Investor Opportunities

As the country looks to address the vast infrastructure needs, how does the buy-side view the opportunities – and the risks – of investing in U.S. infrastructure? What do investors want to see more of in the coming months/years? What opportunities are there for alternative investors?

Transcription:

Jeff Lipton (00:08):
Good afternoon. My name is Jeff Lipton and I am honored to be moderating this distinguished panel in my newly minted role as the Bond Buyer's market intelligence analyst for municipals. I am joined by Nikolai Sklaroff with the San Francisco Public Utilities Commission, Colin MacNaught with BondLink, Kim Olsan with New Square Capital, and last but not least, Andy Prindle with Foundation Credit. So welcome to the Investor Opportunities panel. During the next 50 minutes, you will be hearing from a diversified group of very talented market stakeholders, all of whom have their unique perspectives on the subject of municipal infrastructure in terms of needs, funding, new structural and credit ideas, as well as investment opportunities. Of course, as is typically the case with investment opportunities, there are associated risks and challenges to varying degrees. These would apply to investors, but also to issuers, underwriters, rating agencies, and other transactional intermediaries.

(01:17):
So as we think about the future of infrastructure financing and assess the available tools in the toolbox, we must look beyond the traditional structures and funding mechanisms in order to address competing budgetary needs. On the issuer side, as a backdrop for funding constraints and the evolving realities of fiscal policies, we may see greater participation from P3s as a way to leverage capital and manage the public entity ownership and private operations of the asset without necessarily elevating the issuer's debt burden. And we must consider the long-term value proposition of the financed asset. We have to think about ways to educate the issuer and investor communities and to consider the risk-reward analysis for the participants of P3s while continuing to capture the innovative benefits of public infrastructure delivery mechanisms that have proven quite successful abroad. Perhaps foreign engagement of P3s has been nurtured by greater political and community support and a friendlier regulatory environment. It is clear that partnerships with the issuer community are essential given that many issuers lack the resources and sophistication to go it alone. And so what does the future intersection of public finance and the private sector look like? So with this, let's dive into the conversation with the opening question. Given your roles and individual perspectives, what would you say is the biggest challenge to infrastructure financing and what is needed to finance growing infrastructure needs? Nikolai, why don't you start us off and it would be great to hear from the other panelists.

Nikolai Sklaroff (02:59):
Great, thank you very much. I've been in this business for many years as a financial advisor, rating analyst, and most of my career as an investment banker. Now as an issuer, the one role I haven't played is as an investor, and so I'm on the investor panel. I do think that the reason for that is—and I really appreciate Lynn and Mike inviting all of us up here to speak on this topic—is because we spent a lot of time on one of the Bond Buyer podcasts talking about how we focus on investors in making some of our decisions. When we look at the challenges in the future, I think there are a couple of key ones. One of the most important is the nature of the projects that we're financing in the future. They're getting larger and they involve more entities, and so our traditional tools won't be as effective for those.

(03:59):
We're increasingly looking at projects that may require different types of governance structures and different kinds of financing tools. That's one issue. The other challenge that we're really facing right now is cost escalation. My team all just went to one of the rating agencies, did a webinar/seminar, and came away with facts about how much construction inflation has been affecting all of us in public finance. And one of the challenges we have, of course, is affordability. We just adopted a new affordability policy, but understand that our entity is unique. We have operations that extend from Yosemite National Park all the way to the Golden Gate National Recreation Area. That's seven California counties. Our customers are in four California counties even though we're a department of the City and County of San Francisco, and we have different customer bases for all four of our rated entities. So we're trying to provide different financing for each of these entities.

(05:18):
And I think one of the key challenges we're going to be facing as we enter into this next CIP cycle—and we do a 10-year published plan, longer-term internal planning of our capital projects—is this cost escalation and having folks who don't think about the time value of money the way people in this room do understand that the trade-off between trying to forgo 4% interest costs but then incurring 20–30% cost escalation. So that's a major education process that we have to go through as we talk to our various stakeholders across the department.

