Examining the Impact of Lack of Liquidity Providers on Large and Small Issuers in Texas (CPE)

Transcription:

Donald J. Gonzales (00:07):

Morning everyone. Hey Monica. Dave, can you round up everyone that's out there in the lobby and tell 'em to Yeah, you the man. There you go. It takes an Astra and Aosa senior managing director to get that stuff done. Good job



Dwight Burns (00:36):

Plug.



Donald J. Gonzales (00:40):

We do what we can. Well thank you all for being here this morning. I know we're the second to the last session, but I think we've got some really good information, especially with these great panelists up here to I think kind of take the next step on what the Issuers Roundtable discussion was yesterday. I know you heard a lot about what the impacts of SB 13 and 19 are, and we're not going to spend time on that as much as really discuss what some of the potential domino effect of some of those pieces of legislation may have on liquidity. And a lot of people might think, well, that really only impacts the large issuers. The challenge here is if there's a large amount of liquidity that's needed and for whatever reason or reasons it can't be filled, then the large issuers may need to be coming to the market more often.



(01:40):

So then investors are going to be saying, well, I know there's going to be more deals, more big deals coming. And so for the medium to small issuer, they may not get the same eyes and attention that they would normally see if they're only coming to the market maybe once every two or three years versus an issuer that may be a large issuer that might come two or three times in a year. That because of lack of liquidity, may need to come four or five times during the year. So we're going to touch on some of these things. I'm going to see if we can get slide here. May have gone too far. I want to thank Dave Brayshaw, Masterson Advisors for putting this together. Before we dive in any further, I'm going to allow each one of the panelists to do a quick introduction and then we'll get on from there. Dwight.



Dwight Burns (02:31):

Thanks, Don. Good Morning again, Dwight Burns. I've been Treasurer at Dallas Area Rapid Transit for the last eight years. I was a former Executive Director of the Texas Public Finance Authority here in Austin. I was VP, Senior Analyst at Moody's for a long time and Banker and about everything else except bond council here. I really think this is an important topic and look forward to digging in.



Robert Orona (03:00):

Thanks Dwight Robert Orona with Truist Bank, part of the big push into Texas with Truist in the last two years. So covering the markets of Houston, San Antonio and Austin and supporting our public finance team locally and as we grow nationwide.



Dave Brayshaw (03:17):

Dave Brayshaw Masterson Advisors. I've been in the muni market one way or another for probably 35 years, most of the time on the trading floor. Currently I'm in charge of our structuring and pricing desk and municipal financial products.



Anna Sh (03:34):

Hi, I am Anna Sh. I am Managing Director from Lu Capital Market, short-term desk. I started short-term desk at LU Capital Markets almost 20 years ago. So I do variable rate demand builds commercial paper and the short-term notes. And this is the first time I attend the Bond Buyer conference. Thank you. I'm very grateful to being here. And finally put some faces, me the councils and the FA A for the first time. And thank you.



Dwight Burns (04:00):

And by the way, full disclosure, Ann is one of my commercial paper dealers.



Donald J. Gonzales (04:06):

Alright, great. Then let me see if I can I make this thing happen here. Yep. So down at the bottom you can see some information that we've put together. I say we, Dave, thank you for all this. On the SB 13 and 19 pre and post, I'm sure everyone's familiar with all this, but the backdrop is that the large issuers primarily are dealing with liquidity issues and not knowing what the different positions may be. We've got to figure out how are we going to address this going forward. So started in 2017 and then rolls forward. And so I guess one thing that would be good to know is where are we Dave, I'm going to start with you. If you look at Houston and Harris County Maps, how much liquidity do you think is needed for just that part of the state roughly? Yeah,



Dave Brayshaw (05:07):

I talked to Vernon and to Amy and it sounds like the city's got about 2.2 billion that they're going to need and roughly seven or 800 million for the county in the next year.



Donald J. Gonzales (05:20):

That's just in the near term. But in total, what would you guess? 4 billion? Probably four.



Dave Brayshaw (05:25):

Yeah, four to six, yep.



Donald J. Gonzales (05:28):

Okay. And then if we look at North Texas, Dwight, what would you say?



Dwight Burns (05:34):

In north Texas? We'll need about at least that much in available liquidity going forward to several billion across all of the major issuers in my part of the state.



Donald J. Gonzales (05:48):

Robert, when you look at Central and South Texas, I know y'all have been doing a lot in San Antonio and Austin, what are you seeing there?



