Industry Outlook from the Leaders in Public Finance

Join our panel of top industry leaders as they discuss their expectations on market performance, bond issuances, credit conditions, and potential challenges and opportunities for the year ahead.

Transcription:

00:00:07:17 - 00:00:30:08
Kevin Murphy

We are here with our first panel industry outlook from the leaders in public finance. Let me briefly introduce our panel of public finance leaders who you all know well. So giving us an investment banking perspective from her extensive work with major issuers all across the Northeast, we have Natasha Holiday, managing director and head of New York office at RBC Capital Markets.

00:00:33:08 - 00:00:57:10
Kevin Murphy

Also from the investment banking side. Bringing us her wealth of experience in underwriting and hopefully some thoughts on the market and rates and supply. We have Angelia Schmidt managing director and head of municipal underwriting for UBS. And next to give his expert insight from the commercial bank lending perspective, we have Kevin Dunphy, managing director and head of public finance at Mitsubishi UFJ Financial Group.

00:00:58:09 - 00:01:18:21
Kevin Murphy

And last but not least, someone who's been on both the investment banking side and the issuer side and has been both a lawyer and a client. But who's here today to help us with an issuer's perspective. We have Marjorie Henning, who is deputy comptroller for public finance at the New York City Comptroller's Office, where she heads up bond issuance and debt management for that office.

00:01:19:08 - 00:01:44:03
Kevin Murphy

So welcome, all. Thanks for being here. And I will let me ask you to start off by giving us just a few brief words to start. If you could tell me. Tell us what do you see as the biggest challenge or a major challenge facing the industry or your organization or your clients going forward? Can I start with Angelia?

00:01:45:08 - 00:01:46:29
Kevin Murphy

And I think you maybe bring more.

00:01:47:12 - 00:02:07:04
Angelia Schmidt

Thanks. And it's great to be here back in this room and see faces once again. in terms of the biggest risk or challenge that I see. And maybe it's based on the seat that I sit in, but certainly liquidity, particularly in the challenging markets that we faced this year. And we'll talk about that more in a little bit.

00:02:07:18 - 00:02:26:24
Angelia Schmidt

I'm quite sure. I do think at the beginning of COVID, there was a stark reminder for many of us about the challenges our market can have when it comes to liquidity and certainly put extreme pressure. And then once again, we're seeing that year to date as we're faced with rising interest rates as well as volatility.

00:02:28:23 - 00:02:30:07
Kevin Murphy

Go down the line, Kevin. Thank you.

00:02:30:20 - 00:02:49:22
Kevin Dunphy

Thank you. I'm also very glad to be here. I was talking to some people this morning. The last chance we got to get together was one by our Deal of the year Award dinner. And fast forward, here we are again together today. So it's great to be with everybody. And in terms of challenges, and I'll take a unique perspective that a lender is really the cost of capital.

00:02:50:13 - 00:03:06:26
Kevin Dunphy

Money's been free for the past several years. It's been cheap. It's been easy for that before. But also, it's got to change. It's still readily available. It's still inexpensive, but it is going to change the cost of funding for the banks. We increase the seller's market.

00:03:07:24 - 00:03:10:02
Kevin Murphy

Make sense. Natasha. Yeah.

00:03:10:11 - 00:03:28:02
Natasha Holiday

I feel like well, first it feels great to see everyone. It really is a pleasure to be happy to be able to hug and to not be masked. I'll tell you that. Quickstart. So my son is five and I told him, so we walk outside and you can take your mask off. Now we say No, I'm okay.

00:03:30:04 - 00:03:56:03
Natasha Holiday

So, so, you know, we're going to the younger people have a bigger adjustment to make than we do. We are ready to take them off. You know, I think that Trezor wouldn't actually stole a lot of my thunder as far as the ESG topic. But I do think that one of the more pressing challenges or areas of focus for the municipal industry going forward is probably going to be the evolution around ESG disclosure.