Andy Prindle (06:14):
It's actually interesting to bring that up. I see that from the investor side a lot, and the thing that kills most of the projects we look at is not having somebody who's thought about cost escalation and what's happening on the construction side of the world right now where you have projects that maybe barely penciled today, but we know—just go back the last four or five years—anything that was budgeted pre-COVID is over budget now. And if you don't have a deep pocket or a flexible capital source behind that to be able to cover that cost overrun, those are the deals, especially in the project finance space, where we've experienced a lot of conservation and problems going forward. And so I think getting back to your original question, where do we see big risk?

(06:57):
It's having a sponsor behind a project, be it a muni developer, if it's a P3 deal, or an equity source, that really understands those risks and has the balance sheet and the flexible capital available to bridge those unexpected costs, be it a COVID-like event delaying projects and causing cost overruns or the inflation we're experiencing now with tariffs. It feels like every two years now we have something that's a black swan type event causing pretty significant cost escalation, and you need to have deep pools of flexible capital backstopping deals because barely getting by on a project right now just doesn't cut it anymore.

David Quam (07:39):
I can jump in here. Before I do, I'd be curious in the audience with a show of hands, how many issuers do we have out there listening, and then how many investors are in the audience? And everybody, I assume everyone else is on the banking side. I've learned a lot over the last 24 hours. There's a pretty wide spectrum that captures this private market. I call it private capital for munis. And I'm just going to speak generally and my perspective a little bit more upstream than Nikolai's. From the issuer side—I'm a former issuer, I still think of myself as an issuer—I think the challenge is twofold. On the issuer side, one is just a lack of familiarity with the options. It's very easy to float another municipal bond, and generally speaking over the last 20 years, it's been very, very affordable to do so.

(08:39):
But there are good reasons to move certain infrastructure investments off-balance sheet, but I just don't think a lot of issuers are as educated and aware that there are different options. And truth be told, these are very complex; they're heavy in terms of legal provisions. But the second big hurdle I think is just a lack of infrastructure. And by infrastructure, I don't mean bridges and sewers; I mean market infrastructure. When you're going to issue a bond, you sort of know what that process is going to look like as an issuer. For certain private deals, there is no IPO calendar, there's no EMMA, maybe there's no CUSIPs, no DTC. So that is a very foreign thing for issuers. And if those things get ironed out, I think the liquidity or the potential for liquidity in certain private investments could be significantly better than it is today.

Kim Olsan (09:44):
I would just add, I am newer to the investor side within the last year or so, having had a long trading background before that. So in my mind, I think about how do you match the buyers with the sellers when sometimes the seller-issuer is more incentivized or has a timeline that necessarily doesn't align with the bigger buyer pool. And so it's a little bit of a nuance if you think about how the muni market works. We have certain periods in the year when the calendar, if you will, plays into the buyer's advantage and sometimes it plays into the seller's advantage. So I think when you talk about infrastructure needs, some of those nuanced scenarios in the muni market that don't necessarily apply on the corporate or treasury side can influence the process of a financing or capturing a buyer pool when sometimes the needs aren't really aligned together.

Jeff Lipton (10:44):
That's great. Thank you. So I know we spent some time talking about the challenges and I realize there are some nuances here, but maybe let's talk about the transactions themselves. What are the biggest inherent risks that are associated with the transactions? Colin, maybe you can start us off on that.

David Quam (11:03):
In terms of risk, Jeff, I might again just back up a little bit. The risk is that we miss this moment. There are massive financing needs that need to get done, and those include just catching up with basic infrastructure. There's a huge pothole right in front of the hotel that needs to be addressed. And then thinking about on the issuer side, the responsibility to finance infrastructure has done nothing but expand. Now you can think of things like data centers for AI. Communities are now responsible in certain parts of the country for broadband. A decade ago, no one thought Boston Harbor needed a seawall. Now a lot of people think Boston needs a seawall. We timed the conference well; there's no high tide with a full moon. When that happens, you're flooded out the front door of this hotel, and I think that's the big risk—that this market does not develop. There's a lot of demand from the private side, and I think there's an opportunity to invite private capital to fund some of these projects. The muni market works well, but given the scope that needs to be done over a very short horizon, depending on retail demand to finance every infrastructure need in the country seems a risky proposition.

