The Issuer Roundtable

Transcription:

Karl R. Biggers (00:08):

Good morning.

(00:10):

I know y'all have had enough coffee by now to be awake. Thank you all for being here. This is the issue, a round table, and we're definitely going to try to make it as much of a conversation as we possibly can before. I'm Carl Biggers. For those of you who don't know me, I'm managing director at Bancroft Capital and I am in Dallas. Joining us today on the panel is Phyllis Garcia, senior director and treasurer for San Antonio Water. Amy Perez, who's the Deputy Executive Director in the Office of Management and Budget for Harris County. And to my immediate left Vernon Lewis, the director and deputy controller for the City of Houston.

(01:05):

As I said, we're going to try to make this as conversational as we can. I'm going to throw out some subjects and each one of them of my panelists here have strong opinions, I guess we'd say about what they'd like to express. We've spent some time talking ahead of time and we've kind of identified some areas that we think are going to be of interest to you as bankers, as attorneys who work in the industry. So with that first thing on the docket for today, and we're going to go in hot SB 13 and 19, many of us in this room tend to think in terms of SB 13 and 19 from the impact that it has from a debt issuance perspective. However, one of the things that we've uncovered in our conversations among ourselves is that the impact of those two pieces of legislation go far beyond for the issuers, not only debt but investments, liquidity in particular, liquidity and depository, all of which are impacted to some degree or another by SB 13 and 19. So with that kind of introduction, I'm going to let Phyllis kind of start out talking about that and then we'll, again, they've got a healthy dialogue between themselves, so they're going to cut in and interrupt each other and add to and contradict maybe. But again, we're having a conversation and go ahead Phyllis.

Phyllis Garcia (02:55):

Okay, thank you. Obviously, we're all aware of SB 13 and 19 and I think the biggest impact has been a lot on the competition or the availability of competition in some of those realms that you spoke about. It will impact our underwriting of our bond issues. We did have a pool of 23 firms that we did business with. All of the players that have left the business were in that pool, so that obviously reduces the amount of firms that we can deal with and be able to underwrite some of the larger transactions that each of us do. So that is a concern in response to that, and I don't think anyone likes it. We don't like it do these RFPs, but we're going to kind of do what we call in mini RFP to maybe add additional firms that we're not in our pool. And so hopefully we'll still be able to spread out the business in that competition.

(04:04):

And as was mentioned, also liquidity is a concern. We all have large capital programs that we're going to have to fund. We have saws has a $500 million commercial paper program that we need liquidity. We actually went out a little early to secure that liquidity before the expiration of our facility just to make sure that we were with, make sure we could extend that facility with the firms that we had before, they might have not been able to do business. And in that realm, because we did do it a little early, I mean it is impacting price. The availability of liquidity is supply and demand. It's less supply. So the price is unfortunately going up a little bit for us. And in terms of investments, we have about a 1.5 billion investment portfolio. We do have broker dealers that we deal with and we've had to reduce the number of broker dealers because of the legislation. And then we also on our general depository, we went early to secure that agreement as quickly as possible just to ensure that we have a bank that can handle our depository and lock in that as long as possible so we won't have to go out again in the near future with this uncertainty. I think a lot of it is uncertainty. If we could get past this uncertainty, I think it would help us all. So that's kind of been the impact to us so far.

Karl R. Biggers (05:49):

Amy, from your perspective?

Amy Perez (05:52):

So I mean we're experiencing similar things. So on the underwriting side, obviously it has limited our pool a little bit, but if I'm being quite honest, we have not seen a differential in price. I mean, I really feel like the other firms have been able to step up. However, anytime you lose competition of any kind, it is a concern and should be a concern because it could possibly get to a point that we see a differential in pricing. Where we've seen the biggest impact is probably on the liquidity side, just those that can offer liquidity for our commercial paper programs. And because we have 12 different commercial paper programs across different credits, they're all at least probably around 200, we have one that's 500 million. And whenever you have so much exposure, when you take some of the players out, only let's say we have one bank, they already have exposure with us.

