Market Outlook, Issuance Expectations, and the Road Ahead for the Industry

Transcription:

Greg Pacifico (00:07):

Greg Pacifico. I'm with Build America Mutual based here in Austin. Our panel today is titled Market Outlook Issuance Expectations and the Road Ahead for the Industry. We have a great set of panelists here and I think our goal over the next 50 minutes is to kind of set the tone and the stage for the rest of the sessions that we have coming for the conference. So we'll try to cover a number of topics. So with that, I'll introduce everybody immediately. To my left, we have Tom Kozlik. He's the Head of Public Policy and Municipal Strategy Hilltop Securities. I think everybody knows his research and he's just a great tool for his firm and the industry in general. Next to him we have Rob Dailey. He's Head of PNCs Public Finance Group. He's responsible for PNCs, public finance, banking and capital market efforts. Next we have Brendan Troy, he's Managing Director and Lead Underwriter for BofA Securities. And down at the end there we have Fernando Lopez, Head of Municipal Underwriting at Loop Capital. So with that, again, we're going to cover a number of topics, but let's start high level. So Brendan, we saw inflation come in hotter than expected last week. Walk us through at the start of the year, what was the expectation for rate cuts and where are we now in light of that information?

Brendan Troy (01:34):

Yeah, happy to get started and again, Good Afternoon. Tough to follow Mr. Demerson. That's a great start to this panel and just tells you how powerful things are in Texas and really we're seeing it across the country, not only the CPI data was hotter than expected, but labor force participation, labor force in general retail sales this morning, again got off to a resounding start. It certainly makes the argument that not only are we not in a soft landing, we're in a no landing scenario when we went from six to seven expectations on fed cuts for 2023, actually to be fair, we went 2024 as well. They were wrong. In 23 we had to continue to hike rates. 24, we continue to stall and on Thursday morning, bank of America changed its official forecast to now one interest rate cut from the Fed and that's in December of this year.

(02:31):

So we continue to push things off. We got pretty resounding statements out of the Fed that they are very comfortable holding rates higher for longer or at least high for longer, and it seems as though that the election is not part of at least their calculus in terms of the expectation of rate cuts. At the end of it though, it's really hard to see the fed cuts coming, given the fact that not only are we not at a two handle on inflation, we're definitely not a 2.0, which is what they want to see. So for the time being, we're going to stall, but we'll enjoy the tremendous amount of growth that we continue to see coming out of Covid.

Greg Pacifico (03:11):

Thanks Brendan. And Fernando, following that inflation report, there was a US treasury equity market selloff. Following that news, we then obviously saw flight to safety on Friday in light of the geopolitical turmoil. Walk us through again, what's going on in the muni market, how did it respond to the inflation report and what do you foresee going forward?

Fernando Lopez (03:34):

Yeah, thanks Greg and thank you everybody for having us here. I think it's really interesting when you look at those developments. It's been a really interesting time period to the comments that Brendan made. I think it's important to take a look back. Look, we had close to $10 trillion in stimulus money that was given out over two month, I'm sorry, over two year period. And now we've had roughly about 525 basis points worth of monetary policy that we're looking to have wash out or neutralize the effect. And I think when you listen to the comments around certainly where the numbers have come in, you look at last week's CPI number certainly at 3.8, a little bit higher than what was expected, but you think about the fact that mid 22 we were at 9%, so we've had some pretty significant improvements, but more importantly, when you look more recently at where the market is today, clearly we had a monster rally in the fourth quarter of last year.

(04:29):

When you look at the fact that the muni curve for the most part rallied about 130 basis points in anticipation of the fact that we would, as Brendan said, have some kind of fed action by as early as March, which we know didn't happen and certainly into this upcoming May meeting, which clearly doesn't look like it's going to happen as well. So where are we? I would agree with Brendan that if you think about the position we're at now and to the extent that Greg, your question about Friday's numbers, a couple of things could certainly change. This meaning certainly geopolitical events like we had over the weekend or certainly some kind of a bubble economic bubble that could happen or banking type bubble that can happen into the system. The reality is that we are probably going to be an environment where we have a very resilient economy.

(05:15):

It's going to continue to drive through 2024 and I would not be surprised if we do not have at a minimum one with potentially no cuts out of the Fed as we work through the rest of the year. Not to mention the fact, and I certainly don't want to skip ahead, but we can't forget the fact that we have got an election towards the latter part of this year and clearly the market's going to start at some point in time focusing on that, and I don't even want to start talking about the 2017 tax code that's going to elapse in the next year or two. So there's a lot going on, but certainly the markets are being weighed by a number of the factors that I mentioned and certainly we'll see how liquidity and volatility play itself out as we go through the rest of 2024.