Robert Orona (05:57):

Yeah, so just in Central Texas alone, I'd say in the last 45 days we've been asked to look at something north of about 500 million. I think Phyllis Garcia highlighted yesterday the needs of sauce upcoming. So there is that need in central Texas. It may not seem as robust as what we're seeing in other markets, but I think one thing to point out is it's not just the needs today. We're starting to see issuers be a little more proactive actually looking in that stack and seeing a bank on there that may or may not be in trouble today, but maybe just the noise of that. So we're starting to see people come a little early to maturity and ask us for the liquidity support. So it's definitely a need.



Donald J. Gonzales (06:33):

I know as an example, CPS energy increased their CP capacity from 750 million to a billion and there just seems to be a constant need for liquidity and as we see the potential for what we've already seen, some banks leave the market, but if we see more concentration, we could be faced with the problem that I think we're going to be focusing on. So Robert, from a banking perspective, how would you have seen competition in your industry fluctuate or shrink during these times?



Robert Orona (07:12):

Yeah, I would probably say just going back 10 years, there were say more players that were around 10 years ago and maybe not there today. We were relatively new in the last two years, so we were kind of that new entrant. But then with everything we've kind of beat on all conference about 13 and 19 and net zero, that list is definitely shrinking. So we've talked about that at length and as some suppliers show up, others are disappearing. So it's definitely a changing time.



Donald J. Gonzales (07:43):

Anna, I know as you've seen many changes in the number of investors or their willingness to participate in the short-term space. What are you seeing since you're the one that's dealing directly, kind like your insights on some of this?



Anna Sh (08:00):

Yes, for the short-term desk, every day is a different day. When the interest rate were pretty low, the single digit, the VRDB mainly dominated by the money market fund, same with cp. But since the interest rates start rising, we have seen VRDB expand the traditional money market funds and sold to SMA and bond funds investment advisors. However, on the CP side is still mostly the most popular buyer base still on the money market funds. And the reason being is because bond funds rather like to own VRDB than CP because CP had to change the duration. It's not always the same and also more work. And also if the bond fund want to buy CP, they usually tend to buy more like a cheaper EEO, which I will elaborate later.



Donald J. Gonzales (08:51):

Thank you. So another part of liquidity that we don't often necessarily think about, thank you sir, is going in a slightly different direction and shifting gears, like to pose this to Dave, let's talk for a moment about on the liquidity front, what impact has the legislation and the net zero alliance review had on participation in municipal financial products and has there been any flexibility that's been made available?



Dave Brayshaw (09:21):

Yeah, thanks. I know this is kind of an outlier and I know there have been some references to this a little bit throughout the conference, but my part of this is really to talk about municipal financial products and municipal financial products. I just want to be clear, that's a defined term under the SEC rules 15 B or section 15 B, and that means a municipal derivative, a guaranteed investment contract. Those are their words, not mine. And investment strategies, which is a little bit vague, but it's been interpreted to mean escrows or the deployment of proceeds and so forth, which is pretty broad. But so keeping that in mind, we've all heard a lot I think over the last couple of days about what's the impact on liquidity and all that kind of stuff, but what's the impact on the investment side, the asset side? We've heard a lot about the liability side.



(10:14):

Maybe we talk a little bit about the investment side. I think Vernon the other day alluded to it a little bit and are the problems that 1319 net zero and those things have created, I'll call 'em problems, whatever challenges on the liability side. Are they the exact same in the asset side and I say they're pretty similar. There may be some nuances and this, well, not that slide, but basically I think it boils down to those kind of points that we discussed. With respect to liquidity, we've got participation problems, right? I mean there used to be a big and vibrant market on the asset side for municipal active swaps, caps, collars, floors, all of that kind of stuff. On the muni side, investment agreements of varying forms, secured, unsecured, all that kind of stuff. Investment strategies, buying, selling securities all day long. There used to be a lot of people doing that.



(11:12):

There are fewer people. So participation is declined. I think we've heard that similarly with respect to liquidity and then flexibility is a big concern. I mean where it's a problem with liquidity, flexibility may be even a slightly bigger problem in the municipal financial products market. And the reason for that is if you think about an interest rate swap like a derivative that's just a full on contract and it is square in the middle of 13 and 19 crosshairs. And so what kind of flexibility do you have if all of your counterparties are afraid to make any kind of modifications to those contracts? 10 years ago, could we change a swap a floor contract? Oh, it was easy peasy. You just call up your guy, you say, I want to extend, I want to change this change that I want collateral provisions differently. All those kinds of things were just amendments and they were very easy.