(06:49):

They can't extend anymore liquidity to us for a certain amount of time. So I mean that limits it even more because their ability to extend their selves is a concern as well. I mean, just the same on our side. We don't want all of our exposure with one bank. We want to spread it around, but we have a lot of needs. And so we've experienced a lot there. We've experienced it on the dealer side. We have started to put in place two dealers where we used to only have one just in case one ends up back on the list. We can still do business with the other if we're having issues there. So I mean that's been an additional cost to us. I mean, it's not a huge cost, but it is a cost. Probably a bigger part of it is it's just more work for us on our side, stuff that we have to keep up with, that we have to manage, things that we did not have to do in the past, and they're not paying us anymore to do that.

(07:49):

It's the same pay as we got before. So those kind of things on the investment side, I mean, we haven't gotten really clear guidance on do we have to take off those brokers that are under Senate bill 1319. We've just tried to stay away from 'em. We've taken them off of our list. We're not utilizing them just to kind of stay on the safe side there. So that has, again, that's limited that side as well. And then depository, when we just went out for our depository RFP and whether it was intentional or not intentional, we had a lot of delays within our RFP process that worked out in our benefit because I mean, the banks that can handle our business are larger and they're usually involved in the Senate bill 1319 thing. And so there was a lot of times that we were nervous, okay, are we fixing to award?

(08:43):

And are the banks that have come back with a response, are they on this list? And so there was a lot of back and forth about that, and we had many conversations with our county attorney's office about what language needs to be in these agreements to make sure we're good and that sort of stuff. And so by statute, we have to go out for RFP every four years if we don't extend for an additional two. And so we're going to be in the same boat if this is still going on for six years from now. There was a city not in the area that whenever theirs came up for RFP, their bank at the time was on this list. And so they could not renew with them. And so they had to change banks even though they had no problems with their current depositories. So it's been an issue, and again, it's just more work. It's more work on us than we ever bargained for at the end of the day.

Vernon M.D. Lewis (09:44):

Well, good morning everybody. So I'm going to reiterate what my counterparties here on the panel is Senate bill 13 and 19, we all know what that is on the debt issuance side, right? The limits competition, increased prices for taxpayers. But on the liquidity side, as Amy and Phyllis has said, it sucks. I mean the city of Houston has a $2.8 billion commercial paper program and we use that for capital improvement projects. And so when you got banks telling you, Hey, we can't do underwriting business, we're just going to pull out all together, that hurts us in large cities. And so I look around the room, I'm seeing a bunch of bankers, lawyers, prospect vendors that here want to knock on the door and all municipalities up here to do business. What person that really needs to be in the room is the ag and the comptroller because they need to understand how much impact that it does have for City of Houstons as well as Harris County and other municipalities in Texas.

(10:44):

We do have a depository service contract that's having an RP and we're nervous. We have a lot of TPI requests coming in the city of Houston from the attorney general office saying, Hey, what all contracts you got coming in the city of Houston, whether or not there's letter of credits, credit agreements, underwriters or deposit storage service, well, we know that they're actively looking into it. And so we want to make sure how we do that. So it is a big issues here in the city of Houston. I know for a fact being the director of the treasury department for the city of Houston, not only on the debt issuance side, the investment fixed income, I have banks literally today it was like, Hey, can we talk about removing ourself as fixed income? I was like, wait, wait, wait, wait, wait, wait. That's on the underwriter side.

(11:28):

Why are you coming over here? I thought you should be good over here. It's like, well, we just can't do business altogether. We just want to just pull out remarketing agents on our LLSC, they want to pull out as well. So it has a huge effect for municipalities here in Texas. And it's not on the issuance side. And I know all that You guys are bankers. Yeah, we just want to know we had the impact, but municipalities are really having a hard time with this. And on the way up here, I don't want to say this too lively, but I was considering syndicate choices on all the transactions and I was like, wait a minute. We just reused this bank two years ago and the city of Houston didn't have an evergreen system. And we're like, wait, we don't have banks to use. We don't want to put a bank as a lead. If you're on a list and not a lot of banks can do transaction that's on the list. And so far when we see the names coming out of the bond buyer news, it's one bank as another, bank as another bank, and every bank is always on review at this point. So it hurts a business here in the city of Houston for sure, as well as all municipality in Texas.