00:03:56:14 - 00:04:04:15
Natasha Holiday

I understand what constitutes materiality, and so I'm sure we'll talk a little bit more about that as we go through your remarks.

00:04:05:08 - 00:04:05:15
Kevin Murphy

Okay.

00:04:05:27 - 00:04:30:26
Marjorie Henning

Thanks, Mark. Happy to be here in person. Finally, the last time I was on this panel was 2020. And boy, what a difference Two years in the pandemic makes. We were then in a prolonged period of low interest rates, and that seems to be changing as I speak. We are in the market today with six now $800 million in New York.

00:04:30:26 - 00:04:56:28
Marjorie Henning

Water authority refunding and the volatility that we've seen as well as kind of technicals that are fairly weak with fund flows out of muni funds  makes for a very challenging market. So I think that we sell a lot of bonds. Our biggest challenge in the year to come will be to find a market for all of those bonds in a more challenging environment than we've seen in the past.

00:04:57:23 - 00:05:00:24
Marjorie Henning

While we're keeping our debt service costs as low as possible.

00:05:02:28 - 00:05:16:28
Kevin Murphy

Great. Thank you, Mar. I guess let's dig in a little bit more and maybe start with Kevin. From the commercial banking perspective, give us your thoughts on general more general thoughts and outlook and what are banks like yours doing and planning for?

00:05:18:18 - 00:05:45:14
Kevin Dunphy

Thank you. Kevin. Well, we continue to like the market with all the bad news that we hear, the pandemic war rates, all those types of things. The really good news is that we expect the credit markets to be stable next year. So stable is good. So we've seen a lot of good things, a lot of recovery trends. State, local governments, slow growth also being supported by continuing federal stimulus.

00:05:46:09 - 00:06:07:23
Kevin Dunphy

Transportation is improving. Mass transit is how these issues must be recovering nicely. And Pat McCoy is going to tell us about that this afternoon. So that would be good. There are some bright spots in transportation that we look at, particularly marine ports we know about and the airports are recovering nicely. We would expect the airports to come back almost to pre-pandemic levels at the end of the year.

00:06:08:29 - 00:06:34:08
Kevin Dunphy

So and also we've got some exciting things that some of us may be experiencing, though. Kids are going back to campus for higher ed and those types of things that will improve their revenues. So there are quite a few bright spots on the credit side that we're looking forward to and committing the bank capital, because really what we do is we commit our own capital to the deals in the form of bank loans and private placements.

00:06:34:26 - 00:06:58:14
Kevin Dunphy

And we live with the entire deal as opposed to the public market execution And I think it's worthwhile to spend a few minutes as I as I look around the crowd, not everybody has lived through some of the cyclical nature of bank lending but if we go back, for instance, to 86 tax reform at that time, banks with big players and no breaks laughing, he remembers.

00:06:58:27 - 00:07:25:12
Kevin Dunphy

But banks own 40, owned 40% of that out there. So there's a big change there so that to some disruption in a way that many of you would experience and the banks migrated at that time from a funded position of owning the debt to moving to an off balance sheet. The yield curve and change in the banks migrated to letters of credit, standby bond purchase agreements off balance sheet contingent liabilities.

00:07:25:21 - 00:07:43:19
Kevin Dunphy

So it is a bit of a change. Until that 2008 hit hard and then there was running, oh, what are the banks going to do? What's going to happen? Are we going to be able to renew those types of things? So what evolved out of that crisis was really another movement back to the funded world. And that's where bank loans became more and more popular.

00:07:44:00 - 00:08:07:11
Kevin Dunphy

Almost 45% of the market during that period of time were people converting their variable rate debt to bank loans. So we moved back in that market. and people were adding debt, adding that. And then we had the Tax Act in 17, and all of a sudden that changed. And the banks returns were going to get crushed because of the different tax rates.

