Transcription:
Mike Scarchilli, Bond Buyer (00:00:05):
Hi everyone and welcome to The Bond Buyer podcast, your essential resource for insights into the world of public finance and municipal market strategy. I'm Mike Scarchilli, editor in chief of The Bond Buyer, and in this episode we take you to our July 31st virtual event, the Shifting Muni buy-side, which can be seen in full at bondbuyer.com/event-archives. But in this episode, we'll focus on a timely panel discussion out of the event titled Muni Buy-Side Amid Policy Changes and Alternative Investors, moderated by Paige Litton, director of Public Finance at Assured Guaranty. The panel features Hector Negroni, founder and CEO of Foundation Credit, Julie Morrone, partner at Rosemore Management and Timothy Self, Managing Director at JP Morgan. Together they explore the forces disrupting the municipal market in 2025 from tariff threat and tax uncertainty to grant recessions and the retreat of regional banks and discuss how alternative investors and private capital providers are stepping in to meet the growing demand for municipal infrastructure financing.
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Let's get into it.
Hi everyone, and welcome to the Shifting Muni Buy-Side, a virtual event presented by The Bond Buyer. I'm Mike Scarchilli, editor in chief, and I'm delighted to welcome you to today's program. We have a packed agenda ahead with two other can't-miss sessions. Later this afternoon we'll dig into the high yield muni sector where panelists will assess how this part of the market is weathering higher rates, rising volatility, and growing policy uncertainty. And then we'll close the day with a forward looking discussion on the explosive growth of ETFs and separately managed accounts and how those shifts are forcing investors, underwriters, and deal teams to rethink strategies across the board. But first, we'll kick things off of a panel called Muni buy-side, amid policy changes and alternative investors in a year marked by volatility including renewed tariff threats, tax policy shifts and tighter federal grant programs, credit dynamics are shifting dramatically for issuers.
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We'll hear from our four expert voices about how these pressures are reshaping the market and the investment landscape and drawing new players into the muni space. On panel with us today are at Paige Litton of assured guarantee, Julie Morrone from Rosemawr Management, Hector Negroni of Foundation Credit and Timothy Self of JP Morgan. They'll help us understand what's driving this evolution and why the broader market should be paying close attention. Before we get started, just a few quick housekeeping notes. Give a big thank you to our sponsors Assured Guaranty and BAM Mutual. And for those seeking CPE credit, you must remain the full duration of each session and respond to all polling questions. And then to complete the CPE and evaluation form afterwards by Tuesday, August 5th. And please also note that CPE credit cannot be awarded for watching session replays on demand. Now, with that all said, let's get things started with our opening panel.
Paige Litten, Assured (00:03:23):
Okay, great. Thanks very much Michael, and thanks everyone for joining us today. Really excited to kick things off here and start this discussion. We do have a lot to talk about and as Michael touched on in the introduction today, we really want to talk about the investment landscape in the muni space and how that landscape is shifting and really continues to shift as we move throughout 2025 with a special emphasis on alternative investment and how alternative investors are entering and really continuing to play a very big role in Munis as this landscape continues to shift. So I want to get the discussion started and kind of talk about the market, the backdrop and what we're seeing. So Hector would love to kick it off with you and get your thoughts. The municipal market has gone through several volatile years, going back to even 2020 and the start of COVID and the first half of 2025 continues to really bring a lot of shifts again to the landscape. So curious to get your thoughts on how the muni market is different now than it was say five years ago. What's the same? And really how these changes have opened the door for the application of alternative capital.
Hector Negroni, Foundation (00:04:36):
Thanks a lot. Thanks to the bomb buyer and thanks to assured for convening us here. When I think back and I make a juxtaposition to the 2020 time period, I think about four big changes to the marketplace that are relevant mostly for us on the screen here, not necessarily for every investor. First and foremost, base rates are higher. That's a lot nicer when we have a high hurdle to making returns on our capital from alternative investors. The challenge of doing so when the 10 year notes at 1% is pretty hard. So base rates being higher have been opened. The opportunity set up a lot of more for us. Secondly, is probably what for me, the most profound market structure change has been how the market continues to be consolidated in retail and then even more passive investing style. And what I mean by that is over the last five years, I'm going to throw a number out there that's kind of big, maybe a half a trillion dollars of mutual fund assets.
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Hazards have been replaced by SMAs and ETFs. It's a multi-hundred million dollar impact. And if you think about what the consequence of that is, you're one step further removed from active management. So that means there's an extraordinary concentration of passive long, only largely defensive and conservative that doesn't play offense in the marketplace. Thirdly, the money's been spent from COVID. There's fewer resources. I don't know that we're necessarily immediately facing a negative credit cycle as much as the positive tailwinds to mostly dissipated. And so that means issuers projects all face a renewed set of challenges for how they're going to fund and finance themselves. And then lastly is there's been an extraordinary amount of policy shifts, whether it be the most recent, there was a tremendous amount of large yess from the federal government, that's all now. The tide has come in now and that's all been done in many ways, pulled back, whether it's the rescission packages or some of the addressing of certain policy measures which we'll cover later, or even in some ways its impacts on even the banks. And Tim can speak to that in some ways. While the largest banks are still involved, local banks are retreating more and more from our marketplace. And so that means the landscape is much more open and available for alternative capital to be a solutions provider for an unchanged if not growing quantum of financing needs.
