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Nancy Feldman Reflects on 30 Years of Muni Credit Analysis

Nancy Feldman has made a career of responding to times like these.

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A veteran of more than 30 years in public finance, Feldman has guided issuers through the upheaval of 1986 tax reform, helped Goldman Sachs respond to Orange County’s 1994 bankruptcy and the 1998 collapse of Long-Term Capital Management and mitigated New Jersey’s risks on a $3 billion swaps portfolio roughly 10 years later.

Now a managing director of public finance, credit strategies, at Wells Fargo, she works with clients to get better ratings at a time when credit concerns have again gripped the industry. As the market watches the struggles in Detroit, Puerto Rico, Rhode Island, Illinois, Harrisburg, Pa., Stockton, Calif., and Jefferson County, Ala., she says one step to avoid is getting locked into the thinking and processes of the past.

“Just like anything you do, if you’re not changing and evolving and thinking and being creative, you get stuck,” Feldman said. “You don’t stay in the same business for as long as I have — even if I’ve been in different seats — if it’s exactly the same as it was 30 years ago. You do things differently, and you try to learn from different sources.”

Feldman emerged into the working world in 1982 armed with a degree in economics from Albany State University, a Bond Buyer red book and an analytical mind.

She got her introduction to local muni credit coverage, mostly in New York and Connecticut, at Roosevelt & Cross. Feldman covered counties, cities, towns and school districts, learned how to analyze official statements and write credit reports for the firm’s sales force.

She left in 1984 to join Standard & Poor’s, where she stayed until 1992. Working in the tax-backed group, Feldman followed general obligation credits in a variety of non-contiguous states. She also gained some perspective from the tax reform of 1986, during which time S&P applied some innovative ratings investment banks concocted to get out ahead of tax reform.

Feldman remembers working on early letter-of-credit and pool transactions. Tax reform meant “a big upheaval,” Feldman said, as rating agencies responded to what issuers, investment bankers and law firms were doing through the ratings process.

“Something changed, and everybody rushed in to take advantage of the existing law,” she said. “And then after that, they said: let’s figure out how to do this, as you couldn’t do a blind pool. And you couldn’t advance refund a not-for-profit higher-ed deal more than once. There were all kinds of changes that needed some time to be assimilated into the business.”

She also met people there who’ve remained industry colleagues to this day. Robin Prunty, a managing director in the public finance department and lead analytic manager for U.S. states, education and health care practices, at Standard & Poor’s, has known her 26 years.

In the late-1980s, Feldman trained her, as well as many on the analytic staff at S&P, during the five years they worked together, Prunty said. She also mentored Prunty, who joined the firm straight from graduate school.

“She was a very detailed and thorough credit analyst,” Prunty said of Feldman. “She really provided a lot of the foundation of analytic development for a lot of the junior staff. And as a mentor, she provided a lot of professional guidance, as well.”

In 1992, Feldman joined a boutique bank in New Jersey that specialized in high yield. There, she did some single-family housing analysis, worked on structured transactions and helped support secondary-market trading operations.

It closed in 1994, after the Federal Reserve, under Chairman Alan Greenspan, raised interest rates.

Later that year, Feldman joined the credit group in the muni bond department at Goldman Sachs. She worked on the Goldman team that participated in the Orange County bankruptcy in 1994.

Navigating that storm, Feldman made note of several lessons: don’t assume that everything in muni credit formerly believed to be true is in fact true; be open to creative ideas to solve what might seem to be unsolvable problems; and bondholders and lenders represent one set of interested parties in a distress situation, but not the only one.

“It seems that all the bankruptcy and distress situations that we have observed over the past several years have encountered at least some of these elements in their path toward resolution,” she said. “Of course not all these situations have yet been resolved.”

Four years later, the large hedge fund Long-Term Capital Management collapsed, requiring the Fed to organize a $3.6 billion bailout. Though the crisis didn’t involve munis, Goldman mustered its credit department to ensure its portfolios’ exposures to counterparties were properly managed.

Feldman, whose responsibilities within the credit department included municipal derivatives, and later swaps, covered Goldman’s global swaps book with employees in different regions. Post-Long-Term Capital, derivatives grew in prominence as an investment vehicle within the financial markets.