(12:04):

Now an amendment may be viewed as some sort of new or additional agreement and therefore maybe something that's not doable by your counterparty or the counterparty of your choosing because of the 1319 requirements, certifications and so forth that they may not be able to make. So flexibility has been squashed basically in that market. And I would say it's similar in the investment market. The investment agreement market where we have the same problems back in 0 8, 0 2, 0 8 way back then when we had lots and lots of folks had investment agreements in place of varying forms and there was a big sort of rash of downgrades that all happened and lots of people had these investment agreements where they earning like 6% and at that time it was easy to transfer to get a new provider in place, do a novation, that kind of thing. And you could maintain, let's say you had a 6% rate, you could maintain your rate by kind of doing one of those things. Nowadays you probably can't faced with having to terminate and lose your 6% and replace it in the new market or the current market with a 3%, you lose 300 basis points. So flexibility has been a big problem.



(13:18):

I couldn't sleep last night so I was messing around. I'm trying to think what do we not have in the panel? At least as far as I could tell from all those discussions we've had so far. And I think we don't have any artificial intelligence in this one and I know the last panel had a lot of it. So I thought, well what I got to do is I got to go chat GPT, this thing and see, and I think it was Vernon and hopefully I'm not throwing 'em under the bus, but I think Vernon said something yesterday on the panel that they had where the issuer panel and he said this 1319 net zero business is kind of a threat to the free markets. And I thought, okay, chat GPT, what do you think about that? And I kind of typed it in and I thought I'd probably get nothing back.



(13:57):

I don't use it very often, but it was surprising and interesting. He said it kind of agreed, it said 1913 and all that kind of stuff is a form of state intervention which limits the markets got. These are their words, not mine. Selective boycotts. They're calling limit freedom for businesses to make their decisions based on economics instead of policy. The impact on investment decisions because of this will lead to the misallocation of resources, prioritizing policies over economics. I thought that one was awesome. And then this one goes right to the point I think that Phyllis was making, which is legal and regulatory conflicts. It's saying, okay, well all of these things are requiring more complicated and complex municipal compliance. Basically what Phyllis said, more work for us at the same pay. So anyway, that's our ai. So we've got AI on this panel just so everybody knows that we are up the curve 21st century.



(14:54):

And lastly, I would just say that with respect to municipals national products, there is another thing it's going to affect a lot of people. One or two people talked about this the other day, but it's the Balan game that's coming down the road I think in November this year. We've got enough stuff going on, fewer participants, less flexibility, then the base end game is going to come and kind of hammer the banks with respect to the liquidity requirements and some of the bigger banks are going to have to put up more and more liquidity or reserve basically reserves against certain kinds of trades like the kind of trades that are the municipal financial products and others and may make them back off basically putting more pressure on a market that's already really pressured. I should shut up and let everybody else talk. That's what I got for that.



Donald J. Gonzales (15:38):

That was good. I was just going to say on behalf of the Bond Buyer and Mike Ballinger, the opinions of those up here on the panel are strictly theirs and not reflective of that of the Bond Buyer. Would that be appropriate? Good. Just want to make sure we're staying clear all that. No, that's good. He did cite ChatGPT and all that. So one more question for you Dave, following up on some of that. So along the investment mind, we've got escrows, particularly on refundings and things of that nature that require investments. What are you seeing there? Are you seeing more bidders, fewer bidders, what's happening on the investment opportunity side?



Dave Brayshaw (16:19):

Yeah, I mean that's awesome. It's funny I kind of go back a little bit. I kind of mentioned this, I kind of was going down that road earlier, but I remember back in oh eight even 0 2 0 8 that there was a market for the municipal financial products, especially on the investment side was probably 40 people large, right? 40 counterparties broker dealers and banks. Pretty much some insurance companies. That was a deep broad market that we could access like that. It was awesome. It declined a little bit, rates came down, spreads came in, liquidity in oh eight and so forth, kind of bashed that, but it was even probably I would say four or five years ago, right before SB 13 and 19, the market for investment agreement. So that's like repos. Think repos, that's the easiest thing, right? Everybody uses repos probably in this room.



(17:11):

I mean it's like school districts, cities, all the most conservative investors use repos all day long. The market for repo before SV and 13 and 19, we had, oh gosh, I'm just looking off my list. I dunno, we got 14 active providers in Texas that we could do repo with all day long. As big as you wanted, as much flexibility as you wanted. Today we have one in Texas, there is one repo provider in Texas that I know that complies with everything that's necessary to do the trade and is willing to do the trade. A lot of these folks that were shown on the list do comply to varying degrees but are just unwilling to take the risk that the Texas AG may change his mind about something and all of a sudden now they are out of compliance or they're in review again, that kind of thing.