Paige Litten, Assured (00:07:12):
Great. Really appreciate those comments, Hector, and I think that sets us up really nicely for the meat of the discussion today. Before we get to our next question, I do just want to pause and go ahead and ask our first CPE audience questions. So Lynn, I'll turn it over to you for that.
Lynne Funk, Bond Buyer (00:07:31):
Alright, so the question is, what policy shifts from Washington concerns you the most for the public finance industry? The rescission of federal funding to various sectors such as higher ed B tariffs and their effects on construction costs, C cuts to Medicaid D, the overall cost of the OBBA and the federal deficit E, I'm not concerned about any policies and we'll give the folks on the line a few seconds to answer this as this shakes out. It's a nice segue question for this group. Alright, alright, I think we've got a quorum here. Alright, so I'll let you all know the percentages. What concerns you most policy-wise for the public finance industry? The rescission of federal funding to various sectors such as higher ed is 23% tariffs and their effects on construction costs 25%, cuts to Medicaid, 23% D, the overall cost 24% E I'm not concerned at all. Interesting response there, Paige. I'll kick it back to you.
Paige Litten, Assured (00:08:45):
Great, thanks. So yeah, I mean it sounds like there's kind of a lot out there and there's kind of an even split on what everybody is concerned about, which I think is totally fair, totally understandable and definitely makes sense given the dynamics that we're seeing. That does go nicely into our next question and we've talked about this a lot, but one of the major focus points this year has been on some of the policies implemented by the new administration, whether it's the tax and spending bill or the announcement of tariffs or many others that continue to be floating around. So Julie would love to get your perspective on this one. How did these policy changes change things for you and your team? And do these policies create more opportunity for private capital?
Julie Morrone, Rosemawr (00:09:41):
Well thanks for having me here today. Yeah, I mean this administration's policies have impacted the market in a few ways and firstly it's contributed to volatility, right? I mean we saw in April long MMD swing 85 basis points within a couple of days, very similar to what we saw in 2020. If we want to look back five years ago when MMD spiked 105 in a week, and in both cases, interestingly, the market stabilized because of federal policy, right? In 2020 we had the CARES Act passed and 2025 there was a pause on tariffs. But that volatility in and of itself creates an opportunity for private capital. We have found that borrowers want to know ahead of time what their interest rate is going to be. So for example, when we at Rosemawr give a term sheet to a borrower, they know that's the rate they will get when they price regardless of what happens in the market in the interim, right? So we have found that borrowers and bankers appreciate that certainty of execution and you get that with a private deal. Now, with regard to the OBBA municipals were remarkably unscathed, but as we know, they were meaningful changes to Medicaid and I think it's going to make it more challenging for some hospitals and I think analysts underwriting metrics will have to adjust to reflect that increased risk, particularly on the revenue side.
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The other dynamic in that sector though has been the pullback by the for-profits. There were eight m and a deals in the second quarter of 2025, and that was all among not-for-profits. So we may see more tax exempt financing for that purpose. And again, I see private capital being increasingly relevant there also, I mean I wouldn't call it policy per se, but we touched on this a little bit. This administration's aggressive use of grant rescission to further its policy goals is something our market has never encountered before. It's an unpredictable risk, difficult if not impossible to forecast or quantify, but that loss of federal grants we've seen it has made a number of issuers, particularly on the higher ed side, try to shore up their liquidity in the bond market and also I think in the loan market. So again, this all sets the stage for more engagement with alternative lenders.
Paige Litten, Assured (00:12:42):
Great, thanks Julie. We all talk about volatility and I know that backdrop that you set out when you're talking about the administrative changes that we've seen that are impacting our market, we talk about volatility and in times of volatility, liquidity does become one of the most important words and we have seen a trend this year in general where the dealer community is holding less inventory and then we also have some buyers simultaneously holding fewer munis because of these tax and regulatory changes that we're looking at. So Tim would love to turn it over to you now and get your perspective on this. How have things changed from your seat and how differentiated is bank capital in this environment?
Timothy Self, JPMorgan (00:13:29):
Yeah, and thank you for including me in the panel. So I think on the bank balance sheet side of the equation, I mean I'll echo a few of the comments that Julia and Hector have made. I think we've certainly seen a pullback from some of the regional banks in terms of them being less active than they were a few years ago. A few years ago I think we saw a lot of the regional banks deploying a lot of capital, sometimes writing loans that were 10, 15, 20, sometimes 25 years in duration. My view typically of our book and the bank book is that we're typically a five years and in portion of the curve, by definition, what we're doing on the bank side is largely illiquid. I mean, our book is roughly 28 billion of various types of credit commitments. We hold it in loan form, it's not marked to market.
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So it is generally very illiquid, roughly a third of it churn each year. So really the only chance we have to reposition ourselves is when positions roll off and we can reposition as a result of that. I think generally what I would say is that we're generally product agnostic in a way at JP Morgan because we have a part of the business that obviously focuses on issuing an underwriting long-term fixed rate debt, and then we have the direct lending book, which is more focused on providing private capital type solutions. But I think as we've seen more volatility and pullbacks in certain sectors and we've seen public market issuance maybe or public market investors potentially get more defensive. I think that has certainly driven more flow into the bank book. So we've mentioned areas like ports where tariffs have had a big impact. We're seeing certainly more interest in healthcare and higher ed.