Greg Pacifico (05:54):

Thanks Fernando, and we'll certainly be touching on the election, but I want to stick with the fight on inflation here. And Rob, I want to just talk about the inverted yield curve with obviously the Fed trying to keep inflation in check. We do have that inverted yield curve. How should issuers be thinking about that? How should they be approaching it when they're thinking about transactions and coming to market?

Rob Dailey (06:20):

Yeah, it's funny. Well first, thanks for having me here today. Appreciate it. Good to see everybody. But I heard the market described this morning as a complicated stew and it definitely feels like that and the inverted eel curve is just one piece of what's a pretty complex story from the point of view of issuers, the inverted yield curve. It creates something to have to steer around and to manage, but what I look at is that it's predictable that it's going to revert to a normal curve. We're going to have a positively sloped curve. It's a question of time and when that happens and what it takes to play it out, and it's a little bit also of a question of how much is that as what to refer to as a bear steepening or a bull steeping, but we know that it's going to revert to normal or at least closer to normal over the past 30 years.

(07:19):

I think 94% of the time the curves had the muni curve, the tax lamp curve has had a normal slope, so that gives me a lot of confidence to say that this is something I think issuers should be positioning themselves around. It's probably in our view, not going to happen this year. We'll see a flattening this year and probably won't see a reversion to a positively slope curve until 2025, but it does raise the question of what are you going to do about it when it comes, and I think specifically it introduces the question of to what degree do you want to get floating rate exposure into your portfolio? A lot of these questions apply in both the asset side and the liability side, but it is something that's easy to look ahead and say. Okay, got to be prepared for that.

Greg Pacifico (08:14):

Thanks Rob and Tom, Brendan mentioned the idea of potentially no landing for 2024. What's your economic outlook for the rest of the year?

Tom Kozlik (08:27):

I have to imagine that especially for the folks who in the third and the fourth quarter of last year, were expecting that we could have gone, or even in the first quarter of this year were expecting a recession. We've come a lot further, a lot and a lot better situation than even, and we'll talk about issuance projections in a little bit. I think that I've been, my outlook has been positively impacted by the demand side of what I'm seeing on the macroeconomic kind of big picture, what's going to happen on the supply side, how especially over the next couple of weeks. I'm interested to see what is in the earnings numbers. I'm interested to see what's on the qualitative side from the corporate perspective over the next couple of weeks as companies report earnings, but for the most part, I've been pleasantly surprised and am expecting to continue to be pleasantly surprised for most of the rest of this year.

Greg Pacifico (09:29):

Great. Why don't you walk us through your projections. I know you revised your outlook earlier in the year. Help us understand that and let us know if you feel like the inflation numbers and what's going on in the market changes that.

Tom Kozlik (09:42):

Yeah, so in November of last year, the issuance projection that we published 4 2024 was pretty low. It was 330 billion, but at the end of January of this year, we revise that projection to 420 billion and while it's not, it's common to revise the issuance projection, it's not common to do it that quickly. And in my defense, as I just mentioned, there were a lot of folks who in the kind of second, third quarter of last year were expecting that the economy could fall into a recession in the fourth quarter of 23 or the first quarter of this year, and I didn't necessarily buy that there was going to be an all out recession, but I was expecting that things were going to slow down. I have to admit, I wasn't expecting that things were going to roll as positively as they have for the last couple of months, and I wasn't expecting to be able to tell you that.

(10:45):

I was expecting to be pleasantly surprised for the rest of 2024, but as a result of changes that when we came back after the holiday in the first and second week of January, that's when I knew and I was seeing the economic data that was coming out, I knew that I was going to have to take another look at the thesis that we had in the second and third quarter of last year, and I still think that four 20 is going to be a good number for this year. That being said, folks have to remember that that is just a little bit over the 10 year average so that it's not a home run number as far as overall issuance is concerned.

Greg Pacifico (11:29):

Thanks, Tom. And I'll open this one up just to the group. I mean, if we do have no landing in 2024, do we feel like that increases the probability of a hard landing at a later date?