(17:57):

So the market has changed. That kind of begs the question, well what do we do? Repo was a giant part of the market. It was probably, gosh, I did 56 billion just one year myself. So it's a multi-hundred billion dollar market for investments for local governments and it's kind of gone in Texas. So I think the place to look is look around the room at all the bankers that are in the room and I think talk to them about deposit products, bank products like you got DDAs deposit, demand deposit accounts, you got IDAs, you got CDAs insured deposit accounts, collateralized deposit accounts. Those things have started to take on a little bit of a new look and feel and so talk to your bankers about that. We have programs for that that work really well and replace the gaps in the market that SB 13 has created in Texas.



Donald J. Gonzales (18:53):

Thanks Dave. So we're about halfway through the questions that we have for the panelists, so just wanted to give you all a little heads up so that you've got time to prepare your questions. And if you want to start lining up at the mic here in a few minutes with all your questions, feel free to do so. To use a French term, we've clearly established there's a great need for jingos of commercial paper liquidity and just in case you weren't familiar with that term, it's a lot. So going back to Anna, what impact has the change in the players had on getting filled up or exposure to a particular client?



Anna Sh (19:30):

Yes, thank you. So from Bloomberg, I have been tracking the data for the top five recruiting providers in this market and that top five, that list of the five banks remain the same for the past three years at least. So what does that tell you? We have buyers are buying the same banks over and over and the consequences is there are four of those exposure. So because they have a 10% per bank rule, so when they are four, so what I heard are hearing the same names, couple of names, large banks therefore of so in the impact of the trading spread in the low interest rate environment is narrower couple basis point, but in the high interest rate environment it can be at least we see three even to seven. So that's the consequences of when buyers are really full of that specific bank credit.



Donald J. Gonzales (20:25):

Dwight, next question is going to go to you when you're either going out looking for RFP for liquidity, what impact have you seen so far in terms of or what you would expect in terms of number of bidders, pricing terms, those types of things? And then I'm going to ask Robert to kind of follow up on from his perspective.



Dwight Burns (20:47):

Sure. Well luckily so far we have not had to go back to get new liquidity. We have some in place and later on we'll have to go back. So I haven't been in that market so I don't know have experienced the impact yet. Also at dart, we haven't been in a bond market either, so we haven't experienced that. I'll just say that most of us are veterans in this room, in this industry. We know that this conversation is not about bond underwriting, but just to compare liquidity issues to bond underwriting, we've been able to maintain adequate issuance with the supply of bond underwriters in the state despite the volatility.



(21:43):

But we all know that liquidity is a different story. There's a smaller number of players, financial providers that are able to provide balance sheet to help support liquidity and we have to have efficient markets, we have to have efficient markets and Texas is still known to be fiscally conservative and to allow the markets to work. And so I'm encouraged that I think that as we go forward and when I have to go back and get more liquidity, the method markets will be liquid, that we will have plenty of providers that will answer R-F-Q-R-F-P for us and remember throughout the state we need that liquidity for commercial paper programs for both the major purposes for letting contracts and then for folks like us at Dart for actually drawn down on the paper and utilizing it and getting to market and actually doing interim financing for it. So I'm just going to give a prediction that over the next year that we're going to have going to have continue to have efficient markets and have adequate liquidity because when it comes to CP liquidity for all of us larger issuers in Texas, it's almost binary. It's either available or it's not. When it comes to the largest providers, again, I'm optimistic and I think the market will remain efficient.



Donald J. Gonzales (23:37):

Robert, from a follow-up perspective, anything you can share with respect to what you're seeing on the pricing side? Not going to, I don't think Dwight's looking for a quote for the next time, but just a little something in terms of as there are fewer players, you're probably getting more and more requests and more and more need that's expected to come from you and the other players, right? Yeah,



Robert Orona (24:01):

I mean you could think from a general perspective



(24:03):

Supply shrinking, there could be an increase in pricing, but there's been some deals that have gone to market where we've seen the opposite in the last, I would say six months, very aggressive pricing for some banks that may not have been huge players in the space a year ago. So we're still seeing competitive pricing now moving forward. I mean that could change, but I don't anticipate a massive swing in spreads all of a sudden. But one thing to note is we're fortunate to be in Texas. I mean look at some of these issuers in here who do need that support. They have ratings higher than some banks in here, so you still have that great credit quality and huge names behind them. That's my next thought. Yeah.