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And then just the general theme of infrastructure more broadly. And once again, I think the bank markets potentially being a little bit more flexible or the private markets being more flexible in terms of being able to fund projects that are in the construction and stabilization and ramp up page. And then those projects are turned out once they're fully built and stabilized. So I think from a bank perspective, we're typically less concerned about liquidity, more concerned about the return on equity of the positions that we're in, and then also just being very proactive around how we underwrite risk and how we monitor that risk once we own it, given that it is very, very difficult for us to trade out of the positions that we're in.
Paige Litten, Assured (00:16:27):
Okay, great, thanks. I guess just one follow up question for you, Julie. Curious, are you seeing more activity in smaller deal sizes given that banks are holding less capital on their balance sheets?
Julie Morrone, Rosemawr (00:16:40):
I don't think there are any small deals anymore, and I'm being mildly facetious there, but construction costs are higher, interest rates are higher, so that means cap I is higher debt service reserve funds are higher. For example, we do a lot of work with charter schools, and I did a little research on, because I knew you were going to ask this question, and in 2020 the medium par amount of deal for charter school was $16 million. And I did a back of the envelope calculation this year in 2025, I went through MuniOs and added up the deals. The average deal side size was 40 million. So I mean yes, you have some bigger systems now issuing, but things just are more expensive. Also, I went to the Bureau of Labor Statistics, I'm sorry, I'm an analyst. I got to do these things. The cost of construction for K through 12 increased 33% between 2020 and 2025. And that's massive. That's just a massive swing. So just anecdotally, I have to say we've been seeing more deals generally. I'm sure Hector and Tim will agree. I mean just in 2025, we're seeing a real uptick in borrowers looking to do private deals and the par amount of those deals is just a lot higher than what we've seen historically. It's not unusual to get a request like 50 to a hundred million dollars plus for a transaction. So maybe there's some small deals out there, but we really just, that's unusual now it's not the norm.
Paige Litten, Assured (00:18:26):
Got it. That's interesting. Thank you, I appreciate that. So let's take a brief pause again and ask our next CPE audience question. Lynn, if you're able to do that, that would be great.
Lynne Funk, Bond Buyer (00:18:40):
Yeah, actually it's very well timed to everyone. The next question is with supply on track for a fresh record in 2025 after a record year in 2024, do you think investor demand will keep pace or do you think investor demand will keep up the pace into the second half as redemptions fall after the summer reinvest, and I'm going to get this a couple seconds. It says yes, there's still a lot of cash on the sidelines. The no issuers will need to offer more yield at this pace, and C, I'm not sure, we'll give that a couple seconds. I know I just saw this morning we got preliminary numbers for July and issuance now looks per LSEG data looks to be at about $333 billion as of this morning before any deals were done, which is a 16% increase year over year. So it's pretty big mark coming in. All right, we're going to give it a couple more seconds here. Alright, I think that is tri good to go. Okay, so the responses A yes, there's still a lot of cash on the sidelines, 46% answered that B, no issuers will need to offer more yield at this pace, 28% and C, I'm not sure, 28% back to you.
Paige Litten, Assured (00:20:05):
Interesting. So it sounds like we have some optimists out there that our market is going to remain strong. We'll be interesting to see how things play out. That's actually a perfect segue into the next question. We talk about this market dynamic that we're seeing play out where we've seen very, very heavy supply interest rates are higher than they've been in a while. Historically the yield curve is steep, but credit spreads are still very tight. So Hector, how do you think that these dynamics will kind of play out in conjunction with where we are in the credit cycle and are there certain sectors where credit has become perhaps more of a focus point than it was previously? And how does that impact how you think about things?
Hector Negroni, Foundation (00:20:51):
I think that one of the most important points to make implied in that question is to highlight how the growing size of our marketplace, whether it be because of pull forward of deals, increased cost of deals or increased burdens as a result of policies being pushed back, whatever you think is the key driver that size of our market increasing is exciting for Tim, Julie and myself. And the reason is everything can't be a muni bond. Municipal on market is resilient and it's been a tremendous tool, but as the quantum of demand for financing grows, it can't all be built off of the backs of individual retail tax paying Americans. Sometimes that's because of a capacity issue with respect to rating. Maybe it because it maybe the projects don't qualify. Increasingly, one of the things I always remind people when we're on Zoom or on any electronic mediums is this is an important infrastructure item in local governments.
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Local broadband matters a lot now just like clean water does. And so the portfolio of obligations that local governments have to provide infrastructure is just expanding, expanding at a time when it's costly, expensive, and they have to turn to the private markets to do that. So I'd say first of all, we think the expansion of the marketplace, the growth of marketplace, it's just a golden era for our private capital to kind of round out the edges of necessary capital. I mean, I'm pretty constructive on the generic municipal marketplace. Generally, most of our clients, we all have different constituents. Most of our clients are institutions that don't have arms and legs and don't pay taxes in the United States. So we're not the most profound investor in taxes and product, except if we're trading dislocations, as Julie was referring to earlier, when the market has those momentary dislocations.
