How Demand Is Changing (CPE)

Transcription:

Lynne Funk (00:09):

All right, let's get started here folks. This is a panel entitled How Demand Is Changing, and I have three wonderful experts here with me to talk about sort of the buy-side angle. We've got Bernard Costello, who's Executive Director Institutional Sales and Trading and FMS bonds. It's right here and next to him is James Pruskowski, who is Chief Investment Officer at 16 Rock Asset Management and next to James is Andy Prindle, who is Co-Portfolio Manager of Foundation Infrastructure opportunities and the Head of the FIO origination team. So we've seen some shifts in the traditional muni buy side over the past few years with mutual funds seeing major outflows in 2022, somewhat in 23. While SMA growth and ETF growth has been tremendous liquidity challenges as usual remain in this market, particularly in times of volatility and also as the dealer community holds less inventory these days, crossover buyers, including insurers and banks are showing the asset class because of tax policy and regulatory changes.



(01:21):

And this is all leading to Munis being even more reliant on retail investors. But what I'm excited about with this panel is the sort of non-traditional aspects of their businesses and where they see both opportunities and risks in this market, and I think there's a sentiment out there that perhaps there's just simply too much need for infrastructure investment that perhaps the traditional media market can't handle on its own. James, I think I stole that from you by the way. So with that, I would love for each of you to just give the audience a brief introduction of who you are, what you do, and yeah,



Bernard A Costello (01:56):

Yeah. Thank you. I'll start again. My name is Bernard Costello. I'm at FMS Bonds. I just recently joined FMS Bonds. We were a small municipal focused boutique shop down here in southern Florida with offices in Miami and Boca. Prior to that I used to run trading at Morgan Stanley and Barclays before that. Again, right now at FMS Bonds, we're a small boutique shop. We focus specifically on municipal bonds and predominantly high yield municipal bonds. We do bring, I think somewhere between 75 and 80% of the CDD market, the community development district market. Florida DART is definitely our stronghold. We do have a good retail platform. We have probably one of the last few shops that have a team 35 dedicated municipal salesman that focus exclusively on municipal bonds, so we're still at it. We do a good job, again small, but we definitely punch above our weight.



James Pruskowski (02:58):

James James, James Pruskowski. I'm a Chief Investment Officer 16 Rock. I'm also Co-Owner of the business. I founded the firm about this time last year after 30 years at BlackRock. I joined BlackRock in 1994. Really right soon after its inception I ran the institutional wealth management business, so lead portfolio manager. Prior to that I worked pretty extensively with insurance companies and before that in risk management. So yeah, I'm the foundation of 16 Rock was really under the purpose of bringing a specific expertise to the muni market that I believe is highly fragmented and complex, dedicated focus, pretty similar to how you would view like a high yield corporate bond manager infrastructure as Andy does. And as Lynn pointed out, doing specific things in different ways. We launched a hedge fund about seven months ago involved in algo slash systematic investing and providers of SMA.



Andy Prindle (04:14):

Hi, I'm Andy Prindle with Foundation Credit. Foundation Credit is an a alternative asset manager focused on the useful market. We've been around since about 2012. I came over in the 2018 to start up infrastructure focused credit fund and really our mandate and goal is to really look and be a capital provider to all the medium-sized infrastructure projects at the local level around the us. So projects in 25 to a hundred million dollar range and really coming up with bespoke capital solutions for them and for projects that on their face are good credits but they aren't quite ready for primetime in terms of either being able to access the useful market or being able to go to the bank market or private placement market or a more traditional capital source and allowed have that bridge to get from an exception to where they're able to go platform of capital.



Lynne Funk (05:08):

Excellent, thank you. Let's kick things off with talking about liquidity challenges in the muni market. Actually it's interesting, our first panel yesterday we had a big conversation about secondary market liquidity challenges post cities exit from that space. So people are talking about it, but perhaps can we talk about how alternative investments might be making this market more dynamic or attractive to perhaps new entrants? And I'll open it up to all of you and whoever wants to kick it off.



James Pruskowski (05:40):

Yeah, I think from a liquidity standpoint, so much has changed over the last, call it five years, three years specifically. I think the biggest catalyst was clearly the tax cuts and jobs act, which unlike 1986, did not grandfather the asset class under the old corporate tax code. So if you were an insurance company, you immediately sold the asset under no grandfathering and took a tax loss or paid the gain and immediately swapped into corporate bonds and board level decisions, switch your index. So that was a big deal. The deep pockets of institutions that use the asset class, the tax exempt version of it to immunize liabilities, protect balance sheet in terms of profitability and how it flows through earnings. And unfortunately the taxable immunity market, while it may seem big at a billion or trillion, just wasn't of capacity to absorb from a diversification benefit the proceeds of those tax exempt sales.



