Hilltop sticks close to clients in turbulent municipal bond market

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Scattered across home offices by the coronavirus pandemic, Hilltop Securities is managing to serve clients in a bond market struggling to establish a new normal, its top executives say.

“I think we’re doing it exceptionally well,” said David Medanich, vice chairman and public finance manager at the Dallas-based firm. “I think they’re getting accustomed to working from home like this. We’re working on multiple large transactions, including one for $75 million and one for $200 million. It’s not perfect, but it surely has not stopped our business.”

"It’s not perfect, but it surely has not stopped our business,” Hilltop Securities' public finance manager, David Medanich, said of the work-from-home situation.

Hilltop's tech department was prepared for a disruption such as this, though the form of the "black swan" event was unknown, Medanich said.

Since beginning his career in the early 1980s, Medanich has seen some major turmoil in public finance, including the 1986 tax reform that coincided with an oil market collapse that wiped out Texas-based commercial banking.

The current crisis in the Southwest has been compared to the late ‘80s in that the oil market is falling in tandem with the COVID-19 global economic shutdown, two years after federal tax reform.

“It’s kind of a double whammy,” Medanich said. “We represent a lot of issuers in West Texas. The price of oil also drives what’s happening in Houston.”

To help keep struggling health-care providers in operation, Hilltop is offering free financial advisory services for any community-based hospital with 75 beds or less in Oklahoma, New Mexico, and Texas.

“While Hilltop Securities cannot assist doctors, nurses or technicians in their health profession, we can assist their hospital or health system in helping to address the immediate financial needs caused by its impact,” Hilltop chief executive Brad Winges said in a news release.

Hospitals, including those in rural areas, are particularly endangered as they forego elective procedures to deal exclusively with the epidemic.

The federal Coronavirus Aid, Relief and Economic Security (CARES) Act, the $2.2 trillion federal package signed into law on March 27, contains several provisions for U.S. not-for-profit hospitals that will support their operations and help provide access to critical supplies.

Key provisions include $100 billion in funding to compensate for lost revenue and coronavirus preparation costs, increased Medicare reimbursement, and liquidity support through advances on future Medicare reimbursement.

“While the extraordinary level of federal aid offers the sector some relief, it is unlikely to fully cover the material revenue decline facing hospitals as a result of the pandemic, and cash flow will likely be materially lower for the next several months,” Moody’s Investors Service analyst Daniel Steingart wrote in an April 3 report. “As such, our outlook for the sector remains negative.”

Smaller, single-site hospitals may face near-term liquidity challenges because many are unable to access alternative capital sources such as bank lines, according to Moody’s. Even those hospitals with only a few COVID-19 patients may suffer significantly because of the suspension of elective services.

“The impact of these suspensions will likely be more pronounced for small hospitals than for larger systems with more flexibility in their operations,” Steingart wrote. “If these credit effects materialize, ratings will face the possibility of negative outlooks or downgrades, with the degree of movement depending on the severity of a hospital's situation.”

Hilltop has clients at ground zero in West Texas oil fields.

In the heart of the Permian Basin, the Midland County Hospital District has recorded two COVID-19 deaths at Midland Memorial Hospital, where 31 patients have been treated.

A Brookings Institute study found Midland to be the most vulnerable metro area in the nation to the economic crisis. The neighboring city of Odessa ranked fifth and the border city of Laredo ranked sixth, based on the industry sectors most at risk.

Last month, the Midland County Hospital District voted to postpone its May tax election due to the uncertainty over the ability of voters to congregate at polling places.

Tom Kozlik, head of municipal strategy and credit at Hilltop, cited studies that showed someone hospitalized with COVID-19 costs hospitals on average $73,300 per case.

“The total cost of this inpatient care, again we think this is a high-end estimate at least for now, could cost the healthcare system between $362 billion to $1.449 trillion in charges, depending on the incidence rate of the infection and how well social distancing is maintained,” Kozlik wrote in an April 7 commentary.

Kozlik’s arrival in 2019 was part of Winges’ mandate to raise Hilltop’s profile four years after the firm’s creation through the merger of First Southwest Co. and Southwest Securities. Kozlik has become a regular on financial media and produced a trove of market commentary. Winges recently marked his first anniversary at the firm, in a year that ran from deep decline in bond volume in 2018 to the coronavirus pandemic in March.

As the perennial leader among municipal advisors in the Southwest, Hilltop ranked third in the nation in the first quarter of 2020 behind Public Financial Management Inc. and Public Resources Advisory Group. Hilltop accounted for $4.93 billion and a market share of 6.6%, versus $5.02 billion and 7.7%.

Amid the recent upheaval, Winges managed to bring First Southwest veteran Michael Bartolotta back to Hilltop from Citigroup, where he played a part in keeping Citi at the top of the senior manager ranks in Texas for three years in a row.

At Citigroup, Bartolotta worked five years as managing director, including head of municipal banking solutions and head of the company’s public finance regions. He will be senior managing director in the Houston office, which is in rebuilding mode after the departure of former managing director Drew Masterson and his associates who formed Masterson Advisors. That split came after then Chairman Hill Feinberg decided to represent traditional school districts exclusively, leaving charter schools to Masterson’s firm.

Medanich said Hilltop plans to expand the Houston office despite the economic downturn and has no plans for layoffs.

While industry leaders are trying to quantify this economic collapse, writers such as Kozlik recognize the need to put the event in some kind of historical perspective nearly 12 years after the 2008 global financial crisis.

“The last four weeks in March 2020 have been far and away the most eventful that the financial markets (generally) and the municipal market (specifically) have experienced in recent memory, and perhaps ever,” Kozlik wrote.

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