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As we move across from our hedge fund book to our private credit book, we're really focused possibly on more taxable type solutions that round out the capital base. But where are the M marketplace is going to be demanded of capital? I'm pretty sanguine about it. Yeah, it's getting bigger. I do think there's an interesting conundrum around the lack of demand for duration, by the way, a big part of that has been what I talked about earlier as more money comes from mutual funds into SMAs to oversimplify it, that's moved further down the curve. Bank capital bank reg cap has not been as friendly for munis. Tim doesn't run a big TOB. Maybe he might have 20 years ago. The insurance universe is feasting off of other higher return beggar regulatory capital in the structured product space. They're noodling on, it's starting to come in, but I think at some point in time, the relative value of our marketplace, especially out in the longer duration part, where it is right now, four standard deviations, cheap to a 20 year historical versus corporates is undeniable and will draw capital into it.
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But the difference is we all have patient capital to capture that. I think that's an important distinction here is the volatility in the marketplace isn't just outside exogenous factors, tariffs, rhetoric, political rhetoric, policy itself, but it's actually the fact that a number of the investors have much shorter, much shorter liquidity profiles that daily liquidity requirements in the funds and everything ourselves and Julie and Tim have much longer more patient profiles. So we can take our time, put a price on things, hold there for a while, be steady and resilient. It's why we think we're in a really good place to provide additional solutions, whether it be for liquidity or for specific financings. Okay. Last part of that was what do I think there are sectors of interest? Listen, I think we all have a little bit of a different, like Julie's squad has done an unbelievable job in charter schools.
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I don't even try to compete frankly. So I look for why we have our special sauce is more in the project space we're focused on where the rescission has left some orphan projects by the pullback of the ITC. We are focused a little bit on where Medicaid is going to be a challenge for some of the senior care facilities in lending there. And we are somewhat intrigued by the higher ed state. I'm a little less interested in that. That's not my bread and butter. But I do think where there is stress that's been aforementioned, it's an excellent place where private capital come and make a difference. Tim and Julie will really be, we have diverse interests and diverse expertises, and so we really round out the available capital base.
Paige Litten, Assured (00:25:38):
Great, thanks. I
Timothy Self, JPMorgan (00:25:40):
Think just to jump in a little bit there, I think the infrastructure side of the business, we have just seen tremendous growth there and a lot of this really, how do you define infrastructure? I mean we define it extremely broadly. So I mean for us it's bridges, it's toll roads. We do a lot in the kind of stadium and arena space. And so we've seen a lot of private capital flow into infrastructure more broadly. I mean every large kind of private equity fund that you talk to, they're also very, very focused on infrastructure. And so there's this, I think overlap between what a lot of the private equity and the hedge funds are looking to do and what the banks are looking to do. But we just see a tremendous need there given the amount of infrastructure across the country that is in a all state of very poor condition and needs a lot of money to be spent to get this infrastructure up to current day standards.
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And as Julie and Hector both pointed out, that's getting more and more expensive every day. So these projects are getting larger, they're getting more complex. People are coming in at different parts of the capital stack. And so look, I think at the end of the day that is a good fact pattern for us on the phone. It's also a good fact pattern for a lot of our clients because it just gives them a deeper pool of capital and it gives them more alternatives and the ability to kind of build bespoke solutions around what are highly complex projects.
Paige Litten, Assured (00:27:25):
Thanks, really appreciate that. Julie, anything to add there from your seat?
Julie Morrone, Rosemawr (00:27:30):
I mean, I agree wholeheartedly with what Tim and Hector have said. I mean, I think credit is past its peak in most sectors, if not at all, not of 'em. And there's a challenge because as Hector says, retail isn't going out on the curve. And as long as their inflation fears and concerns over deficit financing, they're not going to go out. And if a credit is a little complex, which you're going to have more of that as the credit cycle will go declining credit cycle, there's not the expertise there to really manage this. So I certainly see bankers preferring to work with a single investor who is willing to put in the work, help do the structure too. I mean, I think all three of us are pretty active when we're doing a transaction. We get very involved in the structuring, which is constructive I think, and we understand how to price the risk. So again, it also speaks to the certainty of execution that I think is really important in this kind of credit environment.
Hector Negroni, Foundation (00:28:39):
I can say, Julie just said something super important, especially for the audience to appreciate. The thing about the private capital that's represented on this phone different than maybe name brand private capital elsewhere outside of marketplaces, we're all uniquely sensitized to the nuance of the deal flow that you engage in, like governments and bureaucracies and permitting issues at a local level are very bespoke. And it's one of the reasons that large capital providers struggle with how to attack the space. They just don't have the, unfortunately, I'm going to say it, decades of experience in this space that we all collectively have understanding. I'd say we're friendlier calls than a lot of you may understand.
Paige Litten, Assured (00:29:27):
Yeah, absolutely. That is a very important point. So appreciate that comment as well. Tim, would love to turn it back to you now and get your thoughts. Given the conversation around credit and the need for issuers to be able to access capital in our market, do you think that this causes our market to be even more reliant on retail investors and does that somehow create a window of opportunity for you?
Timothy Self, JPMorgan (00:29:56):
Yeah, I mean I think that as we mentioned, the retail investors tend to be fairly passive. I mean, I think ultimately we're seeing kind of a growing marketplace. So I think there are room for multiple kind of players within the space. I think one of the areas that we see, I guess we just see still a lot of growth, a lot of financing needs. So I think that will provide room for players across the spectrum, whether they be retail, institutional, or whether it's more coming into the bank or the direct lending side. I think we continue to just see very, very significant growth. And I think that it, it's also just been interesting to see the amount of private capital has started to really flow into the space as he and Julia have said, A number of us on the phone are kind of very experienced in the muni space, but we're getting inbounds regularly from other pools of capital that have been much more focused on the corporate area that are now looking at maybe not so much regular tax exempt munis, but what's going on in the taxable infrastructure space. And I think we're seeing more of a blurring certainly of some of the lines where governmental entities aren't able to go and issue traditional tax exempt debt and are looking to tap into that pool of capital. So I guess the continued growth and the sheer scale of the financing need, I think will beat a lot of mouths ultimately.