Karl R. Biggers (12:38):

Anything you all would like to add to that? Okay. So it gives you a little bit different perspective. Again, I think those of us here in this room, we're accustomed to thinking of those two pieces of legislation from the debt issuance standpoint, but clearly to the degree that it causes us problems on our side of the table, it clearly is a major concern and an issue for our clients on the issuer side. Moving on, city of Houston has been in the news quite a bit of late, and with regard in particular to a large refunding issuance that's coming up, would you Vernon give us a little bit of background as to how this transaction came to be and what all is going to be involved with respect to that issuance? Again, you've got a room full of bankers and lawyers here, so everybody's ears no doubt have perked up.

Vernon M.D. Lewis (13:42):

Thank you, Carl. So I was very contemplated of actually mentioning this. This is a very controversial topic, obviously in the city of Houston, and I got to be very careful. I'm looking at, I don't have my communication director here, he's probably downstairs setting up for the city controller for the keynote luncheon. So yes, we're calling it refunding geo deal. That's what we're calling at this point. But back in 2017, there was a pay parity lawsuit with the firefighters in City of Houston where fast forward last year it would favor in the instead of City of Houston. Well, fast forward to the beginning of this year, there has been a settlement agreement essentially two tranches, seven years back, pay of 650 million that's owed to the firefighter as well as a 24% five year forward that's owed to the firefighters. Well, we all know that essentially we're going to have to do what we call a refunding deal geo deal here in the city of Houston while the city of Houston is already facing a budget deficit, about 158 million, 160 million.

(14:42):

Want to round it up. I mean we are running out of upper dollars. We have about 164 million that's already appropriated out of our Tech-star money market account. And so we understand, hey look, we got to issue this. We can't put it out our general fund. Well, if you do the math and all you brilliant bankers and lawyers are in a room, you take 650 million, amortize that off a 25 to 30 years out of coupon rate about five to five and a quarter or five and a half, you're looking at about additional 400 million plus 650 a billion dollars off the rip and not including the four 24% five years. So it does going to put a strain on the city of Houston deficit at this point, but we have to actually get this done before July 1st, FY 25. Our agreement starts on July 1st for both the forward and backward pay for firefighters. So I'm assuming you guys all probably writing it down at this moment like, oh, okay, we got to get to Vernon as soon as get off the stage. And so we are facing at this point, along with other things going to sit decree of United Airlines terminal B expansion, but firefighters in itself is going to cause a huge physical cliff for the city of Houston. And that's all I'm going to talk about it.

Karl R. Biggers (15:58):

That was abrupt.

(16:02):

So next 2024, and again, we're room full of bankers and lawyers. We all want to know what's coming down the pike, not just for 24, the remainder of 24. And I think all of us can attest on the banking side in here that we have been inundated with RFPs since the beginning of this year. Probably any of us can just about write one in our sleep. But the good thing about RFPs is we know that there's going to be some business that follows it, so we'll tolerate it for that length of time. And I've gotten interesting perspectives from my panelists here about how much they love issuing RFPs as well. But that all having been said, let's talk about for a few minutes what is coming down the pike from each one of you for 2024 and into 2025 as well. I know you all have extensive capital plans that need to be addressed in the next few years. So please each one of you take about five to 10 minutes each and just walk us through what you're going to be looking at. Every banker in here I'm sure will be taking copious notes so that we can, as Vernon alluded to run up to you right after you come off the stage.

Phyllis Garcia (17:28):

Okay, I'll start. So for the San Antonio water system, I mean obviously we're very capital intensive to provide our water services. And I look back over the last, we do obviously an annual budget and then a five year lookout, and then we have a 20 year model. And I went back and looked and for I would say the last five years, every year we said for the next five years it's about a 2 billion budget or a 2 billion capital program, and about half of that would be debt funded. Well, in our 2024 program, it is over a 560 million capital program with about 350 million of that being funded with debt. But we are starting our budgeting process for 2025 now and looking forward and that budget for our five-year. CIP has grown from about and two and a half billion to now 3 billion over the next five years. And that's a combination of obviously important projects, but I do think inflation has a lot to do with that. I mean, cost for everything is increasing seeing, I mean not just on the capital side for pipes and everything like that, but also our operating and maintenance budget is increasing because of inflation.

