects are. As you can imagine, New York has a massive capital program across many different agencies, many different types of projects from the mayor. Success of mayors have made incredible commitments to ESG areas in terms of we have a new task force inside OMB(Office Of Management Budget) dedicated environmental resiliency and sustainability so that capital projects within every agency have to meet certain standards, but pulling out specific projects becomes very, very challenging to us. And you talked about the assets under management and in the hundreds of millions, we're a 400 billion tax exempt market every year and we have concerns whether the scale of assets dedicated to the sector are sufficient to provide, provide incremental benefit to us relative to the effort takes to tease out what it is we're doing. And then we have similar regulatory concerns about how are the regulators going to look at this going forward. There are the broad concerns for greenwashing. I don't think that's that much of an issue in the tax market because it's sort of what we do. You could label all of our bonds as environmentally social or some level of green just because they're all capital, they're all infrastructure. And maybe the challenge is to identify the bonds that, but it's hard to do. So we'll continue to watch this and we talk to our underwriters and advisors all the time about the sector. It's important to us to know, but I think we have taken a more Let's say circum back look at it and we need to be clear on what it is we're doing. I think the projects that the city is undertaking and you see it every day, the East Coast Resiliency Project, the projects, the water departments the water authority is financing for green belts to address inland flooding. It's part of what we do. It's part of the DNA of the city and the city has been at the forefront of this for at least a decade. And I think we've spent a lot of time with Kristen and her team discussing this by trying to tease out specific projects that we could label becomes very, very challenging for us uniquely to us. And I think other issuers may be positioned better to address that than we wouldn't.

Kristin Stephens (45:52):

I would just chime in with New York as very much a leader with their thoughtful management practices around esg. So it's not surprising to me to hear about the successes you're having on these label transactions. And I think as the market continues to evolve, you'll hear about more success stories. There's always been this ever elusive question we get about and will there be a pricing benefit from all of these efforts? Because a lot David can attest there's a lot of effort that goes into these types of financing so as well. But we do have a really exciting success story to share recently on that regard in that regard rather, I apologize, but we were delighted to be able to work with the city of Chicago. It's inaugural social bond issuance, which was issued through the sales tax securitization corporation just recently. And the city did achieve the highest pricing differential on an ESG financing to date. Were the social bonds actually priced three to five basis points lower in yields than that non-social bonds. So it was really, you're starting to see some of that, I don't know if it is a trend or something to monitor, but certainly a nice outcome there and I'm sure Glenn could comment on as well.

Glenn McGowen (47:03):

I think really the key thing mark said ESG is here to stay. I a hundred percent agree with that and Director Womack said that the core of what we do as a public finance industry in terms of issuance is esg. Every school bond in some capacity is social, every housing bond is social. Every water utility bond in some capacity is somewhat green compared to what you see in other markets. Standardization of disclosure, best practices. I'm a big fan of having independent opinions. I'm working right now on a hospital transaction that is a sustainability bond. It's got an independent verified opinion in that regard. That's green plus social which I believe is the first healthcare transaction to go down that path. And I think investors just like to see that there is another party out there that's done some due diligence on it. At the end of the day, the investors have their own criteria of what fits the mold of of ESG in their own portfolios. They have to make that determination. But I do think moving to a place where there is some guidance on disclosure and more formality about reporting and how the external parties grade E S G would help the development of the sector.

Mark Kim (48:20):

Great. Can I just build on these comments Brian? And I think another factor that I think will be, or another something to watch over this next year I think is SEC actions with respect to ESG. The S C has a proposed climate risk disclosure rule out for comment. Now I would expect that the SEC may propose a final rule with respect to climate risk disclosure and if it survives the threatened legal challenges, that new rule may provide some guidance and some insight into how climate risks might be disclosed. And I think another area to watch with respect to the SEC is the enforcement area where they have been pursuing cases against greenwashing, which you mentioned David. And I think those are instructive for our market.

Brian Garzione (49:31):

Yeah. Okay. So we have about a minute left. I want, and that's not a lot of time, but so, I'd like to hear from the audience if there's any questions, we'd love to answer them. So are there any questions?

Audience Member 1 (49:50):

I have a basic economics question. The inverted yield curve, what's your outlook on it normalizing and what are the variables in supply demand price that you see happening over well over your outlook? When are we going to get a normalized?

Glenn McGowen (50:07):

If I knew the answer to that, I probably wouldn't be up here. I think the inverted yield curve is more heavily inverted and has persisted longer than anybody expected. There's the old joke that economists have predicted 10 of the last six recessions. But I think when you have a significantly inverted yield curve for a persistent period of time, that's a challenge. And I think, you know, would expect that at some point it, it's kind of shocking me when you think about it outside of mandates tied to duration. Why would you ever buy a 30 year treasury when you can pick up sign, or even a tenure when you can pick up significant yield in the two year. Kind of an interesting strategy right now might just be to construct a treasury ladder out to two years. So, how does it normalize? It's hard to say, but I do think part of what's driving it is you do have duration specific mandates that certain investors have to manage to a life insurance company could pick up more yield by buying a six month TBILL or a nine month TBILL than a 30 year treasury, but they have to match asset and liability constraints. And so that's probably part of it is that you have some fragmentation of the investor base that has to support various parts of the yield curve. But I think at the end of the day, the fed either will or won't crack the employment market and that will ultimately determine how long the curve is inverted for. That could be wrong though.

Brian Garzione (51:31):

Other questions? Okay. Well thank you everyone for your attention. We appreciate your time.