Fernando Lopez (11:43):

Just to get back to Rob's point, I'll start with this. You think about the inverted yield curve for the most part. Obviously in the monetary policy environment that we're in right now, you normally tend to follow that up with some level of recession within a six to 24 month time period. Well, the treasury yield curve inverted in March of 22. Here we are in April of 24 and we still don't have that level of showing with regards to certainly the economy being anywhere near a recession. So to that extent, I think it kind of solidifies the concept of where we will be as we go through the rest of the year and certainly the fed's policies, again, it's always subject to change. We're so data dependent as a market, but the reality is that right now the suns are just not evident that we could certainly have it this year.

Greg Pacifico (12:29):

Thanks, Fernando. And Brendan, you have any thoughts on volume? There's some sectors that are maybe a bit underweight when compared to pre covid levels. Are there things you're keeping an eye on?

Brendan Troy (12:41):

Yeah, I'd say substantially underweight, but again, just to kind of follow up on Fernando's point, I think the interesting part is after all the Fed speakers a week and a half ago, you really got the sense there were whispers that the next move from the Fed could actually be a hike as opposed to a cut. But if you think about the last time that really resonated, that was October of 2022 and rates were still 35 or 40 basis points higher than where they are right now. So I think we're still digesting through it. I would absolutely agree. I don't think a recession is imminent at least it certainly doesn't feel that way and the hard landing scenario seems like it's quite some time. Maybe that's a 2025, 26. From the standpoint of market issuance, I think the way we all set up, and one of the big reasons that I would agree with Tom, if anything kind of take the over on the four 20 is in response to the sectors that have been so underweight that they need to catch up.

(13:40):

They have significant capital needs and in particular, you look at the healthcare side, you look at higher education healthcare versus 2019 issuance is down 58%. Well, the first quarter of this year, we already did half the volume that we did all of last year. Obviously one transaction was a big part of that, but there are significant capital leads that need to catch up with higher education. Similar, there were a couple of Ivys that were at the top end of that. They've already been in the market both tax exempt and taxable. They were down 52% versus 2020 highs surface transportation airports, almost every sector top to bottom, the one place that sticks out from an issuance standpoint that's actually up is right here in Texas. So Texas feels like it's already ahead of it unfortunately. I think there's a lot of sectors away from Texas that have an awful lot to catch up on.

(14:33):

The capital plans that were established by airports 2019 pre covid in 2020, a lot of those plans being rolled out again, and yet still on the airport side, we're almost 30% lower issuance wise. So I think it all sets up to be a relatively active year. The biggest issue I see is whether or not we're going to take a two month holiday, October, November just because of the election. It does feel like a lot of issuers are setting up to avoid that time and maybe even kind of get quiet after the primaries. So are you going to see a market that really kind of front lows issuance through August when the technicals are incredibly strong? It gets really quiet September October, by the way, that wouldn't be the worst thing from a technical perspective and then maybe the couple of weeks in December kind of off to the races again and setting up for a good start to 2025.

Fernando Lopez (15:26):

Hey Greg, maybe just a couple other thoughts on that just to pick up on where Brennan was going. Part of the issuance expectation this year we had was that we would have a second half that was stronger than the first. We're running, I think 27% ahead of last year already. So we still think that's probably true. One dampening effect might be higher rates if rates end up staying higher for longer as we all expect. Not sure what exactly that's going to do, but it does seem like there are a bunch of sectors that just need to catch up. I think it's also important to recognize the fact that even if we look at the consensus for the industry for the year at roughly about $400 billion plus a minus, we've had a pretty orderly first quarter. I mean, the reality is in light of the choppiness we've had in the market and the level of volatility we've had, certainly the concerns from a credit perspective, we know that the sectors for the most part have been very constructive.

(16:22):

And I think what's important to note is the fact that, as Brendan said, you think about the technicals that are coming up in June through July, our analysis of the last two presidential years, 16 and 20 have shown us that those last two months leading up to the election seemed to be very large months. If you recall in 2020, we had 72 billion into the market in that one month. That's going to put pressure on our market, and I don't even want to start the subject matter centered around the fact that if we do get some level of lumpiness with regards to our supply, how's that going to be handled by a market? When you look at our ratios as an asset class, we are more expensive than we have been in a number of years. I mean, if you look back at our current ratios relative to either a 10 or 25 year analysis, we're not within 10 basis points or 10 ratios of those averages.