Andy Prindle (12:34):
I do think that there's capital that would love to look at these projects. Inherently the issue here is that the way that capital is organized globally is not well suited for how infrastructure in the US is developed and propagated. It's generally bottom-up, small projects, smaller needs, more fractured and fragmented credits, and the process of going through an underwriting doesn't really align with global infrastructure funds that want to write billion-dollar checks. There are a dozen billion-dollar projects in the US a year, but there's 150x or 200x that many smaller projects that are $200 million and under. And so you do have this mismatch between the capital base and where the dollars are and ultimate needs in the US that I think the market is still trying to figure out the best way to address so that you can get these very deep pools of sophisticated capital that would love to invest in US infrastructure, but haven't historically because they're not interested in buying municipal bonds, finding an efficient way for them to actually get access to what they want, which is exposure to US government entities.

David Quam (13:42):
And get that return that they need to.

Andy Prindle (13:43):
Well, look, the municipal market has worked great for a long time for that aspect of it. Realistically, if you want to tap into that broader base of capital, you're going to then compete against global capital returns and cost on risk, and it's going to be higher than the tax-exempt market. But if the tax-exempt market isn't servicing everything we need, you have to start looking elsewhere and you're going to have to start embedding that into your assumed cost. Even if it does offer flexibility—you say you can move it off-balance sheet, you can do a lot of different things with it—it does come with a balance there.

Kim Olsan (14:14):
The other consideration too is as a buyer, now that you're considering, especially in high-tax states where the in-state demand is very strong, you get into a scenario where you have over-allocation of credit. And so if you're trying to diversify your buyer pool, you're actually giving the issuer a little bit more of a scope of buyers who otherwise maybe were locked out. You're maxing out the heavy issuers even though most are very creditworthy and it's not a credit perspective, it's just more of a balancing a portfolio objective.

Nikolai Sklaroff (14:53):
I'd like to take the risk question in a slightly different direction. I think one of the cross-themes that you've been hearing from all the issuers today is this lack of predictability. We are managing hundreds of projects across these four entities and we're doing it on a programmatic basis planning for 10 years and beyond what we've actually published in that 10-year report. These sea change events—for example, the risk to tax exemption—I'd maybe disagree a little bit with the earlier panel. I don't think we can take it for granted that that risk is off the table. I am very grateful that the Government Finance Officers Association is staying vigilant on this issue. I think we should all continue to be vigilant around helping to support the message about "built by bonds," but these sea change events out of Washington—take the Inflation Reduction Act. We were here last year for this conference with a great deal of excitement, Treasury officials up on the dais talking about the potential for the largest investment in clean energy in history. And the sad legacy of that is that so much of the prior administration's time was spent on rulemaking that by the time the rules were made, the program is greatly changed under this next administration. So I think these big wild swings from one side to another make it very hard to plan capital over the long term.

(16:51):
I think the other area of risk that I'd focus on is in ratings, and I hope we'll get back to ratings later, but this year we've seen some really unprecedented events. Take for example the wildfires we saw in California earlier this year; even as some of our counterparts were still dealing with saving lives and putting out fires, they're also dealing with rating downgrades and these very quick actions on ratings. Now I get it—Barron's published headlines that said, "LA Burns and the Muni Market Wakes Up to Climate Risk." Well, I think some of these knee-jerk reactions—we then a month later saw all of the Northern California power entities, including ours, put on negative outlook by one of the rating agencies without having any prior conversations. And so over the subsequent months, many of us were able to demonstrate that managing wildfire risk wasn't new to us. It was particularly objectionable for a city that's surrounded by water on three sides that protects our base and we have an emergency water system even beyond that. So I think these big swings, these big events that affect many of us at the same time, are problematic. And I hope that from an investor perspective, we can be more thoughtful about what we're communicating to those investors.

Jeff Lipton (18:40):
That's great. Wonderful insights. Shifting gears a bit, what are your views on P3 transactions? I know we heard from an earlier panel, and can we expect to see a growing presence? Why has this financing structure and other private investments shown limited use for funding public infrastructure at a time when demand for this type of financing is very heavy? Kim and Andy, as investors, what is the buy-side looking for in terms of deal and credit structure and where can the opportunities be found? Nikolai and Colin, perspectives from your roles would be very useful.