Paige Litten, Assured (00:31:49):
Yep. That makes sense. Hector, what are you seeing as it relates to retail specifically? I know you talked about the overall backdrop and what you're seeing there, but any thoughts on the retail side of things?
Hector Negroni, Foundation (00:32:03):
So when I talk about market structure, which I've probably done ad nauseum for three and a half decades now, I always make the point that we have a market that's worked fine and done a good job, but it's always challenged to increase in scale. So dependent on the inefficient transmission, like if you want to borrow yesterday, JP Morgan, the dealer, not Tim, did a three and a half billion dollars financing in the marketplace. They had to come at a healthy concession in order to get clearing levels in the marketplace, the rocks, taking the boulders, turning them into pebbles to distribute them downstream is a time consuming elaborate exercise. And so I think what I've noticed is that retail hasn't necessarily changed either. I don't know whether it's what they want or whether they're being sold. Generally speaking, most people come to our marketplace because credit quality is very good and they get a great tax exempt coupon.
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And so that's their first move. I'm going to come in, put money to work for some duration of retirement or whatever kind of lifetime event. And then if they want to take more risks, then they just go down the credit spectrum. But I don't think enough people turn their eyes towards absolute return or tax efficient total return. And I think that that would be an interesting growth area. I don't think it's picked up quite, I don't think it's really got anywhere near any real sense of demand. And so as long as the marketplace is going to be fairly passive, we're just going to continue to have the susceptibility to the mismatch between demand and supply. And so that imbalance that occurs, it causes us to have very frequent and sometimes significant dislocations. And fortunately, especially for myself and Julie, we have capital that can come in and take advantage of those dislocations because the dealer community is under extraordinary pressure.
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It's really hard to make money being a dealer. I can tell you firsthand having run one, the wallet is really small, the economics are challenging, and the return on capitals, you're in competition with other asset classes that may be doing better. And so as a result, there's fewer, if there's less capital for the intermediation and there's really inefficiency between when demand is there versus when supply is there, that disruption is just going to continue to be, it's just not going to go away. So I would expect increased what we refer to as basis volatility, the relative volatility of our marketplace to other fixed income when we idiosyncratically get rich or cheap. And I expect there to be increased basis volatility for the foreseeable future until retail starts to either adapt or change to being more interested in absolute return and tax efficient total return strategies rather than passive long only. And until a more diversified capital base is informed, that includes a larger participation of banks, larger petition of insurance companies, and maybe either other asset managers.
Paige Litten, Assured (00:35:17):
Super interesting. Thanks. When I think about retail, and we're talking about credit and how retail tends to view our market as passive long, only looking to collect a coupon for a life event, and if they want a higher coupon, just moving the credit spectrum for me being in my C at assured, curious to hear how you guys think insurance fits into this conversation. Clearly that's a big product that retail investors tend to look at. So Julie, how do you view insurance as a tool in these times of volatility throughout different credit cycles, and when do you think about wrapping bonds?
Julie Morrone, Rosemawr (00:36:01):
Yeah, as Hector mentioned, retail obviously is focused on the short end of the curve if you own, and we are long buyers. So if you have a 30 year bond right now, it could be very difficult to get attention, particularly in the secondary market. And if the bond's a little esoteric, forget about it. So to us, insurance really putting insurance on the secondary really broadens the buyer base. We see the primary value add of the insurers is enhancing liquidity in the secondary market. It just really evens out the story and can really change the liquidity profile of a bond immediately. So I think at least for us, that's a huge value add. And also if it's in, I think, and we appreciate the fact that the insurers are willing to look at not just GOs and revenue bonds, they will look at bonds that may have a little bit more of a story to them that are in healthcare or in education. And that has been, I think, very constructive for the market.
Paige Litten, Assured (00:37:22):
Great. Glad to hear that.
Hector Negroni, Foundation (00:37:25):
Can I just add one point? So I'm excited about what I think is on the future for us, which is I just talked about how the monolithic nature of demand presents some challenge for sourcing capital. We're here to round that out, but there's no reason they can't work in concert. There's no reason that a capital stack isn't built that includes some more risky capital or more expensive capital, more solutions oriented capital in conjunction with a higher quality piece that's wrapped by you. And the reason that's especially exciting to me is when things go wrong, and I've been around long enough to been involved when things go wrong, I like having professional people with me at the table and having been alongside assured in at least two significant bankruptcies, namely Puerto Rico, having professional credit enforcers really matters. And I think that there's, if Julie is correct in thinking that the horizon of credit is going to be more challenging, there's a value proposition to having more serious professional people at the table to deal with problems in a transaction, whether it be restructurings or just accommodations. There's an extraordinary value to that, and I've had repeated success with you guys doing that.
Paige Litten, Assured (00:38:51):
Thanks, Hector. I really appreciate that.