(06:54):

I find it fascinating that if you had the highest rates in three decades but you've had zero new mutual funds or closed then funds, and I think it's just a reminder of the struggles in that industry. Hence ETFs are growing substantially and to a bigger extent cannibalizing the industry from a fee compression and certainly you're reading about Saba Capital and attacking the shareholder activism side on the closed end funds dividends and whatnot and discounts. I think too, you've had this big focus on SMAs, which has just been a massive transition. So over the last 10 years you've had large shops now providing lower minimums at competitive fees with greater degrees of customization. So I see the industry from a traditional perspective barbell with an SMA and ETF type approach had some of the decisions BlackRock announced over the last couple days in terms of alternative capital and liquidity.



(08:04):

One of the reasons why I started 16 rock was just a huge opportunity given the regulatory shift, the broker dealer model that, for lack of a better word, is somewhat broken in terms of prop desk declining and the mentality of Wall Street, a sales side trader going from market maker and price maker to now the buy side being the price maker, and you could view that arbitrage as the ETFs and SMAs as price takers, put it up, fill the inquiry, get money invested versus hedge fund opportunities where we are an alternative source of liquidity. Sure, we're in it for the profits and I'd say that there's a little bit of a learning curve in that aspect to educate investors because you're talking about tax exempt bonds, which people use as a low volatility investment that sleeps well and earns tax preferred income and these funds are designed long short agnostic to exemption. So there's changing dynamics there and I'll just pause and pass it over to the other guys to talk about algo later.



Andy Prindle (09:19):

I think it's interesting the way the panel in terms of how the demand changing in terms of just where the market has shifted and where you're seeing dollar flow. I think big side of that is also just how the supply side is and really how the demand side is changing to meet the supply needs that we're seeing out there. We're increasingly seeing a lot more bespoke types of projects, a lot more project financing is a lot lower investment grade or high yield or taxable entering into municipal market. So I think what you're starting to see, and part of the reason why we raised our infrastructure fund is a need for a less liquid, more flexible source of capital out there for these types of projects and for these types of assets that are starting to access the municipal market on a much more frequent basis in size that doesn't necessarily work for the large institutional market and we're talking 25 50 million deals. It's hard for large global infrastructure investors to look at deals at that side. And so what you're end up seeing is it's the demand side re itself in terms of the increase in hedge funds and those types of capital providers. Then also our infrastructure fund or other entities that are raising more bespoke capital to go meet the supply. That is really I think what's driving the changes on the demand side of the equation.



Bernard A Costello (10:31):

I think they crushed it.



Lynne Funk (10:34):

Alright, well Bernie, maybe we can talk a little bit about trading this market. You're in long duration, you're high yield, you're high grade your taxables, how how's the demand shifted from sort of the buyers you're working with, particularly moving from Morgan Stanley to like you said, a smaller firm?



Bernard A Costello (10:50):

Yeah, I mean look for me and I'll try not to make it about my move from a large platform to a smaller platform, although I would say the playing field has never been more level, I think it's a function of what we've seen happen in our asset class. At its core, it's still predominantly a tax exempt asset class that you cannot short and that puts some natural guardrails around how you can transact in our business, which is different from corporates, it's exceedingly difficult to hedge. When you look at the last big blow up we had with the pandemic, alright, maybe management kind of shrugs that off. Upper risk management is a once in a planetary cycle type event. The world's economy shut down that wasn't part of anyone's VAR models and it's a one and done type thing. But then two years later we have the fed hiking cycle and everybody saw that coming.



(11:44):

No one went into the start of that year not knowing what was going to happen and what typically happens to municipal assets when rates, excuse me, municipal bond funds when rates start to rise and increase rate volatility, you get outflows even with that because of our asset class you couldn't get in front of it. Some dealers fared better than others. There was some bespoke hedging type products that came out, but these are exceedingly difficult to create and not readily available to all the market participants. So you still had in the face of what was widely known as an increased rate environment, outflows and losses at the dealer community. So this is all happening at a time where you have banks going out of business because of their exposure to US treasuries, what risk management wants to have to explain that to their bosses around losses of muni.



(12:33):

So it's not surprising that you see dealer positioning pretty close or at its all time low across the street. The risk appetite across the industry has definitely shrunk as volatility has increased in our asset class. So I think the playing field has become more level, obviously the big institutions are going to be there and certainly I don't think you're going to see that much of a change in liquidity. Somebody else is going to step up in the absence of a city going away, but it does create some interesting environments and it does create opportunity for smaller firms to step in if you have an opinion, you understand credit and you do have some balance sheet to put to use in terms of the changing dynamic, yeah, I mean you really hit the nail on the head. I mean the biggest change in our asset class away from the dealers is the continued growth of SMAs and ETFs and that I think is also fueled by the growth of electronic trading. 10 years ago it was like a thing. Now I don't know that there's a major broker deal that it doesn't have some form of automated trading automation not only developing prices but connectivity to clients, executing tickets, buying bonds, reoffering 'em, not quite a set it and forget it. I don't think any of that goes without being monitored, but that's an increasingly growing component of our business and I think that's also helped fuel some of the growth of the SMAs and the ETFs that we see happening in our market.