Andy Prindle (19:18):
Sure. I'd argue, considering all I do are transactions that are effectively P3s, that there is a market that's pretty vibrant out there. You're not seeing massive deals or as many massive deals done as I think many people would like, but there's a pretty vibrant market on the smaller side for transactions that are P3s or have some level of government support in some way, shape, or form. And I think if you go back and define what a P3 was 10, 15 years ago when we first started doing those deals, it was a pretty prescriptive view of taking an asset and privatizing it—either selling something that we own or having some private entity build something with a very formalized arrangement. The definition has broadened, as it should, to include really just governments taking different levels of involvement in private projects, either through a project they want to see done that benefits them so they provide a specific subsidy to it, or you may have a government project where there's a specific aspect they're not good at—i.e., they want to operate an asset but they're not good at building it—so they bring in somebody to just build the asset and you do it as a quasi DBFM or something along those lines. I think you're seeing a broadening of it. As Colin said earlier, it's a tool in the toolbox that people are using increasingly, and I think they're being a lot more flexible about thinking how and when to involve the private sector on everything from design building to the operating side to financing in the case of our capital coming in to look at a deal that doesn't necessarily fit on the balance sheet of a government, or maybe it could, but there are reasons why they don't want to own it. And so I think you are seeing the market broaden out in a way where if you look at what gets done today relative to when we first started talking about P3s in 2006, 7, 8, when the Chicago Skyway got privatized, we're miles ahead in terms of what's happened since then.

Kim Olsan (21:13):
And to the point of the growth of the business is that it is a diversity of credit and as an investor you want a portfolio to have name diversity, revenue diversity, and rating diversity. And even though some of these may fall below typical investment grade, the ones that are still within that capture of investment grade—single A, triple B—it can be a good addition and diversification for somebody that may only be thinking about a AAA or AA rated county or city utility system. And so I think as that area of the market grows, it gives a broader range of investors more credit diversity to think about.

Nikolai Sklaroff (21:59):
So we have about 13 billion of debt and loan obligations outstanding. We have about a 10 billion plan for the next decade based on the plan adopted last February. As I said before, we're working on the new plan and cost inflation is an important factor, so I'm excited to see more private capital come to this market, but at the risk of being something of a wet blanket, I also will point out some of the challenges. We went through the process of looking closely at P3, spent a lot of time on it internally, and ultimately didn't do that transaction. We have a multi-billion dollar treatment facility that we're bringing to state-of-the-art, really turning it into a resource recovery facility that will produce high-grade fertilizer and biogas. We don't want to be in the gas business; we are a clean energy provider. We do mostly hydro with some solar and geothermal.

(23:19):
So that seemed like a great target for a P3. But again, thinking about how we produce all of this infrastructure, if you provide me with a solution that helps me with this much of our capital but it puts this much tax exemption in jeopardy, that's not a trade-off that we can live with. I think one of the challenges is that from our side of the table as issuers, we're not aiming to do a P3 product. We're looking for solutions to challenges, and we understand that there are people in P3 roles who have to deliver P3 solutions, but I think the best ones are ones that are very bespoke to our needs. And I think one of the challenges we face—and it's the fault of our side of the table as much as anyone else's—is that we're not having the right conversations with the right parties early enough. Too often we've been seeing conversations happening with the engineering folks making decisions about procurement and then coming to finance and requesting financing. And I think we collectively need to be having those conversations earlier on.

David Quam (24:57):
Just to build off on Nick, I think it depends on the solution. Obviously you need to have a sophisticated issuer that can hang through the complexity of a P3 deal and be able to manage it to whatever extent it's required post the deal closing. But I think it really depends on the solution. Is it core to that central government's mission? I'm a taxpayer here in Massachusetts. I don't own a home on Cape Cod. If the state proposed a third bridge to Cape Cod, that to me seems like a perfect P3. I would rather my tax dollars go into more schools and things like that. The Celtics were recently bought and sold and there'll be a new Celtics arena at some point in the near future. That seems like a perfect opportunity for some sort of P3 to finance the infrastructure around that stadium. And I think it comes down to the solution that you're trying to address as the issuer.