Afterward, she took responsibility for swap credit risk analysis, important for evaluating the portfolio’s stress-tested exposures and resulting credit risk. Feldman helped check volatility and understand trading strategies, as well as how much credit Goldman would extend to any individual counterparty with or without collateral, she said.

The challenges and learning experiences continued as Feldman left Goldman in 2006 to work as the director of the office of public finance for the State of New Jersey, under then-governor Jon Corzine. As the debt manager for the state, she was responsible for all aspects of bond issuance in New Jersey, managing the state’s derivatives portfolio, overseeing debt reporting, and maintaining investor, rating agency, and bond insurer relationships.

“I had an opportunity to go into the public sector and practice what I’ve been preaching, to some extent,” she said.

One of Feldman’s biggest tests, her office had to remediate the state’s more than $3 billion in auction rate securities, as well as almost $4 billion in swaps associated with ARSs. She did much of that in 2008, with a couple of pieces spilling into the following year.

Feldman’s office made intermediate changes to stabilize New Jersey’s portfolio. But some of the fixes were temporary, requiring her office — as well as that of her successor — to continue modifying the portfolio to minimize risk.

When the ARS market first showed signs of trouble in early-2008, Feldman’s office was able to monitor it carefully ahead of time. And it was nearly ready with a plan when the first failure occurred in February.

“There are certain limitations on when you can enter the market,” she said. “And you had to do some procurements; we brought in some banks to do some LOCs. We also had to modify a number of derivatives to try and minimize the impact of those on cash flow. Things didn’t happen immediately, but we had some bonds in the market probably by April of 2008, and did a number of transactions in the April-May timeframe, because the state budget [was] being adopted at the same time.”

Through it all, New Jersey didn’t lose any money, as far as Feldman was aware, though there was a change in cash flow, because it couldn’t replace those investments.

Her role with the state ended shortly after Corzine lost his reelection bid in 2009.

The next year, Feldman joined Wells Fargo to do credit work on the investment banking side of the firm’s public finance department.

She works with clients on their credit ratings and with credit structures to maximize the outcome of their rating process when they create new products. She also provides some of those strategies to the transportation investment banking group.

She brought valuable skills to the bank, which ramped up its muni business significantly around the time she arrived, according to Peter Hill, head of U.S. Public Finance at Wells Fargo. The firm has been able to build on her experience as a former issuer, rating agency analyst, researcher and dealer, he said.

“She is able to provide that chemistry across various groups geographically, and all of my sectors: transportation, higher ed, etc.,” Hill said. “So, she spends a lot of time around the country helping the various groups with client matters. With a lot of the discussions around muni financial duress, she is a very important lynchpin in a lot of our client discussions.”

In 30 years of credit research and analysis, what has changed?

“Reporting is better; transparency is better; timeliness is better,” Feldman said. “All the things that are still issues on the table are dramatically better than they were back then.”

Early in her career, she remembers reading a 25-page official statement in about 15 minutes and knowing everything she thought she needed to know. No longer.

“Today, when you look back, you realize: I didn’t have every piece of information I needed,” she said. “But that’s what our market did back then. Things are very different now in that respect.”

When half the market was insured, credit analysts looked at the uglier credits, the really difficult credits, Feldman recalled. They didn’t have an opportunity to do much else.

This doesn’t excuse credit ratings agencies’ shortcomings that played a part in the financial crisis, Feldman said. But it goes some way to explaining their role in the breakdown.

Ratings agencies were an important backstop for the investing public; they were paid to inform investors of the risks involved in fixed income securities. But in retrospect it appears they failed in bestowing high ratings to subprime mortgage-backed securities.

In her eight years at S&P, which ended in 1992, the ratings agency operated in what felt like a very transparent way, Feldman said. In retrospect, she added, it wasn’t nearly as transparent as it is under the Dodd-Frank Act.

“At the time, we thought we were doing a good job,” Feldman said. “Remember, back then, there was no asset-backed market, or CMOs or CDOs; they didn’t exist. It was a big deal to do a deal that was backed by a letter of credit.

“And so, as all of these markets have evolved, their job has been to try and stay with the markets and try and come up with their strategies. And unfortunately, there were some things that, in retrospect, didn’t work out as they had anticipated.

“But I can’t say that you want to heap all the blame on them,” she said. “Things are changing. And just like everything else, they’re adapting to this new environment.”

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