(17:12):

So I think our markets could certainly be challenging. If I'm talking to issuers, I'm saying to them the same thing. To the extent that you have some level of flexibility around your timing with your transaction to the extent that you could put it into a time period, which gives you a little bit of spread or room from where we expect to see that supply pickup certainly do that. Our analysis also shows us that post-election, November and December, we tend to see a pretty good drop off. So think about what could certainly be ahead of us with regards to just more than just the Fed and certainly the volatilities we have in the market because as a supply side sector of our market picks up here in the next couple of months, it could certainly put a good amount of challenge into our asset class.

Brendan Troy (17:50):

I think it's interesting, Fernando brings up the ratio side, and it's almost in contrast to what Rob was just saying, right, rates are higher. Does that prevent issuers from entering the market? And that's really the response of 2017. We introduced forward refundings as a way to mitigate the lack of tax exempt advance refunds. We rolled out taxable refundings and then really to be able to capitalize on where higher rates are. Right now it's the tenders and in particular it's the BAB refunding. Those two areas continue to be tremendously positive and tremendously successful. It's a way to be able to take the banks and the insurance companies out of debt that they're already selling in the secondary market. They're selling the short maturities, they're selling the short calls. Well, that's essentially what issuers are tendering for in higher a tax exempt or a taxable scenario. And in the midst of both healthcare and higher ed, what a lot of those issuers have determined is that the taxable bonds they issued 2019, 2021, they have tax exempt proceeds to offset. So they have the ability to take that taxable debt out reissue as tax exempt and given where ratios are, realize some pretty tremendous savings. So again, market's going to continue to stay efficient, water's going to find its level, and it really offers a great opportunity even though rates are a little bit higher. Then again, you look at the very front end of the curve from SMAs perspective, the weekly index, is it higher than one basis point? Yes, but it's sitting between 60 and 65%. It's incredibly efficient. This market continues to be resilient and efficient.

Fernando Lopez (19:29):

So what we're basically saying is that the attraction from uni as an asset class is clearly nominal yields, right? The attraction that the buy side or that investors are seeing is the fact that they're getting an opportunity to invest in yields in our sector at levels that they haven't seen in decades. So clearly it's not ratios. It's all about nominal yields with regards to municipals.

Greg Pacifico (19:50):

Thanks. And Tom, did you have something to add on there?

Tom Kozlik (19:52):

Yeah, I just wanted to mention one of the questions that I get from almost every buy-side account that I talked to. They asked me if I think that issuance is going to get pulled forward ahead of the election and back in 2020, I remember it was as early as June that I heard folks starting to talk about getting something done before the election. And so I'm expecting that there's, there's more uncertainty that people are expecting to occur either as a result of the election or just after. So I'm expecting that issuance is going to get pulled ahead this year as well.

Greg Pacifico (20:28):

Thanks, Tom. And with increasing rates, we've been seeing increases in retail demand for Muni. So I want to shift gears a little bit. We've also seen a decline in financial buyers like banks and insurance companies as part of the retail demand. There's been huge growth in assets by SMAs. What exactly are the SMA managers looking for and how has an impact in the market?

Fernando Lopez (20:52):

Anyone in particular?

Greg Pacifico (20:53):

Yeah, I'll open that up to Fernando and Brendan and

Fernando Lopez (20:56):

Sure. Well, clearly the SMA space has been where the growth has been from a distribution perspective for our asset class, no doubt, one and a quarter to one, three to one and a half trillion dollars and roughly about a 25% market share. So they're relevant and to the extent that you marry that up, which certainly as I mentioned before, the impact that nominal yields have had towards gathering traditional retail, it's nice to see that into the new year. So far, we've managed to stop the assets outflow out of the mutual fund space. So combination of the growth in the SMA space, certainly traditional retail, and to the extent that our mutual fund customers, which naturally are the second largest segment now of buyers are involved. Again, I think that's certainly what's driving and allowing our transactions to be as successful as they have been so far this year.

Brendan Troy (21:44):

I think it's interesting. There's so much analysis that goes into tracking fund flows within the open-ended mutual fund complexes, and yet we have very little visibility into the SMAs. We can track it by word of mouth, mostly feel, again, Fernando just tossed out two numbers, 1.3 to 1.5 trillion only off by $200 billion. It's very difficult to get visibility into them, and yet the amount of shift that they have caused in the market from a number of different ways. First of all, they used to be a ladder portfolio, one to 10, one to 12. Now you're seeing them buy out to 25 years. You're seeing them buy different coupon context. Really, there's no one structure. What I would say more important than anything is the credit. Obviously Texas makes that really easy to be able to get credits approved, but more importantly, they do take a little bit more time.