Lynne Funk (14:00):

That's Great. James, I know you mentioned systematic trading. We want to talk a little bit about technology here. What are your thoughts?



James Pruskowski (14:10):

Yeah, I'd say there's a lot of displacement in the industry from a personnel perspective. We spoke at a conference in New York not too long ago about career advancements and I think the opportunity set is very appealing under the impression that someone's going to pivot given the startup of a lot of technology providers you could call muni chain spline solve folks here today, just a number of firms that are attacking the market or servicing it from a different perspective. Bernie alluded to a little bit of algo, but there's a lot of moving parts similar to equities with a lot of different use cases for the asset class. We often think about tax exempts as the ultra wealthy mom and pop buyer sleep well, but I've traveled all over the world promoting muni bonds and there's significant presence in Singapore and Taiwan and South Korea and all parts of Germany.



(15:16):

The solvency two amended at the end of 2016 to include US infra, whether it be what Andy's doing or the light version which is taxable muni bonds and obviously the green solution which is sustainability both more from a regulatory perspective overseas than in the US at this point. So a lot of use cases, a lot of fragmentation, a lot of different buyers and a lot of platforms to trade the market on, not just over the counter vis-a-vis Bloomberg or new issue and the electronic or algo. I think you could look underneath the hood. I mean there's an arms race going on within the muni market and I think that's pretty apparent. I think part of the issue with algo is just connecting the pipes, figuring out the connectivity with a platform to warehouse your risk, your CUSIPs a platform to be able to read and post your offerings to automatically bid.



(16:22):

And once you figure that out, it's about putting a proprietary model on it. What is your way of scoring the market? What are the spark plugs that you want to have in your engine? What is seasonality? What is the budget process? Where do markets trade from A to AAAs and couponing and all those sorts of things. Callability and the differentiation of the yield curve and to the extent that you can make an algo systematic, which is means to have someone maintain the model and not actually humanly bid on bonds, that's where the perfection comes into play. So there's a lot of excitement in this area and fortunately I don't think it's going away. I think there's tremendous opportunities both on the servicing side as well as products to be offered to end users and the liquidity it brings back to the market for issuers is I think going to be sensational.



Lynne Funk (17:22):

Bernie, actually, can I ask you, your colleague Chad Wildman came down with you and FMS, he's created an algo and he's using actually spline data and I had done a podcast with these two earlier this year and it was pretty funny. I've got two muni quants in the same room and we record on a Friday and I'm like, go easy on me guys. But can you talk a little bit about, because I think it's interesting, right? I bespoke your own versus



Bernard A Costello (17:49):

I think you hit the nail on the head. When people think about an algorithm, it's like this big giant test to come up with the price and that's just one of 15 moving parts that you need to come up with. I think the genius behind it all is okay, once you come up with the price, then what do you do to it? How do you display it, how do you get it so someone can execute it? How's the order flow? Making sure that everything clears after that and do it without physically touching a button is the real genius or ingenuity that Chad's working on. Spline was one of the services we explored to come up with the price, but to your point, we're not going to be all things certainly FMS or all things to all people. I don't necessarily know that we're going to be the best bid, the right bid in certain parts of the curve we may not want to be a part of.



(18:37):

There might be better order flow for the types of distribution that we have. So having the prices, one thing how you implement that is and where you choose to use it is the art of automated trading and then having all the pipes and plumbing in place is really what Chad has been spending a significant amount of time. I mean it's up and running. It's certainly we're in beta testing mode. It's certainly not completely filled out. Certainly going to take some more balance sheet to put behind it, which we have the commitment from FMS to do, but it's steady as she goes. We're very happy with its initial results.



Lynne Funk (19:10):

Cool. Kind of want to move over to high yield, high yield market. We just had the bright line panel before this, the high yield market. It's been on a tear so far this year, at least relative to mutual funds that they've been I believe only one week so far. And that was during tax filing season where high yield had outflows. From all your perspectives, and maybe Andy you can kick this off with your work, what kind of opportunities are there in high yield? What are you working on? Is there enough supply out there? I'll start that.



Andy Prindle (19:45):

Well, I think high yield market really is two separate markets. You have the high yield tax in market and you have the high yield taxable market and they're very, very different in terms of how they've formed to date really over the last three to four years while we've seen a significant rally in the tax exempt market, we just haven't seen that in the tactical market And actually Bright Line's a great example of that situation. You have two tax exempt pieces that were performed very well, continue to perform well, came attractive prices, whereas I think struggled pretty heavily in terms of getting the taxable portion of that deal done and it came on an equivalent basis at a materially wider spread yield than you saw on the rest of the deal. And I think we see that in the majority of what we're looking at where when you start looking at smaller taxable bespoke deals in the market because there's no liquidity because credits are not ones that really trade and have access to ultimately retail or some more traditional buyer base, they have been struggling pretty mightily for the last year and it's created opportunities for people who are willing to spend the time and effort to understand those credits and you have a capital base that can withstand those types of opportunities.