(18:58):

So we are looking for, obviously again, we are just just a water system, not a county in a city who has much larger programs, but we do have a lot of needs and there will be quite a bit of funding. We thought our capital program would start decreasing as our consent decree. We are coming on the end of our consent, our tenure year consent decree, but the needs are just increasing. So we're looking to expand on our repair of our water pipes to help offset non-revenue water. We had a record year of main breaks last year due to the dryness of the ground. The shifting cause a record year of main breaks, which caused obviously a lot of non-revenue water. And while we did have our consent decree focused on our sanitary sewer overflows, that was mainly on our mains. Well, now we need to go back and look at our treatment facilities.

(19:59):

So we do have a capital program for our treatment facilities, which is quite extensive. And while I think saws has done a great job in securing water for our future, we've had growth averaging 2.4% over just the last three years. And with the drought, our water supplies were pushed to the limit last year. So we even have to continuing to look for new water supply and expanding of our water system. So those are kind of the projects that we're looking for, which every year, I'm sure it'll grow every year, but there are quite a few needs just in the San Antonio area.

Amy Perez (20:43):

So Harris County is no different than any other city county in Texas. Everybody's growing and our infrastructure needs to grow with it. We have several things going on this year. We have our toll road is going to be issuing 950 million this year to meet their capital needs and they're projecting billion and a half in needs next year. So I mean, I do think that we'll probably be in the market fairly often over the next few years just for the toll road. As you know, flood control went out in I think 2017 with two and a half billion dollars worth of voted authority for different flood projects. It looks like we are not going to be in the market this year for that. They're going to be spending down some of their bond proceeds from last year. But we do anticipate probably calendar year 2025, beginning in the calendar year, we'll probably be back in the market for flood control and that'll be based on their ramp up in spending this year. So we're going to be in the market for Road and PIB this year. We're looking at 650 million thereabouts for pib, 200 million for road.

(21:58):

We went to the voters in 2022, and so we have additional voted authority for both roads and public safety and one more. Let's see, other one. I can't remember the other one now. Anyway, so we're going to be issuing different bonds for things like that. We have lots of other projects kind of going on in the background, has to do with some of our hot funds with this possibility. We're going to be building a new jail in upcoming years, so we'll have a significant amount of needs there. Our liquidity programs, we're always going out looking, we have two rps on the street right now for liquidity program liquidity providers, so hopefully everybody has received those if that is a service you provide. If you did not get one, please let me know because we are looking for 'em.

(22:55):

Yep. And what else are we doing? So I mean, our CIP is just growing year over year. We have a lot of things that need to be updated, maintained as far as infrastructure goes. And so we only see those needs increasing year over year. And we're having intense conversations with engineering and all the folks actually doing the projects to have a better idea of what their cash flows look like so that we can try to put in some financing in place to meet all those needs. I guess the only one I haven't talked about yet, and probably what a lot of people are wondering about is what happened with Harris Health. So Harris Health went out, did voter authority last year. We did do an RFP for that, and we have not done anything at this point. So as of right now, we have asked the folks at Harris Health to kind of go back and look at their project list, really get a good understanding of what they need issued upfront, just to make sure they can spend it in a timely manner. So they're looking at doing maybe some interim financing to start with and then we'll be taking that out with bonds possibly next year. So that's kind of the update on where we are with that. But again, nothing necessarily in the works at this point. We're just kind of still doing a lot of research and good understanding in the inside right now.