(22:38):

You want to get in front of them and the notices are always helpful. I think the other thing that's really interesting is you look at the way the SMAs reacted back in 2019 and 2020 when we started to get a little rich on the ratio side as well, what they piled into taxable investments instead of the tax exempt, they were more than happy to kind of wait in the wings with an expectation that rates were going to move higher. They're not doing that this time. They're staying disciplined, they're staying in the exempt space, and a lot of that has to do with being able to exit the trade. They were not able to exit the taxable trade all that efficiently. You can exit the tax exempt trade much more efficiently. And this goes back to Greg's original question because retail always has a consistent bid in the secondary market, the amount of liquidity for the taxable side is very different versus that broad reach.

(23:34):

And lots of firms here, I can only speak to the Merrill Lynch side of the equation, but that reach is powerful. It's consistent. Obviously they're looking for new issue participation, but they're also looking for structure. They're looking for names, they're looking for credit. So the Merrill Lynch retail advisor is always looking for a product. And this gets back to Fernando's last point, given the fact that nominal rates are a little bit higher than where we saw them the last couple years, that's a huge driver for them. Maybe they don't want to take the equity risk volatility, risk inequities, but they understand Texas credits and it's something that they're going to respond to.

Greg Pacifico (24:12):

Thanks. And Rob, the growth in SMAs, what has that meant for larger transactions, bigger maturities? What's been the impact there? Well,

Rob Dailey (24:19):

I guess I would just point out that as they grow, I do think there's a greater emphasis on liquidity on block size, on the size of maturities. And from an issuer's point of view, that's something you're going to want to be able to structure around. You want to be able to take the extra time, as Brendan said, to make sure that SMAs have a chance to understand the credit, but you also want to structure it in a way that they're going to find attractive. So I look at the growth in SMAs and I look at the growth, although from a small base of ETFs who really are focused on much larger sizes, and I think this to me looks like a trend that's maybe just getting going, but it's something that I think our market, the muni market I think will begin to converge more. I don't want to make the point too strongly, but it will begin to align itself more with the taxable markets and I think that's something that's going to end up making a big difference to the way issuers amortize and structure their debt.

Greg Pacifico (25:25):

Thanks, Rob. So I want to shift gears a little bit. Tom, we obviously, coming out of the pandemic, we had a lot of issuers that were flush with cash thanks to federal aid. You had generally strong recoveries, booming tax revenues, especially down here in Florida. And again, you had big cash balances, which possibly could have been used to maybe cover up some credit deficiencies. What are you telling investors right now in terms of the credit outlook in Munis in general, and is there anything specific that you're concerned about?

Tom Kozlik (25:59):

So we just published a piece maybe two weeks ago, three weeks ago titled something along the lines of the fact that the Golden Nature public finance is not over back in 21. All of this federal money that you're talking about, I mean hundreds of billions of dollars really propped up credit. The Moody's public finance upgrades have been massively outpacing downgrades, and they did again last year. I'm expecting upgrades to continue to outpace downgrades. And that being said, it's important to point out that that upgrade action has been occurring mostly in the tax backed area. One of the things that I think is important to point out in someone mentioned healthcare in higher ed, downgrades have been outpacing upgrades in both of those sectors. That being said, we've had negative and or cautious outlooks on both of those sectors for the last couple of years. But we are also, when we're talking to investors, whether it be folks on the institutional side or the retail side, we're not saying that they need to stay away from those sectors, but you just need to be more careful there. Let me just mention one more thing. There's a credit normalization process that's happening right now, that kind of sugar rush of federal money help to prop up credit, but this normalization of credit is something that we're talking to investors about and stressing that they need to be careful about how it is that entities react in the next budget cycle or two.

Greg Pacifico (27:34):

Thanks, Tom,

Rob Dailey (27:35):

You may ahead, Rob, just add in on that for a second. I agree with the way Tom described this. I think it's important to note that the federal actions and some of that stimulus money and liquidity that came, some of it has a very long tail depending on where you go, there's still a lot of it around and in other places, obviously it's beginning to look like the cupboards pair already, but I think this effect of the federal stimulus dollars is going to be with us for quite a while. It just depends on sector, and that's where you're going to end up with this normalization and differentiation by sector from a credit point of view, that really is going to be the story, maybe not in the coming 12 months, but beyond that.