Donald J. Gonzales (24:42):

So Dave, as you look at alternative credit solutions that are provided by banks outside of traditional liquidity facilities, what needs do you see to are out there for supporting commercial paper?



Dave Brayshaw (25:00):

Is that for me? No. Yeah, I think I kind of went down that road of the alternatives before when I was talking about maybe talk to your banker about bank products. I don't know Robert maybe. I think that's probably more for you than me.



Robert Orona (25:13):

Yeah, I'll take a swing at that one. I really can't see it in the roof because this light still shining my face. But I imagine there's some entities here that have Ercot exposure and from my elementary understanding of Ercot and their relationships in the last few years, ERCOT woke up probably two years ago and said, we don't care what your rating is and how great you guys are, but there needs to be either a pledge of cash, another LC or a surety bond within the insurance markets. So that's something outside the realm of cp but impacting some issuers. So I've seen people go to the insurance markets now on the surety side for ERCOT. So that's something that I haven't seen in years past, but it's definitely an issue now.



Donald J. Gonzales (25:56):

Great. So Anna, when we look at types of investors for VRDB versus CP, how would you describe, let's start with maybe the universe of investors in the VRDB land versus CP land and then kind of what differences are you seeing between the two also?



Anna Sh (26:19):

Okay, so I am going to tell you my secrets. Okay, investor base for VRDB, of course that's more acceptable to most muni buyers money market fund and SMA, we want to, it's our goal to increase more SMA, the niche buyers to buy VR DB bond funds. They'll buy VR DB if the level is cheap and also investment advisor. So that was a simple one. The CP is the one we mobilized our whole entire Salesforce taxable and tax exempt. Let's talk about tax exempt commercial paper, the Meyer based money market funds and also right now we see more SMA participation and bank funds. If the price is right, they will come for taxable. It's a very interesting point. Some CP issuers, you do taxable. We target second or third tier of the prime funds because the first tier of prime fund, they want big block. They'll be like if you don't have a hundred million or 50 million, the most don't talk to me. Okay, so we go to second, third, fourth year of the prime funds, we go to SMA and we go to corporations. Some of the corporations they like the name they will buy and also municipalities. So we really very thankful for the municipality, the investment departments also by the other municipalities CP.



Donald J. Gonzales (27:43):

And then a follow up question Anna, in terms of what analysts slash investors when they're reviewing CP credit versus VRDB credit, what factors are they looking at and the impact that's having on spread and tenor and how long they'll go out for and are you seeing any changes or limitations on that when they're looking at it from a credit perspective?



Anna Sh (28:07):

Oh yeah, thank you for this question because I want to clarify for a analyst reviewing it underlying bond for bond deal, I think that's easier because I think CP is more complicated because you have to, if you are have a liquidity bank, you also need to make sure the bank is in your approval list. So let's start with self liquid cp. Self liquid CP. Usually for AA issuer or higher, we just need to review the answers need to review the credit. So out of the, there's probably around 80 to 90 higher ed and healthcare self liquid name, they are not always aa. We see some single A, you just target different investor. We see some stay in local governments and also infrastructure like airport transportation or housing. That's called another 25 self liquid cp. You're just looking at the credit. However, you also need to decide how far you can go out self liquid.



(29:06):

If a strong AA name, some buyers can go out as far as 270 days, which is the maximum OCP for CP. If it's AA issuer, they do not need to have an irrevocable direct pay oc. I call that a hundred percent bodyguard. So they will get a revolving amount of credit. In that case the analyst will be looking at the underlying credit and all the related documents plus are they approved for this particular bank? So if you are a CP issuer, you use a bank, it's not on their approved list, but even though they approve your underlying credit, they're not going to be able to buy. So they actually had to look both of the banks and also the credit. But when looking at the banks, they have a bank list, it's not like V-R-D-B. Everything is either one day or seven days. So it's easy to approve on duration for money market fund, every single bank they have their maximum duration they can go out.



(30:01):

So you got to looking at are you approved on this bank and how far can you go out? So if the issuer want to go out say, and I want you to write this for 270 days, but buy side is going to say, well I can only go out 90 days. So we CP dealer, we have to find that happy equilibrium, bring the buy side and also the issuer side to find that where is that happy point. Both sides are happy so you got to make sure the credit is okay. Also, the bank duration is okay for irrevocable direct pay OCCP, that is the most popular cp. Most buyers on the CP land approve because they're looking at the bank. So mostly they're looking at the bank for, in that case they just need to check in terms of duration of CP. Overall CP is very interesting because based on the interest rate, yield curve and investors appetite changes all the time.



