The Bond Buyer sat down with NewOak's corporate municipal group's managing directors: the newly hired high-yield pro Triet Nguyen and Chris Foster, known for the open source model he applied to the Puerto Rico Electric Power Authority. We discuss Nguyen and Foster's quantitative approach to munis, how they are getting cross over investors interested in municipal bonds, and why they are looking at the military housing sector.
The Bond Buyer: Chris and Triet, NewOak aims to provide fundamentally driven credit-based portfolio surveillance, research and analytics to banks, insurance companies and asset management firms. What about your approach differentiates NewOak from other research groups in the muni market?
Foster: What we're doing here is kind of what a corporate asset manager would do. That's the type of surveillance we're going to offer, that's the type of analysis mentality of surveillance packaging [our clients] are going to get.
BB: What are you applying from being a corporate asset manager to the municipal market?
Nguyen: We're bringing a more quantitative approach, with more fundamental research. Traditionally the municipal space has been a little too heavy on qualitative analysis, a little light on cash flow modeling and we want to change that. And the timing is actually good because we now have to address this new crossover audience, they need to see that disciplined research approach. You see that particularly with Puerto Rico: the first question I always get from the hedge fund guys is "do you have some model for this?" That's why I think this blending of corporate and traditional muni research techniques that NewOak is putting together is very timely.
Foster: To me when I [began examining the muni bond space] I said 'what do you mean you can't get all the documents? Why can't you get the financials.' Just the general questions any corporate guy would ask. What do you mean it does not exist?
BB: What does your model bring to the table that you can't get from a general, analytical report?
Nguyen: Our forecasting approach, I believe, which is made feasible by our technology platform. Instead of just looking backwards at numbers that may be 18 months old by the time they come out, we want to try to project forward. Of course many of my muni peers use forecasting techniques too , but we think we have a little edge technology-wise.
Foster: It's kind of like saying goodbye to the old way of municipal analysis, and now we're just going to stick to our guns and say in order to truly understand your risk over time [you need to forecast]. Once you're able to start looking at things more on a forward looking, more on a performing nature, you're not only going to get better credit opinions but you're also going to start getting tiering in the market. One of the wonderful things we learned from Puerto Rico is yeah, guys want you to see it and see forward. And our model allows you to change your scenarios so you can see what your upside and downside risk is, and what your elevated value is.
BB: Do you plan to expand the modeling approach beyond PREPA and Puerto Rico credits?
Foster: What's the difference between that scenario and say, Chicago skyway or Philadelphia schools, or anyone that has cash flow and long-term liabilities and especially, is running a deficit. Governments are very much a 'this year we're going to this and then next year we are going to do this and roll off.' So the taxes roll off, fine, but what do you look like then? I know what you looked like 360 days ago when these numbers were real, but what do you look like forward? Now that you're able to start pulling in a lot of the monthly and quarterly, very local economic data, and population based data, demographic-based data you really can start updating more of a pro forma-based, more of a real-time model. For the entire market I think it's not about what you know now, it's about what you already know you don't know.
BB: What are some of the challenges with applying a corporate approach to muni?
Foster: How do you wake up in a market with 55,000 issuers and do it just like the corporate market where there are just 5,400? You can't. But you got to start somewhere, and we are starting somewhere. But we're trying to do it with technology and an up-scaling ability.
BB: What is your goal for this model? What do you want it to provide your clients?
Nguyen: We want the analysts to spend time on actually assessing the risks and doing the actual analysis rather than running around and collecting data all day.
Foster: In order to have anything scalable you really have to make sure that for your analyst pool that all the information is kind of right there for them. So they spend their time looking at the risk rather than this gigantic data universe where you are hunting for information all over the place and you're spending you time typing in numbers vs. thinking
BB: Have you been able to attract some on your more corporate clients into munis by providing this type of analysis?
Foster: I'm not a broker dealer, I'm not trying to buy or sell so what happens is you come in with and analysis and they see it and [the clients] say "can you just go ahead and do these for our corporates as well" because it's the same mentality. One of our larger clients did just that. And we have some of those client-mentality type of guys who come in and are more special situation, who say "we're looking at this, can you do what you do on this name -- or this situation?"
BB: So in the portfolios you currently oversee, there is just no PREPA or is there absolutely no Puerto Rico in them?
Foster: We don't have PREPA or Puerto Rico currently.
BB: Are any of your clients expressing more interest in high-yield credits now that you have joined, Triet?
Nguyen: Well, I'm just getting started, but in fact I'm bringing some high yield clients over.
BB: What other areas of the market is your group focused on?
Triet: We've developed something of a special expertise on military housing. It's a very poorly covered sector.
Foster: We've had a few clients that have military housing portfolios. On a broader book they have a good sub pocket of military housing. In that space unless you have the documents you're the holder and you can't get any of the information. There are only about 50 issuers and it's kind of closely held. Trading volume had dropped to nothing, no one can get out of anything and the bid-offer is just blown out because of a lack of liquidity, a lack of information.
BB: Are your clients trying to get military housing off their portfolios?
Foster: Right now they are just monitoring it, they have kind of moved out of one or two positions in the past. It's surveillance and oversight. However, once you've boarded an issuer, once you're overseeing an issuer it does not matter if it's one client or 15 clients, it's a nice small niche space. And we've got a good amount of coverage within it. It's been able to have been broadly utilized. So we're kind of building out of that.