Tom Kozlik (28:17):

And there's a regional difference too, right? There's a regional difference.

Rob Dailey (28:20):

Yeah.

Greg Pacifico (28:21):

Thank you. And Brendan, earlier you had mentioned a handful of underweight sectors, healthcare, higher ed, toll roads, many of those took a fairly significant hit from credit during covid, whether it was due to inflationary pressures or a lack of utilization, I mean with a potential growth in volume in those sectors. Do you have any opinions on credit quality?

Brendan Troy (28:47):

I think the biggest thing is you have to be incredibly impressed about where they're trading on a spread standpoint versus the natural AAA credits, the amount of credit spread compression that you've seen now, I think a lot of it has been due to the fact of a very low volume. There just hasn't been as much yield out in the market for investors to participate in. But I think in some cases, and absolutely agree with Tom, I think you have seen downgrades outpace upgrades in certain sectors. But I also think that some of the investors are absolutely voting their own kind of credit upgrades with a number of different names, especially in healthcare. I think they trade them as if they're a notch or two higher than they're originally weighted. I think some of that has to do again with the fact that so many of them coming out of covid.

(29:36):

I love that sugar rush comment. I had to write that one down. I think it's a really apt analysis, but so many of those entities coming out of covid, whether it's significantly higher labor costs, whether it's the PPE equipment side, significantly higher now that's become a little restrained. They're not paying for traveling nurses, et cetera. They're in a significantly stronger position. And the very top end of the sector is positioned incredibly well and it's going to continue to. And if anything, you could see more consolidation come for them. But I think across the board, you have seen credit in a pretty strong position. And if anything, people from the investor side seem to be shifting out of the a-rated space looking for more yield in the triple B space. And I think that's a trend that's going to continue for the balance of 2024.

Greg Pacifico (30:31):

Thanks, Brendan. Are we seeing, I mean, just generally speaking, with all the growth going on in Texas, all the great things we've heard, do we see Texas credits trading better than maybe a light credit elsewhere in the country?

Fernando Lopez (30:45):

Well, the majority of the paper in the state as we know, is highly rated. So to the extent that if you look at the school districts, which is the largest sector within the state, clearly carrying the PSF credit in itself has certainly helped. For the most part, I don't see those challenges existing. And to the extent that Brenda made the point that, look, the buy side has done their share of diligence with regards to credit, they get to a point where they feel comfortable. And to the extent that I think the biggest challenge that supply, I'm sorry, the biggest challenge that Texas has had with regards to the way that their paper gets priced has been supply, meaning the frequency of supply. And a lot of times to that extent, again, sometimes it can't be helped, but that certainly becomes the biggest challenge when it comes to pricing transactions, meaning the frequency of just how often they're coming and the similarity with regards to the amortizations.

Greg Pacifico (31:34):

Thanks, Fernando. So kind of circling back to the election, but taking a different look at it outside of the market perspective, obviously with the election comes a lot of risk to law changes and things of that nature. Are there certain campaign issues, Tom, that you are particularly focused on worried about that it could have a negative impact on our industry?

Tom Kozlik (31:58):

So I think that folks in the industry need to remember that some of the most impactful things that have happened to the industry over the last decade or so they've originated out of Washington. I mean the tax cuts and Jobs act, the 2021 federal money, I mean things coming out of or events coming out of Washington, whether they were expected or not, I mean, they have made a massive impact in the municipal market one way or the other. One of the things that I've been writing about and talking to a lot of people about, and this is something that over the last decade plus I've been talking about, is the potential threat to the municipal bond tax exemption Back in 20 11, one of the things that I was mainly concerned about was just kind of your basic deficit reduction argument, and that is still the case when I talk about this, I'm asked what's different now compared to 10 years ago or 20 or 30 years ago? And what's different now is the US debt to GDP ratio is significantly worse. Not only now, but it's expected to get much worse.

Greg Pacifico (33:09):

Thanks, Tom. Brendan, Fernando, I forget who mentioned it, but it was the roll off of the tax cuts in 2025, and that's obviously regardless of who's elected. What are the implications on that on the muni market?

Brendan Troy (33:28):

Yeah, I think that's one of the reasons you're actually seeing a bit of an escalation in the Babs refunding in this current environment. It's an expectation that there could be another sequestration. If there is that 5.7% reduction in subsidy is only going to get worse. Again, talking to issuers, you continue to hear grievances about how much longer it's taking to get that subsidy back from the federal government. It doesn't seem like it's going to get any more efficient. So I do think that there's continuation of risks. I think issuers are smart to at least be thinking about how to position that in front of it. But I think from an election standpoint, the expectation of less clarity being in front of us is absolutely accurate. And again, it just doesn't seem like tax rates, especially in most of the country, are going to be going lower anytime soon.