00:08:07:11 - 00:08:31:02
Kevin Dunphy

The banks were under. However, if you are very familiar with documents, there is sometimes language in there increased cost which allowed the banks to go back to their issues. They don't mind if we double your rates. Do we have the legal right to do that? So that led to some relationship issues at the time.  And that actually worked its way through, too.

00:08:31:23 - 00:08:57:23
Kevin Dunphy

And now, now that we've gone through that, now we've all gotten a little smart about the documentation It's become even more popular. So banks, banks are back and they're lending like champs. But really, why is that? Well, there's a number of reasons for it. Some are economic. Some are ratings. Some are driven by their long deposits. Banks are flush with cash.

00:08:58:11 - 00:09:22:13
Kevin Dunphy

So though I used to talk about free money, now it's just cheap and available because we've got to put those deposits to work. And the corporate borrowers dried up, really in the pandemic. There's no capital plans being implemented. So we're stuck with this about how to get rid of them. We look to a very solid credit base. Good news is we wound several losses.

00:09:22:13 - 00:10:00:17
Kevin Dunphy

The bad news is our best creditworthy borrowers get our lowest rates. The margins are thinner. I agree. And then you couple that with some of the changes coming out of the regulatory world wherein the regulators are requiring us to hold more capital against us, it's less profitable. So therein lies the rub. What did the banks do? Well, one of the things one, when banks decide whether or not to make a loan behind the scenes, they run return models and they allocate capital within the bank based on the best return So I'm competing with my left friends.

00:10:00:18 - 00:10:27:13
Kevin Dunphy

We're earning plus 500. Then that's how they allocate. Yeah, but the best source. So what we have done in many cases the banks have done in general is we add revenue to the numerator of the return calculation. And that revenue we add are non credit. These fees that don't draw capital, that don't affect that denominator, that will boost the return calculation And what are those most common fees?

00:10:27:13 - 00:10:57:01
Kevin Dunphy

Underwriting fees work really well. That's one of them. So it's really turbocharging that calculation. So you might be incented to provide very attractive financing exchange for a piece of the takeout or exchange for future rendering, those types of things. So that's one of the important decision criteria The also, when you talk about bank loans, they can be very flexible.

00:10:57:17 - 00:11:26:06
Kevin Dunphy

You can create a bespoke structures for the issuers. For certain situations where you may not have time to go to public markets, you might wind up doing it more quickly, could be less expensive, but it could be custom tailored to a specific situation. One example that might be a Cinderella, for instance, something like that. But there's also some uses and as these become more flexible and people get more creative.

00:11:26:18 - 00:11:47:02
Kevin Dunphy

One of the things that we've been doing lately is lending the public pension plans, for instance, to enhance their investment returns. And these are big ticket items. So people are going outside the box when they think about what what can bank loans do for you? How can you use that instead of an interim construction fund instead of a CPA program?

00:11:47:18 - 00:12:26:16
Kevin Dunphy

Can you use a bank loan? Is it more efficient to pay a commitment fee as opposed to entirely used for your drawing, as we call it in the industry? So there are a number of different aspects that that we look at. And then finally, the growth area, particularly in our firm, is something you might not consider, and that's ESG ESG is promoting loan growth because if you as an issuer tell your banker that you have a project that may qualify for ESG credit and you don't have to beat them with a stick to get rid of them, they they want that internally.

00:12:26:17 - 00:12:58:24
Kevin Dunphy

We're desperate for ESG assets. We've changed some of our internal operations like that. We're creating loan funds, not bond funds, but loan funds for ESG purposes. For investors who want that exposure as well. So that's also driving loan growth. So as you think about your need, your borrowing needs, if you think creatively short term, uncertain cash flows, that may make the bank loan an attractive alternative, but something you should talk about with your advisor but it is something that's very popular.

00:12:59:07 - 00:13:10:22
Kevin Dunphy

And although we certainly have attractive rates now, we're not looking down the road to seeing the same attractive rates that we see now. So food for thought. Happy to answer any questions at the end.