(30:55):

But as of right now, because we are in the April tax season, also the recent money market fund reform require money market fund need to have more liquidable assets. So for the taxable fund they have to have 10 should be 10% liquidity, it's changing to 25. But for tax exempt and taxable money market fund, they all require to at least 50% of liquid has to be either daily or weekly. So due to that effective day was April 2nd. So I think due to that news, we have seen the appetite for money market fund right now and I predict for the next three months you will see they like to stay around the 30 to 90 days. And when I ask them about what do you think that going to do? They're like, don't ask me that question. We still, because it's unpredictable but they're thinking. But for right now liquidity is more important and they want to stay around the 30 to 60 days.



Donald J. Gonzales (31:56):

Thank you for that. So Dwight, I know you all have what regular CP you have extendable, you do self liquidity as well. Yes. Can you maybe talk about each one of those and some of the nuances that you've seen in those and in different market situations? Have you seen any variability?



Dwight Burns (32:18):

Sure. I think this falls under the category of trying to be forward looking, trying to find various alternatives to get access to that short term market CP market beyond just the bank liquidity. So yes, we have a self liquidity in the CP program. That is the one we're actively using right now. Again, Anna is my dealer and as you can tell she's pretty sharp and that is really for the most part just a tool available to larger issuers that have really enough available cash sitting in their general fund or operating fund that they can actually use that will stand the test of the rating agencies for that self liquidity. Got to have two times amount of debt service sitting in your operating fund, which is fun for me as treasurer because I'm stingy about my reserves and so if there's talk about using it I can say, hey, I got that self liquidity, I got to have such and such hundreds, millions of dollars and so I'm very happy about that. Then of course, yes, we have the traditional bank back, bank back debt that we will end up tapping because we've got some assertive capital needs coming up and we have access to an extendable CP program as well. So it's called I think hedging your bets.



Donald J. Gonzales (33:49):

How much more or less would you say you have of each?



Dwight Burns (33:53):

Right now I just have self liquidity. They're all 125 million each. The programs are right now, we may have to change that, but right now there's 125 million each and we only have outstanding again on the self liquidity, that's all we have. Outstanding.



Donald J. Gonzales (34:07):

How do you kind of differentiate between why you would choose one versus another?



Dwight Burns (34:13):

I don't have to pay JP Morgan on the self liquidity. I don't have to pay a quarterly fee. So that's



Donald J. Gonzales (34:23):

Good. I guess it kind of goes back to what you've said, this is my money. Yes, yes.



Dwight Burns (34:28):

Or I have fiduciary responsibility. There you go.



Donald J. Gonzales (34:32):

And in terms of what you're seeing on the pricing side, there's got to be some differences and how does credit and all that play into it? And maybe you can kind take each one of them and give us a little bit of insight for regular CP extendable and then on the subsequent



Dwight Burns (34:52):

Sure. It's almost the self-fulfilling prophecy that with self liquidity it has to be a larger issue that has enough cash, it ends up being, it's going to end up being an issue where that's at least AA or higher. And so that's just the way it is and with the other facilities then there's still, I'm going into bond analyst nerd mode here, your CP rating a P one, the A one is going to end up mapping bank liquidity kind of stuff. It's going to end up being mapped to your underlying credit rating and it really only makes sense if you have a high A or double A forth forward. Is that right Anna? Yes. Alright. And then extendable, which is still a form of, in a way, upset of a self liquidity. It's kind of the same thing, but yes, this is a game that, and then of course on the bank side then you have to make sure that the banks have a high up rating. Again, if they're in this game, if they're providing their balance sheet, then they're going to have to be for the most part bracket, highly rated financial institutions.



Anna Sh (36:07):

So from my side, just want to, in terms of trading spreads, so DAR is a perfect example. They have three different type of ice cream flavors, self liquid, liquid blue



Dwight Burns (36:19):

Bell, make sure I'm Texan Blue Bell.