Greg Pacifico (34:29):

Thanks. I mean, Rob, in your conversations with issuers, are they specifically discussing coming to market before the election? Is there any guidance that on generally you're offering to your issuers?

Rob Dailey (34:44):

I mean, I think generally people need to go when they need to issue in terms of things to worry about. The election's one of 'em, but there's a lot of stuff to worry about right now. So I think what we've been telling our clients is come to market when you need to. And it's really more about instead of trying to market time, it's much more about execution. Just make sure that you're doing a thorough job of marketing, that you're being transparent, that you've got a fully communicated and aligned working group alongside you. And so if you come to market well and you've got some flexibility to make decisions as you come into because you don't like the market, well then you're in great shape. But you could do all you can to plan your issuance around an election or something else. And all of a sudden we've got unrest in Europe or the Middle East that throws everything out the window.

Greg Pacifico (35:41):

Thanks, Rob. On that note, with geopolitical turmoil, we're seeing increased cybersecurity threats. I think we're all very familiar with the idea of phishing and ransomware at this point, but we saw the US government put together a letter citing potential threats to water and sewer infrastructure through cybersecurity attacks. That's obviously a much different risk. Yeah, I'll open it up to the group. How should issuers be thinking about it? How's the market thinking about it? I mean, is that being addressed? Is that being contemplated at the issuer level?

Rob Dailey (36:21):

Maybe just to jump in for a second, we're seeing it all over the place. We're whatever, three months into the year, I think every week I have had something reported in on our business where we're doing the corporate banking side of our business where we've had an incident of fraud. Sometimes it could be a loss of a couple million dollars to an issuer that really can't afford to lose that kind of money. We're seeing it all the time, and it is an area that's growing by in excess of 20% per year. And so it becomes, I think, an issue that ultimately will find its way to the top of an issuer or financial decision makers priority list. There are lots of things that you can do, but it actually, in addition to whatever tools you've got at your disposal, it requires a level of focus and sensitivity to it that I think is a cultural matter for institutions. They've got to build it into the way they operate.

Brendan Troy (37:28):

I also think it's one thing when you're talking about a relatively active growing economy, we have to be facing some of these payouts. Just look at what's happening to doctors across the entire country with change healthcare. Their payment provider system has been hijacked. It's been hijacked since February, the middle of February. It's not expected to come back online until October or November. So again, it's one thing when you have a relatively robust tax base, you have liquidity, you have growth in Texas, it's a very different thing. If we do then have to turn the page, now we're facing a recession, possibly something worse, a downturn, and you're still being cyber attacked. And again, these payments then just get significantly more expensive, not just from a payment standpoint, but ultimately it's across the entire tax base that you're going to feel that pain.

Greg Pacifico (38:24):

Thanks, Tom. Any thoughts?

Tom Kozlik (38:27):

You alluded to the CISA guidance for the water utilities. That was released back in November, December of last year, and that was because there were about a dozen attacks on water authorities throughout the country at least we don't necessarily know all of 'em. We know of one of them that happened. It was in a small area just outside of Pittsburgh, and we know about that one because they started talking to the press. Others did not talk to the press. But there's a differentiating factor in what happened with those attacks compared to a lot of the others that we've been seeing over the past couple of years. Over the past couple of years we've been seeing and hearing about ransomware and those types of attacks, what the future of cybersecurity is going to be are going to be these havoc based attacks, attacks where folks or hackers in foreign countries, they don't necessarily care about money. They're going to care about having an impact and a different way. And this is one of the things that folks on our market are going to have to deal with on an ongoing basis.

Greg Pacifico (39:37):

Thanks, Tom. And I'm going to pause there for questions. As a reminder, there's microphones in each aisle here. If you could come up to the microphone if you have a question,

(39:51):

Any questions, let me ask another question to our group here. And if you have a question, feel free to line up. Obviously in the keynote and the intro, we talked a little bit about the hot summers storm, adon cold winters, and how there is a need to make our infrastructure more resilient. And there's some great panels tomorrow that'll address those issues, but more from a leverage perspective. I mean, financing those projects obviously come at a significant cost, especially in light of inflationary pressures over the past few years. I mean, do we anticipate that we're just entering a period of higher inflation for me, higher leverage for a lot of these utilities?