(20:56):

They're generally not things that you can get out in months or six months. You really have to be in for five or more peers to make it worthwhile for.



Lynne Funk (21:06):

Can you talk about any specific before we prepped for this, you talked about a shipyard deal. I'm just very curious, give this audience a taste of what you're doing. Yeah,



Andy Prindle (21:16):

So we just did a shipyard deal in Superior Wisconsin, hundred 88-year-old shipyard. It's been around for a long time. They needed to, new ownership has come in, bought it, it was family owned for 30 or 40 years. Ownership came in turning around operations wanted to, we capitalize their base. They did have the ability to access some amount of tax exempt, but the majority of the debt they needed to do was ultimately a taxable deal to structure some existing debt. They had a lot of demand for the tax tax exempt side, not have demand for the taxable side. We ended up working with them to come up with a taxable solution, ended up shelving the tax exempt until they can through their initial growth curve and I would expect that to happen at some point in the next couple of years. Those are the types of situations where you kind of really see that bifurcation in the market. They were well oversubscribed and had a lot of appetite on the tax side, couldn't get the rest of it done, but fundamentally about as core infrastructure asset as you can get, their building ships specifically in the US and the US has laws on the books under the Jones Act that require that a significant amount of work done in US waters be done by ships built in the US, by US entities and operated with us sailors. So that really creates a very captive monopolistic demand that isn't going to go anywhere.



Bernard A Costello (22:33):

It's funny. Can I take a shot? I feel like I've been asked this question. I've been doing this now for 25 years, a variety of different places and I think after all this time variety of different shops and looking through the market in different lens. The answer to this question in Munis, the Munis exist in a constant of two states. There's either never enough liquidity or there's never enough bonds. And I feel like in our market when our clients are crying about liquidity, they're talking about there's never a bid when they need one. And it might've even been a bomber article, I'm not sure if I'm wrong, please let me apologize ahead of time, but I remember it was the last week in February, our market was tight as a drum. It was right before the first cases of the Covid virus was hidden. And I remember reading, they're never going to make enough high yield muni bonds ever again.



(23:25):

A month later they were 25 points cheaper and there's never enough liquidity. So I feel like because of the nature in our asset class, partly because of the fact that you can't shorter asset class, we always live in this constant state of either feast or famine right now it feels like because we haven't really had material, like you said, we haven't any high yield outflows rates are much higher after the fed hiking cycle. It feels like we're in that with the exception of this bright line deal which just came, which was a much needed dose of supply.



(24:01):

We're tight as you could be. We're a snug, is a bug in the rug. I don't think anyone will come out right now and tell you that high yield Munis look cheap and that's really a function of the technical. Give us a moment, let us go through another cycle, let something else come. There'll be outflows. And I think it's just the Homogenate our asset class. So there's so many bonds held in so few hands that when one of them want to get out it feels like it's a race through a bottleneck I feel like. And that creates the opportunity set, right? I don't know that, correct me if I'm wrong, but how many times have we sat here where we're like, oh no, market's good, it's orderly. Everyone's got what they want, everyone's happy. It feels like it's right value. No, it's either tight as can be and they're buying it because they're forced to have inflows or the market is horrible 115% ratios and they have to sell it because their outflows are telling 'em to do so and they want to be buying and not selling. I feel like at times it's calm, but I feel like we're always bouncing back and forth with between those two states of being, I dunno, you tell me what your point,



James Pruskowski (25:09):

Spot on. I agree. I don't know. That's the opportunity



Andy Prindle (25:13):

Set especially



Bernard A Costello (25:14):

That's the opportunity in our market of that



Andy Prindle (25:17):

Market dynamic can all three of our jobs.



James Pruskowski (25:20):

Yeah, definitely. And it's part of that new providers of liquidity being there when the market needs it or taking advantage on behalf of clients for a greater tomorrow. But I don't know, I mean the high yield muni market to me is, I don't know, I'm just at both ends of it. I think it's a fantastic opportunity. I think when people think about high yield, they think about the next P three wave and really it's Andy's smaller deals that are modernizing this economy and their coming in more acute style deals as opposed to New Jersey turnpike or these big highway systems. And I think that to the benefit of the market, that's probably one of those guardrails that the voters own the debt or the bigger debt and really we're not in a place like Europe or Asia that can do those sorts of things. I think from a high yield perspective, there's just a lot of reasons like the market given the default profiles and income profile, but it's not a naturally growing market to me unless you're doing it in private form and smaller size.



(26:32):

Most of the market has been one time driven like tobacco securitization. Most of it to me is defined by fallen angels, Allah, Detroit and Puerto Rico and whatnot. So the ability to scale is really challenging given the small degree that the market offers. But the aspect and the appeal is its covenant rich. I mean first mortgage rights, you have leadership that runs like a corporation and the covenant packages actually help protect you, so their coverage are often a lot higher. So I come at it from two sides. I'm typically operating in the IG space, but see sensational opportunities for what Andy and his business are doing.