Jeff Lipton (26:04):
That's great. Thank you so much. So for the next question, I debated whether or not to ask it, but I decided to go for it. So when comparing policy between the Biden and Trump administrations, how has this reshaped the infrastructure narrative and what are the differences that can be leveraged? Let's start with Nikolai and work our way around.

Nikolai Sklaroff (26:26):
Every bone in my body says I should run away from this question. Look, it's simply a fact that being in San Francisco means we've gone from having the Speaker of the House as our congresswoman to a very different political dynamic now. And so I think whereas we were very successful, for example, with federal loans—and the secret to those loans was climate resilience and climate risk mitigation—that's clearly not the case. And I think going forward we can't assume that we'll have the same level of federal financing. The WIFIA program has been tremendously important for us. We took down the last chunk of 30-year plus average life debt at a 1.45% interest rate this spring. So it's really been important to maintaining our affordable rates.

(27:40):
But I think there are also opportunities in this sea change. I think particularly around programs like the WIFIA program for central services like water and wastewater, there's bipartisan support. I think the Trump administration was very instrumental in the development of the WIFIA program under the first administration. So we're optimistic about that program. We're working with allies across the political spectrum for changes to the program, perhaps the same type of subordination—true full subordination—that MAP-21 offered to TIFIA loans. So we see opportunities even while we see these significant changes, but we have to acknowledge the reality of some of the changes.

Kim Olsan (28:40):
I would say I probably have the luxury of taking more of a macro approach, and I actually have more sympathy for the issuer side because I think a tentative federal or even state background hurts the issuer more because their needs are consistent and ongoing. An investor can hang back and be a little more judgmental about it and circumspect and say, "Okay, I'm going to hold off and I can stay in cash and see where the options play out." So I think if I think very big macro, I've been in the business a long time and I have seen ebbs and flows and I think ultimately things find a moderate tone and it's more of a near-term challenge than maybe a long-term challenge. And I think the municipal market has proven extremely resilient through close to a hundred years if not more of financings. And so I think you have to take a long-term objective and the issuer may or may not have that luxury.

Andy Prindle (29:52):
I do think this administration has made it its priority to do things from a bureaucratic and a process perspective to make things more efficient and quicker, which ultimately benefits all issuers in terms of being able to accelerate projects faster and get through processes quicker than you had historically. Obviously there's pros and cons to all of those decisions, but my overall view between the two administrations is you have to learn to live within that regime and things will continue to happen. As you say, deals ultimately get done and maybe priorities for federal dollars and what types of projects get pushed from the federal perspective are going to change between one administration and the next. But there are still changes that are happening—I think that happened back during the Biden administration that were ultimately beneficial to the industry as a whole in terms of prioritizing infrastructure. Those priorities aren't necessarily going away from a dollar perspective. Most of those dollars still exist and are still getting propagated. They're getting repositioned as to where they're getting pushed, but they're still available and I still think they're ultimately beneficial to infrastructure writ large in the US. And now you're getting the added benefit of reduced red tape and regulatory oversight, which is allowing those projects to accelerate faster and maybe get built bigger and faster than they would have otherwise, which is ultimately beneficial as well.

David Quam (31:18):
Yeah, just my two cents—both administrations are trying to attack the infrastructure gap, just in different ways. If you think about the capital stack of a sub-sovereign government in the US, the base is tax dollars, and then you've got user fees on top of that, and then you've got federal dollars—the federal government borrowing to fund infrastructure at the local level. And then you've got this alternative world that we're talking about today at the top of that stack. The Biden administration funded a lot on the federal side and pushed those dollars down—they borrowed at the federal level and pushed those dollars down. Now we're seeing a lot of rescissions, clawbacks, and grants being cut. There was a big cut to a big highway project in Massachusetts, and whether that's intentional or unintentional, that opens the door to more private capital playing a bigger role in our infrastructure.