Timothy Self, JPMorgan (00:38:53):
And I think Hector, on that point, I guess in the corporate space, there's been more bankruptcy history, so I guess there's more of a playbook. I think anytime that we see something go wrong in the muni space or in the infrastructure space, we are writing the rules as we go along to an extent. And there's still a lot that needs to be defined. And I completely agree, when things go well, you don't really mind too much who's around you when things go badly, you want to be around the table with people who really understand the asset class and understand credit, understand risk, and have gone through this drill before.
Paige Litten, Assured (00:39:36):
Great, thanks. Really appreciate all of those comments. So I do just want to pause here to ask our last CPE audience question. Lee, if you want to, Lynn, sorry, if you want to tee that up, that would be great.
Lynne Funk, Bond Buyer (00:39:50):
Got it. Okay. So one second here. This question, I think our panelists will be happy to hear the results about, if I can get the question to post. Sorry about that. Give me, give me one second here. Okay. And the question is, have you worked on any deals outside of the traditional tax exempt muni market with alternative investors such as private credit providers or direct lenders, et cetera? And of course, this is a very straightforward question. Yes. No, I'm not sure. We'll let those folks get their answers in.
Hector Negroni, Foundation (00:40:28):
There's no DI really like to,
Lynne Funk, Bond Buyer (00:40:31):
Oh man, I'm sorry about that. That should have been an option. Well, people can write in, they can send us a note. Interesting. I'm going to give it a couple more seconds here. We have a lot of folks on the line and it's coming in as of right now. Keep voting 50 50 kind of, let's see. Okay, I need the jeopardy music. Alright, this looks like a nice even ish number. Let's close it. Alright, so the answer is 47%. Yes. 49% no. And 4% I don't know, or I'm not sure. Back to you, Paige.
Paige Litten, Assured (00:41:18):
I'm going to take that I don't know, or I'm not sure percentage as I would like to. I think we should group people in there. Okay, great. Thanks very much. So we've touched on a lot today, a lot of different pressing issues in our market from the rate environment and different technical factors to legislative changes and the shifting credit landscape. So I do just want to kind of close out by hearing from all of you what you think the path forward is and what does the future of financing look like in the muni market? Hector, if you want to kick this off, I know you did kind of touch on this in your previous answer about portfolios and retail and how you build that out, but if you have anything else to add there, would love to hear from you.
Hector Negroni, Foundation (00:42:05):
I think we're at exciting times. I mean they don't always have to be fun, but they're exciting. I think that the municipal marketplace is going to be forced to really grow up and expand in directions that it hasn't had to in a while. We had decades of comfort with a highly securitized wrap marketplace. We had a burst of focus on credit after the great financial crisis, and then we just had a rip in credit for the next several years. And we're now at a next turn where the combination of a very fragmented universe of needs that is growing has to find solutions beyond just raising your hand and floating out a tax exempt deal. And that means that I think everybody should be open to the possibility that there's cobbling together of capital structures and involved private capital. Our phone's ringing off the hook. I know that my peers are as well.
(00:43:10):
We're very busy putting money out the door. That's exciting. And then the only other thing is I think this change doesn't come without volatility. I think anybody who thinks it's going to be a nice smooth, tidy change and evolution, it just doesn't happen that way. I think we're also excited by the volatility. I mean, listen, our asset classes, I get on the phone with large institutional investors everywhere, and I usually find myself in the third sentence saying, we're the cheapest dollar denominated fixed asset class stop. Now how you put that money to work and how you express that trade and how you get anybody over the home, there's some education involved in that. But we already, as much as we have some headwinds ahead of us, we have some excellent tailwinds of value. We have a really well diversified group of alternative capital providers that can round out stuff. And so I think I'm pretty excited about the future for our space.
Paige Litten, Assured (00:44:07):
Great. Tim, what are your thoughts on what the path forward is here?
Timothy Self, JPMorgan (00:44:14):
Yeah, I think I'd second a lot of what Hera has said there. I was actually talking to someone a few days ago about how our business looks today versus where it was 10 years ago. And it's completely different in terms of the focus of our book. A decade ago we were much more of a liquidity in letter a credit provider. We didn't have a huge funded portfolio. Now roughly 40%, 50% of what we do is funded. We do a lot more that's taxable. And I think we're just seeing a much broader array of opportunities today than we saw a decade or so ago. But ultimately, whilst we've shifted from where we were a decade ago, I'm sure in 10 years time we'll be very different from where we are today. I do think we remain very constructive on the market more broadly, but I think we are facing some credit headwinds that maybe we're not fully seeing yet. But I'm, I guess maybe slightly risk averse in terms of wanting to manage risk very, very closely. And I think we see some clouds on the horizon that we are paying very close attention to. But as I've mentioned before, we see a huge amount of interest in the space, a lot of additional capital. We're seeing capital from abroad look at taxable opportunities in infrastructure, increasingly wanting to put money into the US market. So I think overall we feel very constructive and think that we'll continue to see growth in our portfolio over the coming years.
Paige Litten, Assured (00:46:04):
Great. Thanks very much. And Julie?
Julie Morrone, Rosemawr (00:46:09):
Yeah. Well, I hope these aren't interesting times because what's the proverbial curse? May you live in interesting times. We don't want interesting times. We did as many of, we did a charter school securitization in 2023, and at the time when I spoke to portfolio managers, their comments were, this is terrific, this is great. Something different to invest in. So I think even with the volatility and the uncertainty and the changing credit landscape, the market will continue to be receptive to creative structures and unique financings. There's always room for a new line item. And in that case, even retail participated there. And I do think instead of hoping that retail climbs out on the curve, we have to meet them where they are. So that means being creative and finding a solution. And as Hector's mentioned also, and Tim, maybe t tranching trying to create something for everyone in order to be able to meet issuer's needs as well. So I guess we could leave it to the bankers on this call who are calling in to meet that challenge, but certainly this panel is willing to work with everybody to structure something interesting.