Lynne Funk (27:21):

Do you think when we saw 22, sorry, 20 20, 20 21, there was a record volume and then the past two years prior, 22, 23 a huge drop in issuance and now this year so far it's up and some folks in the industry believe that there's so much infrastructure, so many projects that actually need to get done just to upgrade as that's the chorus line for how long now and there are some folks in the industry who think that supply is going to really rise because of all this need, particularly because of some of the severe weather events, climate related issues that Israel is going to have to deal with and pay for. But I'm curious your take on that because then there's also in some ways I am a little skeptical too because how much appetite do issuers depending on where they are have about taking more debt on particularly when it comes to their ratings and challenges to that. So maybe that is, I'm curious about what you all think.



Andy Prindle (28:28):

I think this is why you're going to see a much more fragmented bifurcated market. You're not going to see states going and issuing bonds for a whole host of infrastructure rates they need because they just can't afford it. You're going to see a lot more diverse structures. You're going to see private investment instructors like Bright Line, you're going to see small municipalities create separate credits that are backed by a specific tax or a specific revenue stream that comes to market. So if you go back 20 years, I think the market was a lot more homogenized both in terms of who the issuers were just in terms of credit overall and now we're going to continue to see a fragmentation of that market, especially as it relates to new build infrastructure, which I do think the market we're, we've been the market we talking about this for 20 years, there is a significant backlog that needs to happen and I just don't see a way where we don't ultimately spend those dollars but they're not going to come through additional channels because additional tax basis can't afford them.



James Pruskowski (29:26):

Yeah, I definitely see supply growing substantially. I think it's to the point though where like Lynn said, there's only so much that the market can afford to finance before it creates that fits and starts bottleneck that Bernie was alluding to. My point on high yield is the modernization of tomorrow's economy is a lot. Bright line is more in private hands, hence it needs private capital. Hence what Andy's doing or what hedge funds can do, I come at it. So what to do with a market that needs all this infrastructure and I'm just fascinated by the Build America Bond program. To me it really wasn't an act to create blue collar jobs. It was about redistributing the transmission of subsidies from the federal government at the states and make the pipes work better from a financing perspective and in part help realign the income inequality issue that the country has Allah, they're afforded by tax exempt bonds to save and not pay tax. So I think once you get into a conversation around that, albeit debt and the amount of debt kind of stops you out, but being able to bounce your debt off a global audience as needs grow is a lot different, but it takes a lot of change in the market and how you actually go about issuing to get that done.



Lynne Funk (30:53):

That's a good segue. I had the panel two panels ago, we were talking to Emily Brock and Leslie Norwood on programs coming out of DC and talking about Babs and Emily Brock as the issuer's voice. They got burned by the sequestration, but I asked them and I said one of the interesting things that I thought, and I think this is true in a way that the Build America bonds really gave the muni market a broader audience at the global level because of the taxable component. And then maybe right when the IIJ or no, sorry, get my acronyms mixed up, the tax cuts 2017 when they took away exempt advanced refunds, all these issues came in and start issuing advanced taxable refunds. And I think I'm just curious particularly from U2, if you have seen more of a global interest in Munis, can that be tapped more with taxable bonds? Is there a way to, I know sometimes they don't make sense economic sense for the issuers, but is there a real market for them?



James Pruskowski (32:07):

Yeah, my old seed, I mean I just tell you at the surface the pipeline that was lost when the bad program ended was tremendous and there are willing buyers that want to step up to buy this debt, especially at corporate equivalent yields given the default trends and arguably structures that help immunize liabilities. I mentioned solvency two and solvency two is acute to the UK, but slowly taking over Japan in 2025 and soon to make its way in the US, which is regulatory treatment for infrastructure debt not just in the US but globally and a capital efficiency that it gets created from an insurer's balance sheet. So there's multiple reasons to buy it. Obviously that isn't a welcome change for the traditional tax exempt buyer, but certainly it helps create accountability in my perspective to issuers that the proceeds are being used to build the right things. I know that's a touchy subject, but to the extent that the debt warrants compensation, the buyers, they're willing to pay tax on it. It's just that you're catering now to an institutional global base as opposed to the retail base.



Bernard A Costello (33:36):

I would just add, and again coming from previous experience at Morgan Stanley and Barclays, the demand for that product is just limited by the supply. You can create as many taxable immunities as you want. High quality. Again, you touched on it before, there's a big difference between high yield taxables versus how high yield muni trade, your high quality investment grade municipal asset class, if it were to come taxable, there'd be plenty of demand. There's not a doubt in my mind just from what we've seen the growth overseas, the amount of time you spend spend, there's a buyer base there and there are only, there's a little bit of logistics hamstring our muni trade on our hours. So I think there's small little logistics there that could be overcome. That's why he's spending all his time over there. He is getting, those dollars are coming over here and our asset managers are here on investing on behalf of those clients. But yeah, if the taxable muni market were three times the size, you'd have no problems finding homes for the bonds.