Jeff Lipton (32:20):
That's great. So moving on to the next question. Are there better ways to enhance communication across all stakeholder parties? And are there deficiencies that can be identified among some of the deal participants? Now, perhaps a better way of asking this in your varied roles: what improvements are you looking for from other partners? Let's consider this with a focus on P3s, but this does apply to general infrastructure financing. This question is open to all of the panelists. Good luck.

Kim Olsan (32:54):
I'll jump in. I think you can't go anywhere without talking about AI, but I think where it applies and can help both issuers and investors is disseminating information in a plain and timely way. When I open up an official statement to find financials or something related to the particular finance I'm not familiar with, the key takeaway is I want to know—I don't need the nitty-gritty, but I just want to know—what is the trend? Are the rating agencies thinking more positively or not? And this is down at a very small local credit, not some of the larger issuers that we're all familiar with, but this is where I think some enhancement and better access to central databases could be helpful. I rely on Bloomberg and some other services, but I feel like there may be some better and possibly cheaper alternatives to accessing issuer information and relying on that.

(34:03):
It's timely. I've actually noticed over the last six months or so, I would say northeast credits—and I know the school districts have come into question recently—but there are an increasing number of failure-to-files. For me as a possible investor and looking to put this in someone's portfolio, my outlook is: "You know what? I might give you one pass," and okay, around COVID, that was completely understandable. But when there are repetitive lapses in disclosure, it just makes me ask: is the rating catching up to that, or is there just some time bomb there that I don't know about? And that's where I think technology as a very large category could enhance where we are today.

Nikolai Sklaroff (34:56):
I almost hesitate to venture into this in front of a room with some of the top investment banks and bankers in the industry. But let me share this, because I often tell people I wish I had been doing this job before I was an investment banker. First of all, my proposals would've been a lot shorter. But more importantly, I think as an industry—and I say this as a former banker, so I share this with love—we're all too obsessed with products and not with solutions. We still have people who come to us with these encyclopedic decks that go through idea after idea without really understanding that what I'm focused on is: A, delivering the capital and making sure that all these hundreds of projects can keep going; and B, that we're measuring our success not just by TIC, but we're really focused on how it impacts rates. So being able to provide solutions and focusing on those solutions rather than these products specifically would be really important to us.

Jeff Lipton (36:21):
Anyone else? Okay, so I know we touched upon a little bit on disclosure. Of course, I think we would be remiss if we really just didn't dedicate a question to disclosure. Perhaps here AI can play a role. I would think that from a risk mitigation perspective and as a way to promote resilience and to detect potential dislocations through active monitoring, AI could be helpful. Kim and Colin, why don't you start us off?

David Quam (36:51):
Yeah, I can jump in. If there's a portfolio manager in this room who could teach me how to short the AI economy, please let me know because I'll make a big investment. AI is a tool; it's not a hacking tool right now. It's essentially Google on steroids. The data that is needed for disclosure needs to be public in order for it to be useful to investors like Andy and Kim. And on the disclosure side, it is absolutely critical. They can speak better to how important it is in terms of their decision-making process. There are tech solutions on the disclosure front, whether it's a federal security that's being issued or it's a true private deal on the issuer side. Like going to the prom, you get all dressed up, you have all your documents in order in order to raise capital at that moment.

(37:53):
The investors are thinking about five years from now, six years from now, seven years from now: how am I going to get the data from you? And on some of the bankruptcies that we've seen or some of the transactions that have gotten into trouble, the first red flag is a delay in reporting and then no reporting whatsoever. A tech solution—we've been approached to build an integration right from the accounting system of the issuer so the investors would get a raw data feed and not wait on a PDF report that may or may not show up. Speaking to transactions where the disclosure is not going to show up on EMMA, that might be a more near-term solution than relying on the hope of AI.

Andy Prindle (38:42):
A lot of the deals investing on or not on EMMA are how we negotiate data sharing and disclosure. It's much more bespoke with our borrower and the amount of both transparency and speed that we get stuff from them, but also what hammers we have over them for failing to disclose. Unlike a lot of the municipal world, in many cases if you don't disclose and you're 30 days late, I can default you and I can accelerate. So the hammer gets very—as you get away from the more traditional market, the hammer for failure to disclose and for lack of transparency gets much, much bigger that I think a lot of people would be shocked by in terms of some of the levers we can pull when people don't give us information. We obviously do use AI to amalgamate information, pull data sources, consolidate, and summarize, which I think a lot of investors are now doing to just help organize our thoughts.