Anna Sh (36:21):

Oh okay. In terms of pricing difference for self liquid strong AA can trade about the same, a little richer than the liquidity buyback bank. Unfortunately extendable CP for the past few years when I'm tracking the number of buyers still very limited to large money market funds. When the low interest in environment extendable CP probably trade five to 10 basis points cheaper, higher yield than traditional CP. In the high interest rate environment, depending on the longer underlying credit, it can trade from as tight right now five to seven to as wide as what I've seen around 15 basis points. So the key of extendable cp, if you want to set up it is a limited bias, but on top of that make sure strong underlying credit and also make sure the documents are solid. What I mean is in terms of the penalty rate, be very straightforward, kind of like be don't only and dime in terms of the penalty rate, but that kind of thing. We can talk, if you have any questions we can answer offline. Okay, thank you.



Donald J. Gonzales (37:42):

And I kind of following up on that then, if you were to, you're given the spread differential, but how many days would you tend to see players on the buy side saying we're happy to go out if it's bank backed liquidity go out 90, 120. Then same thing with the other two in terms of extendable



Anna Sh (38:05):

For extendable CP usually is 90 days the end, okay this bus go to 90 days done, get off the bus and figure out remarket. Again for banks in how many days, I can see some buyers one, some buyer can do three 30 day all the way for a particular day. They can say they can go 180 day, but what they can go out 180 days doesn't mean they want to go out 180 days. At the end of the day there are so many factors depending on how they want to continue to roll the CP with you. It all has to depends on bank duration, credit, headline risk, market condition, yield curve, and also the skills what the dealers present. Okay. So it's is a very straightforward science. A lot of factors get into it, but I would say for is issuer side from 30 day to 90 day is the best timeframe in terms of writing CP to achieve the lowest, lowest cost of issuing overall. So



Donald J. Gonzales (39:15):

Great, thank you. So just another question for Dave and what you all see at Masterson. If we look at the horizon of issuers that you work with, you've got a number of smaller issuers, large issuers, could you see that if liquidity were to become more and more difficult to obtain and there's fewer players there that the larger issuers would need to be coming to market to take out? Maybe they have, I'm going to make up numbers here, a billion dollar program, but they can only get liquidity for 500 million of it. They may need to come to market more often. Is there a trickle down effect that could impact the medium and small issuers, they're not going to get the same attention because they know from an investor perspective that those large issuers are going to be coming to market more often. Would you anticipate anything like that happening? As far



Dave Brayshaw (40:15):

As you're asking me, right, and it's a little out of my wheelhouse I would have to admit, but I think in terms of if what you're asking me is does the trickle down effect, I mean from large issuers to small issuers impact the asset side, the municipal financial product side of the market? I would say maybe to a lesser degree than it does and I'm not trying to be a contrarian up here today with the rest of the group, but to a lesser degree than maybe what's experienced in the normal kind of liquidity, the CP and stuff market that we've seen. I think the market for the investment side in particular the asset side, municipal financial products, swap swaps, collars, caps, floors, all of that kind of stuff, investment agreements and all of those kind of things is a little bit like not impervious but not, it doesn't much matter the size of the issue and I can get a $10 million deal done or a 20 million deal done as easily as I can get three or $400 million deal done. So I don't think that we have the same. I think I know where you're going, but I'm probably not the right person to answer exactly that liquidity kind of question. But I don't see that same constraint on the investment side in the municipal financial market or products market I would say.



Donald J. Gonzales (41:30):

Great, thank you. So I know we've got about a little over five minutes of time left available and I can start calling out names or y'all can just start lining up for questions. Take your pick. There we go. We got a Brave one. Tina, Dave, Tina, and let's see, Troy Madres. Oh there's Troy. Yeah, Troy, you got to step up man, especially because we're in big trouble. Alright Tina, ladies first.



Audience Member Tina (42:00):

Oh, thank you. Good morning. So first of all, I want to thank the Bond Buyer for hosting this panel. It affects so many of our clients and I appreciate all the comments and the remarks. Actually mine's really not a question. It's more of a comment and I'd like to get your insights. So one of the things that we see with our clients, some of the larger clients is their need for commercial paper or interim financing isn't really based on their cash needs. It's more about being able to encumber or appropriate or let contracts. And so to the extent that this is, I'm asking the room to the extent that we've got a lot of smart people in here that we can come up with a solution, a low cost solution to be able to appropriate contracts, let contracts, I think that would go a long way for reducing the size of the required size of the commercial paper programs or these liquidity needs. So I'm kind of throwing that out there, but also would love to hear Dwight, I am so excited to hear that you guys have extendable cp. We're using that for some of our clients for that purpose. Anyway, that's my comment.