Tom Kozlik (40:46):

So not only from an infrastructure perspective, I think that one of the things that from a traditional infrastructure perspective, we're going to be dealing with. I was in Detroit last week and one of the things that I saw was this company that is working on putting charging panels for electric vehicles in a road. And I'm bringing that up because I think that not only is it the kind of upgrades to the infrastructure, it's the future of infrastructure that we're going to be dealing with. One of the things that I'm thinking about is I get asked the question of when is it that issuance is going to rise well above that 400, 415 billion level that we've seen over the last 10 or so years? And what we're going to need to increase issuance, which then could be used to fund more infrastructure and infrastructure upgrades. Economic growth is going to have to be higher and or fees and or taxes are going to have to be higher. That's the only way that you're going to be able to get more money to raise that issuance. And until you get more money going in to be able to pay it off, you're not going to be able to increase the numbers.

Greg Pacifico (41:59):

Thanks, Tom. So if there's no questions, I'm going to pass it over to our panelists just for some closing remarks. We can kind of go down the line here. And while you're doing that, if there's any one certain thing that you're particularly concerned about for 2024, why don't you incorporate that in there and we can start with you, Fernando, and work

Fernando Lopez (42:18):

Down. Yeah, sure. Happy to. So we've talked about a number of different factors that certainly are weighing on all our minds, but the reality is, and I want to leave everybody with this, while we don't know what direction the rates are going with regards to certainly to monetary policy, I want to assure you that we've had a very successful year, a hundred billion in the first quarter. Like I said, we've managed to gravitate away from the choppiness and volatility we've seen in the markets. We've had a record amount of transactions that have come that exceeded a billion dollars in total par value. We've seen transactions upside by amounts, par values I haven't seen in my entire career over $500 million on any one particular transaction. So the buy side is healthy. I think liquidity to some extent, certainly has had its challenges, but I think it's been met. We're going to continue to have volatility as the year plays out, and we'll see certainly where the economy takes us. But in the end, we've had a very successful first quarter. I would expect that we'll continue down that path, and as professionals in the industry, we'll find ways to make sure that we deliver the execution that's expected of our issuer clients.

Brendan Troy (43:19):

Yeah, I would agree. I think a lot of the focus on liquidity is absolutely warranted. There's been a fair amount of change within the industry. We would expect there to continue to be a fair amount of change within the industry. And yet, last Wednesday I priced $2 billion between three transactions. One of them, great example, did a tender, a new money and a Babs refunding component to it. So again, you look across this room and there is an incredible amount of expertise, ingenuity, a little bit of creativity as well to be able to continue to grow this industry. I look forward to seeing that over 2024.

Rob Dailey (43:58):

I would guess I would offer a couple points. One is just to the point that Fernando was making about operating slightly differently as we go forward, just with regard to liquidity and market dynamics among buyers versus dealers. We are seeing more firms organize their municipal, more dealers organize their municipal operations more in line with their corporate or other taxable operations. And I think that's something that's going to play out over the course of the coming couple of years. But I do think it's going to end up resulting in our market looking more like the other taxable markets. So that's something to keep an eye out for. The other point I guess I would make that I think a lot about is just on the credit front, who's performing, who's not, which sectors are doing well, which aren't doing as well. And I think that there's a name by name analysis as we normalize credit, as Tom points out their sector play sectors playing out post covid that we're still managing out in some sectors from the effects of covid. And so I think that's something that I think the rubber's going to hit the road as we continue through the rest of the year.

Greg Pacifico (45:18):

Thanks, Rob. How about you, Tom?

Tom Kozlik (45:20):

So there are two things that I'm really focused on right now. The first is, and we saw this kind of the fall of last year, especially as interest rates are a little higher, there are a lot of folks who aren't used to big swings in interest rates, like a 50, a hundred, a hundred plus basis points, swing in interest rates. That's a big deal. It's a big deal for the broker dealers, a big deal for the kind of bank community. I mean, that's a big deal. That's one of the things that I'm watching very closely related to that. One of the things that could cause that one way or the other would be international and or domestic political uncertainty. That's one of the other big things that I'm really watching closely right now.

Greg Pacifico (46:03):

Thanks, Tom. And that concludes our session. I want to say thank you to our panelists and thank you to the Bond Buyer. Looking forward to a great conference.