Andy Prindle (34:40):

All the fundraising we do, there's very clearly a significant desire to invest in no efficient way to, that's why we ultimately used our infrastructure fund a way to aggregate small bespoke credits and to a scalable and size to go sell them to pension funds. European pension fund insurance companies who would love to have access to this market but don't benefit from the tax exemption and don't have the capacity or internal size to be able to go in diligence. 90,000 municipal entities.



James Pruskowski (35:16):

I would say to the extent that the market does eventually return in larger scale and bigger block maturities get created, it also helps liquidity because you could borrow against the debt. And quite frankly, I use the asset class both on the long and short side, the taxable muni market. Part of the guardrails and benefits of some of the trading aspects of Munis is there's no natural ability to short, there's no pure hedge. This is a way besides writing options on ETFs and all these other things to help offset some intrinsic risk that's within the space.



Bernard A Costello (35:54):

I mean like a busy week, a new issuance from Munis is like 10 to 14 billion, right? Once in a while we'll hit that 18 billion, that's a Monday morning for corporates, right? They price that before 10 o'clock on a Monday. So the capacity is, again, we're only limited by how much we can bring



Lynne Funk (36:16):

And just any issues in the room. I wasn't suggesting that we get rid of the tax exemption. I'm not trying to frighten anyone here or anybody in the room. So I guess I'm kind of curious from, we talked about high yield, but what about just Muni credit in general? What are investors looking at across the board? Are there any areas that are appealing, any new structures? Just what are you all looking at?



Bernard A Costello (36:48):

Go ahead. I mean look, bright Line was a major focus for us.



Lynne Funk (36:52):

Did you buy some?



Bernard A Costello (36:53):

So yeah, I mean again, previous Morgan Stanley was heavily involved with it, traded it for a long time, but again, not a Florida resident. Myself, I didn't really quite get what I didn't get until I moved to Boca and then I saw the product and trying to draw the parallels that all the credit analysis would want to do to Acela. You get to see the, this isn't, it's different again, the product itself is top shelf. Certainly taking the train at 5:00 AM in the morning into the city or being on one of those Acela rides, the atmosphere is a lot different than the folks on the Bright liner. It's just different. The product is top shelf, it's wanted people here love it. And I didn't really get a flavor for that until I moved down here. And then once we were down here, again, FMS smaller boutique shop really heavily involved with CDDs, but we have this natural kind of high net worth buyer that looks for projects like this.



(37:51):

And once we told them we were able to get them involved in Bright Line. I mean we put a hundred million of the old Bright Line, not the new one, not the recap deal, but the previous one we put away into a retail and all those bonds just got called. So some of them are trying to get back into this deal. It it's a little bit different. But again, Brightline was definitely one of the major focuses for us in terms of some other spots in high yield that I think are kind of sticking out a little bit in terms of the natural, I feel like nine times out of 10 on any given day, what's moving price on our market is technical. Very one-off instances where you have some fundamental news come out and that's blowing out where we've seen a little bit of that recently has been in the tobacco sector there's been some headlines, nine and a half percent consumption declines annually.



(38:44):

That's a big number. So I think we've seen some split from the pack away from the general market high yield, which feels like it's just an never ending tightening stream. Certainly we live in this, we talked about this feast or famine last year. It was like you couldn't get a bid for it. Now everyone's done all their swaps, they've rebooked all their yields and now it's like I can't replace that book yield. So the bonds you want to buy, you can't pull out. That's the environment we're living in. Tobacco over the last couple weeks since that headline came out has certainly gotten a little bit softer, but we certainly recovered off the lows just in this past week.



James Pruskowski (39:25):

Yeah, I mean Bernie alluded to some specific credit situations. My hedge fund, for example, our flagship fund is mostly investment grade, so trying to capitalize on the IG opportunities that the market's known for while delivering preservation of capital and do it in the lowest volatile way as possible. In doing that, it's about positioning a portfolio to hit a lot of singles and not a lot of home runs and have multiple bets across the table. To me, from a top down perspective, the US is some of its parts and those are the 50 states and many thousands of municipalities, all the issuers that we invest in. So yeah, the market's very income and state tax driven and state specific because of that reason. But when you build a national portfolio, it's about the opportunity set across the geographies looking at big data besides credit on population trends, where do corporations reside?