Paige Litten, Assured (00:47:41):
Great. So that does kind of wrap up the formal part of this panel. We do want to open it up now to some questions from the audience. So if you have any questions, if you're listening in, you have any questions, feel free to send them in. I did see a couple come through while we were having our discussion, so why don't I kick it off with a few right now. So the first question is, considering that no policy or law is ironclad, as we're seeing now and we have seen in the past, would that make the case that broadening the investor pool is even more important now?
Hector Negroni, Foundation (00:48:24):
Yes. I mean, I think it is. Julie said something important, we have to meet retail where it's in the absence of a broader pool. We have to go where the demand is. But yeah, if we were constructing this market, if we had gotten the order from the White House to go figure out how we were going to finance essential services and infrastructure across these United States, we'd probably come out with something a little bit different than what we have, which is this really kind of clumsy, really fragmented space. It works fine, but it's noisy, right? And so I think, yeah, the diversification of the audience would help. I mean, I point a lot to the symptom of the lack of diversity in the long end of the curve. I remember in the late nineties when I sat at a bank, the conditions were eerily similar and it was a race to put on a TOB book and put on a bank carry book against every other bank.
(00:49:22):
The bank capital regs haven't been very friendly to that. And so I think it's been not great. And then for the insurers, I said also they also have a perverse treatment around REDCap with the muni space. They have some other interesting areas that given better spreads. Not all of 'em are paying taxes because of their outlook flows in claims. Many of them have shifted to annuities. And so there's a lot of reasons that long demand isn't as prevalent as it was frankly, in all asset classes. Anything we could do to address and improve that is good for the marketplace. Greater diversity is how you get the greatest competition for capital and price.
Paige Litten, Assured (00:50:00):
Great. Here's another question. Are we seeing that private capital players are interested in higher quality investments such as investments in the A category?
Timothy Self, JPMorgan (00:50:16):
And I guess I'll jump in from the bank side in terms of where we're a direct lender into transactions. I think we're playing up and down the credit curve. So out of the 28 billion roughly that we have deployed, roughly pushing 80% of that is actually investment grade and the other 20% is below investment grade. So yeah, we will play across the capital curve or across the credit curve. I think we're probably a little bit more flexible and have maybe lower return thresholds than Hector and Julie May for their capital. But I'll let 'em comment on that.
Julie Morrone, Rosemawr (00:51:02):
Yeah, I mean we would certainly a finance and a rated borrower, I think that's a function of where we are in rates now. I mean, with yields higher on a nominal basis, we're getting rates that we would've gotten for a triple B or below three years ago. So that in and of itself is attractive. And I think also it's a function of the borrowers, as I mentioned. They do have some trepidation about accessing the public market and they're willing to pay a little more for the certainty and to do it privately. So I think those two dynamics are working well for at least us. I mean, we're certainly seeing some higher quality borrowers want to do transactions with us, and we certainly welcome the opportunity to do so.
Hector Negroni, Foundation (00:51:55):
For us, it's mostly a hurdle rate. I mean, we'll absolutely look at a rated, and frankly right now in our hedge fund book, we're very concentrated in high quality AA names, short corporates because the relative value of that on a levered basis will make money. So the credit quality isn't the driver of its particular kind of dislocation and a more static private credit infrastructure debt book and a to deal. There's a lot of competing sources and we're solutions provider where we're looking to get paid a margin for doing something unique or that's not broadly available. And so we're probably not the most competitive source of capital. And that's fine.
Paige Litten, Assured (00:52:37):
Great. We're having a lot of questions coming in. So looks like a lot of people are engaged here. This is an interesting one. So regarding federal policy, we saw the new administration, the Trump 2026 budget proposed deep cuts in the federal financing programs for water infrastructure. Would this increase demand for private capital or would it lead to project cancellations and lower demands?
Hector Negroni, Foundation (00:53:06):
We've got three water deals in our pipeline. I mean, I would imagine others, similarly, if there's a takeaway from the policy that's kind of implied is that the federal government, intentionally or not, is opening the door for more private capital solutions, whether they're the best, whether they're effective, whether they're functional, that's each individual borrower. But without doubt, the demand for private capital is not going away and it's going to be in all sectors.
Timothy Self, JPMorgan (00:53:41):
And a lot of these projects are it's critical infrastructure. So it's not stuff that can be delayed. We're seeing infrastructure age. We're also seeing as certain areas of the country grow substantially, new infrastructure is needed. And so this is not kind of discretionary spend. It has to get financed somehow. And if federal local government sources aren't there, then that's why the private capital will flow in to fill that gap.
Hector Negroni, Foundation (00:54:16):
I think one of the things we all do here that maybe isn't well received, well understood is sometimes there's a reason a transaction can't get to the municipal marketplace quite yet. Particular rights haven't been acquired, a continuum of rights haven't been assembled, something hasn't been specifically permitted in a certain way. And so often you'll find ourselves bridging to that outcome. And so myself or Julie or Tim will lend money on a shorter duration so that when certain things happen, there's a more long-term capital base that can be found.