Donald J. Gonzales (43:14):

Thank you. Dwight, you want to respond in terms of, is that primarily a big driver? I know you mentioned you don't have to pay a fee, but are you using it a lot for being able to extend contracts for work?



Dwight Burns (43:27):

No, no, we don't use it at all for letting contracts and I am familiar with several issuers in this room that use it for that purpose. And I think Tina's question is a great one that there's room for innovation in terms of thinking of solutions for those issuers that are looking for a need to meet those statutory requirements. And I bet that there's, Dave, look it up on Jet ChatGPT probably have an answer.



Donald J. Gonzales (44:00):

I'm on it. Dave, you have a question?



Dave Gordon (44:03):

Yeah, Dave Gordon with Estrada and Hosa. I appreciated their conversation on the various options for CP and certainly that was great that DART was able to set those up and I will just,



Dwight Burns (44:15):

Can I stop you Dave for a second? Right. So I had both my financial advisors up here and Dave actually was the main person financial advisor, the DAR, who helped set up the self liquidity CP. So don't ask a question that you already know the answer to.



Dave Gordon (44:30):

Well the conversation has already been, I think it's been pretty well discussed, but I did want to make a point on that. So historically you saw for example with self liquidity CP that most of those were set up for universities and entities with endowments and that type of thing. A lot of cash on their balance sheet that were typically double A credits or higher as we was discussed. I did want to mention that we did recently set up one for DFW airport who's a single credit, but airports tend to have a lot of cash on their balance sheet. So that was something that, so again, just a point to make, but I did want to ask a question of Dave Bradshaw. I know that after the financial crisis there was a lot of workouts of various swaps and a lot of derivatives were not getting done in terms of new derivative products. So I'm curious, number one is what is the market for actually new derivative products? Are you getting a lot of swaps done, caps and collars, et cetera? And then you mentioned modifications or amendments, that type of thing being a difficult thing to do. So what is the percentage of swaps that were done alongside of a bond issuance, say back in, let's call it, I dunno, 2010 or something like that where you have a different termination date of the swap versus the outstanding bond issuance.



Dave Brayshaw (45:50):

Oh, gotcha.



Dave Gordon (45:51):

It really requires an amendment at some point or a new product or something.



Dave Brayshaw (45:55):

Okay. Yeah, I think that's a really good question, Dave, but that's a lot of question. Thank you. So yeah, I didn't kind of go down that road of the new issuance kind of swap market and I think that's part of the first part of your question. I kind of avoided that. I didn't know how much time exactly we had, but that market is largely, I would say, I was going to say dead, but that's not exactly right. It's dead in certain areas. I mean school districts and a lot of cities where we used to see that product getting done in those certain areas. Now it's pretty well restricted and we're talking about municipal financial product. We're talking about municipal derivatives is what Dave's question is about. So we're talking about swaps, caps, collars, floors, and where you're still seeing those get done on new ones.



(46:39):

Getting done is really in kind of the real estate market sort of housing and stuff. The housing agency guys are still using them largely developer kind of deals, those kind of transactions that are sort of real estate based, we're still seeing a lot of activity. That's probably the only bright spot in the swap market as far as new swap stuff goes. Just FYI, maybe somebody knows another area that I'm not aware of, but that's the place that I see the most new stuff getting done. The second part of your question I couldn't quite hear was



(47:26):

Oh, so doing, if I follow you. So it's sort, I think the question is what was, we used to do VVS all the time and then swap 'em back to fix, right? Synthetic advantage. Synthetic fix I guess is kind of the question. What are we seeing very much synthetic fixed rate debt being done right now? No, I'd say like I said in the housing, the space, the real estate space, that kind of thing, used to be that was a big deal, right? I mean we used to be able to do sell VRDBs, swap 'em back to fixed and we would save compared to the cash market selling just bonds, sell bonds at like 5%. We could do this synthetic version of that VRDBs swap back to fix at like 360. There'd be like 150 basis point lower cost of funds for you to do the synthetic transaction.



(48:10):

That's what incentivized a lot of people to enter into swaps years and years ago. Now that those swaps are in place, legacy swaps and that kind of thing, mostly what we're seeing, like I said, I told you about the new stuff that modifications that we're seeing are few and far between. There's not a lot getting modified in Texas, I would say in other parts of the country that's not the case. We're doing modifications, no problem in other states. But in Texas, unless you're going to terminate, there's not a lot of wiggle room for modifications. Did that answer that Dave? I hope partially. Okay,



Donald J. Gonzales (48:43):

Great. And with that, we are out of time and we thank you all for staying for the second to the last session.