(39:39):
But the key is access to both volume of data and transparency of data in a very timely way for us to be able to make decisions. I think if you look broadly at the municipal market, there are a lot of investors like what Kim said, where if you see an issuer that has failed to disclose or had delays—there is no lack of investment opportunity here—that does cost borrowers money. If you do that enough times, people will just stop investing in your credit and that costs you money ultimately in the long run. So I think getting the market to a more consistent, more uniform, more flow of data in a large amount—I love the idea of having direct feeds to someone else. I don't need it on a daily basis, but if I had direct feeds to their quarterly financials where it just populated into my spreadsheets that I can then look at and analyze, it would be hugely valuable to me. I didn't even know you guys were doing that. That's fascinating.

Nikolai Sklaroff (40:44):
So as I mentioned before, we're a very active issuer. We have multiple entities that we're issuing across. I have a great team—one of my colleagues, Dan Fuchs, is here—but one of the things that I've really come to appreciate is how many people within an organization it requires to do good disclosure. And so it's a very time-consuming process for us and we are—I often tell my team about the thoughts I had at 3:00 AM and too many of them are about disclosure—thinking about how do we continue to engage across so many people? I think all of us in the industry have gotten away from the large in-person financing team meetings too much, and too much of it is happening simply on paper. And it's one thing to ask people across an organization to read a page and tell me if that information is true or not, but a very different question of whether all that information needs to be on the page and whether there's information that's not on the page that should be there.

(42:06):
And so we're rethinking new ways to shake up our process and engage people actively in those conversations. One area that I do worry about as an issuer, as we continue to speak to people, especially on climate risk issues, we're coming to appreciate that investors are increasingly accessing data that we don't see—that we simply can't afford to buy datasets across regions and across the country. And I worry that as some of our free information through the federal government disappears and others have access to this information, that we increasingly have a disconnect of what information issuers and investors are looking at.

Andy Prindle (43:06):
I want to go back to one point you made earlier on about how you guys both gather information for disclosure and the idea of working group meetings or investor meetings. I very much view disclosure as a dialogue. It shouldn't just be a one-way flow of information from borrower to investor telling you, "Here's a snapshot because I have to tell you this and I told you I would." The whole purpose here is to help educate both us in terms of what's going on, but then also make sure we can be helpful. In most cases, especially as you get farther away from just entities buying bonds, solution providers out there want to be helpful to you. And so understanding earlier on where your potential issues are allows us to help you mitigate or help solve around even if it ultimately—I'm long-term greedy, I just want to ultimately get paid back. I have a lot more flexibility in the near term to fix those problems before problems happen than I do once they already have. So I think it should be a dialogue between both sides in terms of what's going on, where we see issues, and let's talk collectively about what those solutions could be going forward.

Jeff Lipton (44:12):
Okay, we're doing really well with time, but there is one last question to throw out to the panel. This is more of a two-part question. Nikolai and Colin, as former rating agency folks, could you comment on ratings expectations given that so many P3s come with marginal IG ratings? Andy and Kim, what are your thoughts in terms of expanded buyer interest? Should credit enhancements become part of the transaction? Also Andy and Kim, more generally for infrastructure, which investor groups do you expect or hope will fill growing infrastructure needs in the future? And perhaps Andy can touch upon how the alternative model can capture value.

Nikolai Sklaroff (44:56):
I've probably been too opinionated about ratings already, but let me share this. I think one of the critical areas that we're seeing more and more discussion about is climate. Notwithstanding green-hushing, notwithstanding the changes from the administration, we're having more robust conversations around climate issues, whether it's wildfire, whether it's how we're managing sea-level rise, you name it. And I think one of the disconnects that we have as an industry—and I think this is not just rating agencies, but it's also us, and all of us can help with this—is that we have managed to create great systems for measuring debt and in effect penalizing people who incur debt to mitigate these risks. We haven't done a good job at either measuring or communicating the risk mitigation that we're accomplishing. Our first climate action plan was in 2004. We've been making these investments for decades. We know that from the sea to the mountains, we have the whole range of things coming at us, but we've already been making those investments. I don't think as an industry—we have green bonds, we have these tools—but we haven't yet figured out sufficiently how we merge that conversation into the rating outcomes.