Paige Litten, Assured (00:54:53):
Great. That makes sense. Okay, so let's go to the next question. Do you see a scenario that would allow for issuance of more taxable munis? And if so, would that fill buckets for all accounts who are nowhere near their capacity in the asset class? And would it take away from potential private credit deals if more taxable munis are issued?
Julie Morrone, Rosemawr (00:55:22):
I don't think it will take away from private deals. I just don't see the prospect for a lot more volume on the taxable side. There's just not a lot of demand right now for it. I don't think they tend to also be orphaned. So it's difficult to make a case for increasing that issuance. So yeah, I don't see that being part of the solution. As we were talking about as a credit landscape is changing and federal policy, I don't see more taxable munis as being part of that solution. But I don't know if Tim or Hector feel differently.
Hector Negroni, Foundation (00:56:10):
You're spot on. I think in fact, the fact that the taxable marketplace isn't as efficient or scalable is probably benefits us. Julie, we see deals, and you used a good word like raise your hand if you've seen an orphan taxable deal in your book lately, right? I mean, we see deals and they have to get priced really cheap to clear, and that's an opportunity for us. So I don't know that it's the most efficient tool. Frankly, I'd sometimes rather see bankers be led to being more open-minded about putting together something other than a deal that looks like a tax exempt deal dropped in the taxable marketplace, have $30 million size, I dunno, call Tim, get a first lien on something, then call us for the meds debt or something, put something together.
Paige Litten, Assured (00:57:03):
So we are coming up on time, try to do two more questions, maybe just one. So on the higher ed discussion, earlier question came through, does anybody think that if some higher education institutions have significant endowments, did they also need taxpayer funded dollars
Julie Morrone, Rosemawr (00:57:27):
From a policy? Well, I guess you don't know why they're asking.
Hector Negroni, Foundation (00:57:31):
It sounds like a policy question. I mean, yeah, doesn't it? Yeah. I'm not in the policy business. I'm in the financing policy business. So when somebody decides what they want to do and actually comes up with a conclusive policy or in the absence of policy, I'll lend money, but I'm not going to pick the policy.
Paige Litten, Assured (00:57:50):
So maybe just a fun question for the group to end on. This isn't really, there's no right or wrong answer here, but curious what you all think. What is the actual dollar figure that our country needs for all of the infrastructure projects
Timothy Self, JPMorgan (00:58:16):
For you to go first?
Hector Negroni, Foundation (00:58:18):
Listen, I think I feel comfortable using the American Society of Civil Engineers general deficit of, call it two and a half to three and a half. The number moves around a little; a bit trillion dollars over five years. So remember it's not tomorrow, it's over a five-year horizon. But I'd remind everybody that that's the total cost of projects. So if you think about that, the project costs, that doesn't tell you how much should be equity versus how much should be financing. So what you should take away from that is if funding, whether it be tax dollars, user fees, federal grants, came through and offered some subset of that as equity, then the remainder is financing. There's a significant amount of financing capital available. And if you use a 75% LTV concept, and that may be too high, frankly, but that's 75% of that $3 trillion middle point. I don't know, $2 trillion of financing over five years. That's hundreds of billions a year.
Julie Morrone, Rosemawr (00:59:35):
I was going to say two Ts, and it's going to be more next year. Going to cost more next year. So get the shovels in the ground now because it's only going to get more expensive.
Paige Litten, Assured (00:59:46):
Yep.
Julie Morrone, Rosemawr (00:59:48):
Call Tim.
Paige Litten, Assured (00:59:54):
Well, I think we can certainly all agree that a lot is needed and it's going to be an interesting and exciting end of 2025 and also certainly into 2026 as well. So we are at time here, so we are going to close this out. If we didn't get to your question, we will certainly try to get back to you. So stay posted there and thank you so much for everybody joining today. Thank you to The Bond Buyer for hosting. Really appreciate this very great discussion. So thank you.
Hector Negroni, Foundation (01:00:28):
Thank you for the opportunity.
Julie Morrone, Rosemawr (01:00:29):
Thank you.
Mike Scarchilli, Bond Buyer (01:00:30):
Thank you. That's a wrap for this episode of The Bond Buyer Podcast. A big thank you to Paige Litton for moderating and to all the panelists for their thoughtful and forward looking insights.
Here are three key takeaways from today's episode. One, volatility is fueling private capital's rise from swings in the MMD scale to sudden tariff policy reversals. Policy climate is creating unpredictable conditions that borrowers increasingly seek to hedge with private capital certainty of execution.
Two, alternative investors are no longer niche players. As banks pull back and SMAs and ETFs overtake mutual funds long-term patient capital from firms like Rosemawr, Foundation Credit and JP Morgan's becoming a core financing option, particularly for larger, more complex infrastructure and social projects.
And three, the muni market is being reshaped by credit shifts and structural challenges with tighter federal funding, higher construction costs, and muted long-end demand from retail deal structures are evolving. That's opening the door for new partnerships between public issuers, underwriters, insurers, and private lenders.
Thanks again for listening to the Bond Buyer Podcast. This episode was produced by The Bond Buyer. If you liked what you heard, please subscribe on your favorite podcast platform. Leave us a review and visit us www.bondbuyer.com for more of our award-winning coverage. Until next time, I'm Mike Scarchilli signing off.