(40:34):

Who are the users of the infrastructure, the taxpayers, where's mobility and who has global presence as opposed to local. It's one thing to finance an international airport versus a local regional hub. So there's a lot of conversations that happen around the macro backdrop. How does that filter into Munis? And then geographically, how do you want to diversify a portfolio? A lot of it then formulates around sector specific and there's multiple funding buckets within the muni market, high level geo rev, and then below that obviously all the sub-sectors. And you could kind of put together the market in those that are subject to competition versus those that are natural monopolies states versus a healthcare system. Kaiser Foundation is servicing nine states and 2 million different people is very different than a standalone facility in a local community. And beyond that, a lot of the market has tremendous structural opportunities. You think about it just coupon premiums and discounts. The market's 70% callable past 10 years, highly negative convex and what to do with it, it's long duration by natural being 15 years versus a corporate market that's like four years. So that's a lot of rate risk on the table. And how do you, especially within a hedge fund structure position that duration, how do you hedge it and how do you opportunistically leverage to capitalize on a lot of these credit opportunities?



Andy Prindle (42:16):

The only thing I would add is just taking a step back to the more macro level. I mean we're super focused on the election, not because we necessarily care one way or the other, but just because I think for the first time in a long time you have two states that have fundamentally different views on the federal government's role in infrastructure and subsidizing the development and subsidy of the projects so around the country and a huge amount of the growth in the economy that you've seen has been federally subsidized over the last four years. And if we have a change in administration that's going to have a massive impact on winners and losers, depending upon which programs get subsidized and which ones continue to move forward, that will have a huge impact on the infrastructure market. And there will be winners and losers as a result of that. And I think who those winners and losers are will change vary dramatically depending upon who wins. And it's hard to make that determination now. So we're spending hours weekly talking about it.



Bernard A Costello (43:11):

That's Interesting.



Andy Prindle (43:11):

It's such a massive, they're so different from how they view what the government should be spending money



Bernard A Costello (43:17):

I'd love to ask a question if I certainly from my standpoint, I think both the right and the left have proven certainly over the last that they got no problem spending money. Whether the right's in they're spending money, the left's in, they're spending money, right? That's what I'm saying. So I'm curious to hear you say that if we would have a change in administration, what infrastructure project do you think would be the first thing in the spotlight? Anything



Andy Prindle (43:42):

Anything EV related could happen, right?



Bernard A Costello (43:44):

I'm sorry?



Andy Prindle (43:44):

Anything EV related.



Bernard A Costello (43:45):

EV related. That makes sense. It makes sense.



Andy Prindle (43:49):

There's 5 billion allocated towards EV charging stations nationally. There's 10 billion towards subsidizing Ford and GM to develop EV vehicles. All those dollars are going to get cut, which will fundamentally change how transportation systems around the country are set up. The DOT, if you go talk to anybody at the DOE and the DOT right now, there's massive effort trying to figure out ways to push dollars out the door now for fear of an administration change. They have the dollars now and they know that if something happens come January, those are all going to get caught back. And so there's a huge push to get those dollars out the door. And so how you look broadly at where the US is spending dollars on infrastructure will change dramatically. I agree with you. I think US is going to spend money no matter



Bernard A Costello (44:35):

What they always spend.



Andy Prindle (44:37):

I'm not overly concerned about that. It's just a question of who and what they're going to spend.



Bernard A Costello (44:41):

Yep.



Lynne Funk (44:43):

Want to add something?



James Pruskowski (44:45):

I mean from a tax perspective, I think it's the biggest story of 2025 and there's a tremendous opportunity part of starting a business is for purpose but to also have some good luck. So you kind of do it when rates are really high and I think there's generational opportunity there coupled with the fact that you're rolling into 2025 where federal debt and deficit is at a boiling point. You saw it when tens touch 5%, kind of had a mercy moment. And I think that the market set for tax reform and it doesn't take much to reengage an institutional buyer, whether that rate goes up to 27 or the old rate whatever it was, 35. Clearly this is going to be a huge, huge talking point and opportunity set for the following year.



Lynne Funk (45:37):

Alright. Do we have any questions? Two mics. I think



Audience Member 1 (45:45):

I can't let you go without a question, Bernie.



Bernard A Costello (45:47):

Oh no.



Audience Member 1 (45:49):

So I think the last couple of years have been unprecedented in muni high yield project finance in terms of not just the number of defaults but the size and the lack of recovery. And so from your perspective, have you seen a change in buyer demand on those type of projects, whether it's a Arizona sports facility, whether it's a woody waste energy project, et cetera, but the number of projects that have been $500 million or $200 million of spend and zero to 10% recovery. I think it's unprecedented. I've been in the business 30 years, I've never seen a time like this. Are you seeing different buyer behavior now



Bernard A Costello (46:30):

You're supposed to throw me a softball?



(46:34):

No, I can't say that I'm seeing a different buyer engagement. It's the same from my perspective and where I see it's the same cast of characters, the distressed hedge funds we have things like that that will come out that are the natural buyers for that stuff. And I feel like if anything, we don't have enough of that around to satisfy the demand. I don't necessarily know that we need the new buyer to come in and step in and distressed muni space. I definitely feel like there's a core competency there through some of the fallen angels that you mentioned, whatever. And granted every situation is different, but from my vantage point and the clients that I've spoke to and certainly some of the ones that me in contact with from my seat at Morgan Stanley to now down here, you can't show 'em enough, right? I feel like there's definitely more demand for that than there is supply.