Vernon M.D. Lewis (24:29):

So what does the city of Houston's not doing? Obviously we have a refunding deal for our Geo 650 million back pay. We have do have commercial paper outstanding, so that deal size could be north of 700 800 million. That will be halfway to happen before July 1st. We also have a terminal B expansion project that's happening also at the end of this year, probably in the summertime, July June, along with a GARP deal. So it'd be about 150 million CP takeout possibly what a new money piece attached to it. Then the City of Houston of more likely is going to complete a trans. As I mentioned to you earlier, thera dollars are kind of depleting at this point. We only have about 164 million outstanding. That which is already appropriated and a dollars essentially has to be expired by December of 2026. And so in addition to all those three, we do have a potential c and e deal. Houston First Deal, Houston first is going to do a huge revamp of their convention center, hopefully by the end of this year. And that deal could be a north of $400 million. And on top of that, and I'm looking at Dave Bradshaw over there, we're going to eventually try to entertain the idea of terminating our swaps. Once that mark, the mark number goes down. Other than that, that's pretty much it that's happening here in the city of Houston.

Karl R. Biggers (25:50):

Anybody leave out anything?

Phyllis Garcia (25:55):

I mean, part of our portfolio, we do have one swap that we actually refunded with our commercial paper that's still outstanding. We obviously get updates on that, but we're not quite there to terminate that swap. We also have some Babs, but it's a very small portion of our portfolio, just a little over 101 million. And while they may make sense to take out our refund, we're still a little hesitant to do that yet. Obviously we mentioned our capital needs going forward, so we need investors as well. So we don't want to anger too many investors by taking those out. I will say sequestration has impacted us a bit, obviously with the reduced subsidy. I mean think, knock on wood, we're a larger utility, so we are able to absorb that sequestration as well as the delay in receiving those payments. Obviously, COVID caused a lot of issues, and we even had one subsidy that we didn't get for over a year. So going back to the, it's more administrative work. So while it might make a little sense, again, there's other factors involved in that. That's kind of the other items that we look at as well.

Vernon M.D. Lewis (27:23):

So Carl actually reminded myself about one thing that came into the city of Houston Pocket eventually. The city of Houston. Well, city of Houston passed in agreement back in October. Were all of the TURs for the City of Houston funnels through the working group. So what that means, right, not only at the city of Houston will have the opportunity with the syndicates of the TURs, all the projects and debt issuance because the TURs is a component unit in our comprehend annual report. And if the TURs dissolve, the liability falls on us. And so not only we have the four credit combined utilities, C and e Geo and airport, we also have all 27 TURs. And so that will be coming down the pipeline or all that debt issuing projects. So stay tuned.

Karl R. Biggers (28:17):

Amy, anything else?

Amy Perez (28:17):

I don't have anything else.

Karl R. Biggers (28:26):

Okay. With that, we'll open the floor for questions.

Vernon M.D. Lewis (28:34):

Trust me, I won't bite.

Karl R. Biggers (28:39):

No questions. Very well. Thank you all. Oh, wait, wait, we've got a question. We've got a question.

Speaker 6 (28:55):

New chemical regulations, Any reaction?

Phyllis Garcia (29:01):

So obviously saws, all of us have to test our water on a regular basis. Actually, there was just a news article I saw this morning that while for San Antonio, for San Antonio Water System, we have found that we are probably not going to have to require treatment of our water. I mean, most of our water comes from an aquifer that gets filtered kind on its way down. So we have to actually do very little treatment of our water. However, I think going back to the cost of that additional testing is what's going to be an impact.

(29:43):

Again, please don't quote this number, but the additional cost could be up to a million dollars just to do that extra testing on that. And then the other, what I'm calling unfunded mandates as our lead and copper rule from the EPA saws is kind of doing testing on our facilities, on our mains. And we feel very strongly that there's no lead in very little to no lead in our pipes. However, the EPA is requiring that you know what the homeowners on the other side of the meter, and that is going to be a very difficult challenge because not only we are in Texas and there's private property, so having to go on to a private homeowners property and test that is going to be very difficult and very expensive. So we are still working through that process on how we've been managed that. And so that's still more to come on that, but that's one concern that we have on these regulations that are coming down that have no funding tied to those.

Karl R. Biggers (31:05):

Other questions. Hearing none. Thank you all.

Phyllis Garcia (31:13):

Thank you.