David Quam (46:40):
That's a good point. Nicola, you'd get dinged if you have too much debt. You won't get dinged if you defer maintenance because that's just sort of unknown, unseen, unmeasured. And I think that's really important to what's around the corner for you as an issuer. I'm not going to jump into criteria—it's been 20-plus years—but I think ratings are important. I don't think an issuer should go the route of private capital just to avoid a rating. Most issuers are going to be back to the market raising additional capital on an ongoing basis. And I think most issuers, even if they do a P3, they still have outstanding debt that's rated. I am also a big believer in full access. If Andy and Kim have access to a deal, then so should my parents if they want to take that risk on as an investor and if they're sophisticated enough or high net worth or whatever. They should have the same access. And part of that is the rating; they need to see the rating and they just don't have the scale to do surveillance, so they're going to outsource that to S&P and Moody's. So I think that's an important part of the equation.

Kim Olsan (47:56):
I'll just speak to the SMA part of our market. I think it is a very big benefit to have access to rating information and the variety of a P3 credit. I think that where an SMA manager has access and the ability to assess risk, there's complete opportunity there and it benefits the investor and the issuer. But it comes down to timely disclosure.

Andy Prindle (48:24):
I'm a little bit of an outlier here in that the majority of my investments that I've made since I've been at Foundation have been non-rated—overwhelmingly 90-plus percent. To the extent that a deal is ratable, we obviously welcome it and we're happy to take a look at it. But I do think there's a pretty significant amount of the market and there's a lot of opportunities out there for either issuers or borrowers that have a project that may not be ratable for one reason or another—construction complexity, revenue volatility, ramp-up risk, whatever it is. Those deals still have access to capital, and it's important they still have access to capital. And I think this gets back to why we have a bigger hammer on disclosure, because oftentimes I'm not outsourcing disclosure and credit work to a rating agency; I'm internalizing that entirely. But look, the need for ratings and the value they add to a lot of these projects is huge. A lot of my LPs care very much about that. It's just a question of where and what type of risk you're willing to underwrite and where it sits within the overall deal.

Jeff Lipton (49:30):
Okay. Well, that's great. We do have some time for audience questions. I can't see anything out there, but maybe shout out if you have one.

Audience Member 1 (49:50):
I'll ask one.

Jeff Lipton (49:51):
Oh, okay.

Audience Member 1 (49:51):
Andy, you've mentioned about the disclosure being a two-way street. I love that. What I run into as a banker is the attorneys have us so freaked out about one investor having certain information and not the other. So we tend to pull back from that just to not get in that situation. I'd be interested in how you get in—most of your projects, you're probably the only investor, so that...

Andy Prindle (50:21):
Not exclusively, but I understand the dynamic there. The more public a deal becomes, the harder it is to navigate that dynamic. And so we tend to lean towards and push for either quarterly calls with investors where you can make it open to everybody so everyone can ask questions and hear what others are saying to allow for that dialogue to happen in a more public manner. I just did one with a public issuer last week where we're an investor alongside other mutual funds and managers, and they had a call with all the investors on the call. They walked through their issues and we all had opportunities to ask questions and to poke and prod on various aspects of what they're in the middle of doing. So I do think it's important to do that. I understand the legal dynamic around it as well, but I think as a whole, our industry would benefit from more disclosure, not less. Ultimately it lends towards better outcomes on terms of project delivery, cost of capital, and just overall information flow. So I think we need to see more of that and there needs to be a much more transparent flow towards that transparency.

Jeff Lipton (51:35)
Okay, great. So we are out of time. I want to thank the audience for your participation and presence here today; it means a lot. And I absolutely want to thank this panel—everyone here did a fantastic job. And again, it's a privilege for me to be here with you. Thank you so much. Thank you.