James Pruskowski (47:30):

I mean I'm more in the risk off camp. I'm definitely short, high yield or underweight, however you want to phrase it. I do think there's a problem in the market. No one's really talking about in the private activity bond market, which is obviously subject to a cap and most of it's non-rated and single owner held and you have default trends in charter schools and CCRC is running above 50%, half the market in default. A lot of the projects that were through Covid, yeah, they're filling up but still struggling tremendously. Stuff that's running under the radar that you're not going to read about this is beyond just traditional high yield.



Lynne Funk (48:12):

Great. Anyone else? Well, is there anything I didn't ask this panel that I should be asking you all? Anything you want to leave the audience with?



Audience Member 2 (48:23):

Can I ask one question?



Bernard A Costello (48:24):

Yeah.



Audience Member 2 (48:26):

What is the future model that works the best in the seat you're in now, where you're present? What's the best model you think going forward



Bernard A Costello (48:34):

When you model in terms of



Audience Member 2 (48:36):

Being in the market like yourself, being in the market broker dealer, that



Bernard A Costello (48:40):

Space? I mean, look, I personally hit a point in my career. I was running a trading desk at two different big banks for the past 15 years and while that last year we talked about the rates moving up and dealers getting run over. Morgan Stanley wasn't one of 'em. We had a very interesting bespoke product that we were able to hedge. So while we didn't feel that immediate pinch, I was certainly feeling the pinch from up at the top and I knew that the risk dynamic was going to change. So my decision to move to Florida was a little bit, I'm 50, I don't mind seeing the sun every day change and also the opportunity set because thank you, thank you for that. But seeing the opportunity set, like I said earlier, the playing field has never been more level. I mean I remember when I started at Citi, call it 2005 to before the financial crisis.



(49:37):

I mean I used to get a list from Greg Swanson, it was 15 pages deep. I mean the prop group had 5 billion bonds and that was before we got into the 10 or 15 billion that were held at the bank. The balance sheet mattered if you were at, and I remember, it's funny because I remember Peter Buttler talking about all the small res, they're going to be out of business, they can't compete with us. And it certainly felt like that because we had all the balance sheet, we could throw all the money around and we can control the market. Well, here we are Citigroup's out of business. You've had some other majors go out of business and I feel like for this moment in time, the playing field has never been more level. So you definitely need to have balance sheet. You absolutely positively need to have an opinion about credit.



(50:24):

You do, right? As much as automated trading is definitely on the growth path, ETFs are on the growth path. We still have, what is it, 50,000 municipal issuers or something crazy like that. You need to know municipal credit for no other reason than to protect your, it's making sure you don't step on the landmine, right? You're not going to set an algorithm loose based on spline or whatever else is out there. Price is telling you for a below investment grade. And certainly that's where we live in FMS, we're definitely a little bit more high yield focused and understand those credits. But I think the model that works, you absolutely have to have balance sheet. You definitely need to have retail. You want to have an electronic presence in the market. And I definitely think something that I certainly don't have from my vantage point, but having access to those foreign investors at times where those taxable would come into play. I mean, I think that's a well-balanced dealer model right now.



James Pruskowski (51:22):

I mean, to your point, I mean we've all held big positions at major banks and here we are, foundation 60 Rock, FMS, we've, BlackRock, and PIMCO. And this is part of how the market's changing. You find purpose in your work. Some people like sitting in a tree stand and shooting deer or playing golf. I mean, this is what we do and we want to provide acute focus and very specific experience and extract benefits on behalf of clients. And I think this is exemplifies how the market is changing and it's about manufacturing your own outcome. Given the regulatory environment. I've dubbed it the great reset things that are going on beneath the surface and partnering with platforms or people that really understand the complexities of this industry. I mean, you could go jump on a hedge fund and trade a small amount of balance sheet, but many don't get the var limits that we often hit in our asset class. That 1, 2, 3 strikes, you're out. And it's important to have this platform with content experts on the asset class with patient and flexible capital to really deliver the quality solutions that we're going after.



Bernard A Costello (52:46):

I can just go back to one other thing I wanted to add. The dealer, the few dealers, the one dealer that has the competitive advantage with a correlated hedge instrument, treasuries don't do it. We all know that. We all have access to that, but there are some dealers that have these spoke hedge TRS type hedge instruments. They without question have a competitive advantage over the rest of the field. It is what it is. You don't have to go back to your management. It doesn't need to be a one-way only. Security. We only make money when the market rallies. You can make money in down markets. You can provide liquidity to your clients when they're trying to escape out of that bottleneck because you can have a structural hedge that moves with your asset class. Again, there's not many of them out there, but those that do without question have the competitive advantage.



Lynne Funk (53:34):

Alright, well thank you so much to this wonderful panel. That was a great conversation and thank you all for being here.