00:13:11:13 - 00:13:29:14
Kevin Murphy

That's great. Thank you, Kevin. We'll get back to more on the ESG topic later. Yes. Angela, so it for the issuers who are maybe not going to take the bank loan, but they're going to go do a public offering. Can you give us a little bit of your perspective on how underwriters see the market, maybe thoughts on the rate, outlook and supply?

00:13:29:23 - 00:13:30:15
Angelia Schmidt

Sure. Yeah.

00:13:30:22 - 00:13:31:10
Kevin Murphy

Among other things.

00:13:31:20 - 00:14:06:02
Angelia Schmidt

So I think is probably most folks are aware we're at this point because we've all mentioned it. We've had a very volatile start to the year, both in terms of pressure on rates as the market initially was trying to gauge the pace of interest rate hikes given sort of evolving and strong economic data that was coming out. And then more recently, sort of an opposing force here is sort of a flight to quality that in light of what's going on in the Ukraine and the geopolitical events overseas, focusing first on sort of the Fed.

00:14:07:11 - 00:14:32:00
Angelia Schmidt

There really are two key metrics that the FOMC looks at, specifically the labor market. In the last labor report we got for January beat across the board. Non-farm payrolls came in at four 67 versus one 25. Expected unemployment rate, 3.9 versus 4%, etc.. And then the other key metric is inflation. And I think we all feel that in day to day lives.

00:14:32:28 - 00:14:54:09
Angelia Schmidt

But just to give a metric, there we are at a 40 year high. The January report came in at seven and a half percent increase year on year. So those are sort of the two key metrics the Fed looks at. And therefore the market looks at. And as we really started out the year, we saw a pretty dramatic shift in the market expectation around the interest rate path for the year.

00:14:54:28 - 00:15:23:05
Angelia Schmidt

We started the year with the expectation that there would be three hikes, interest rate hikes this year, probably starting in the middle of the year. Something like that was the market expectation And very quickly, as we got into January, that changed. And prior to the geopolitical events, which we'll get to in just a moment, the market had gotten to the point where they were pricing in six and a half hikes this year and fully pricing and a 50 basis point hike at the March meeting, which incredibly is two weeks from now.

00:15:24:00 - 00:15:51:20
Angelia Schmidt

That's changed a little bit, I think underscores sort of the volatility that we're working through. When I looked at the futures markets this morning, it's now pricing in only a 25 basis point hike in two weeks and four to five hikes for the year. So the market really is sort of moving, I would say, on a day to day and at times on an hourly basis in response both to economic data as well as what we're seeing in the broader backdrop when we look at rates.

00:15:51:21 - 00:16:18:17
Angelia Schmidt

We certainly have seen pressure on Treasuries versus yesterday closed. The tenure was 32 basis points higher in yield. The two year 70 basis points higher. We're getting a rally again today so it's a bit less than that but we are off to the highs of the year. The ten year hit a 205 just two weeks ago. Again, prior to what's going on in Ukraine, and really that's affecting equities, treasuries and of course, the energy markets as well.

00:16:20:15 - 00:16:45:04
Angelia Schmidt

So when we look at sort of to your question around forecasts and some of the perspective here, including what Kevin was just sharing. Yes, we have a bias towards higher rates. I actually think the volatility is what makes things trickier. So when we look at what the market's forecasting, we're looking at a ten year treasury at a two 12 in September and a two 21 by year end.

00:16:45:05 - 00:17:09:17
Angelia Schmidt

So yes, that's 32 50 higher than where we're looking at the ten year this morning. But in the grand perspective of things, particularly relative to historically, you know, we're still looking at low two percents, which does provide attractive financing for issuers with all that in the backdrop. Again, I think volatility as well as in general upward pressure on rates.

00:17:10:00 - 00:17:32:19
Angelia Schmidt

That's made for a difficult start for our market. On the municipal side of things. Add to that and again, Marge alluded to this sort of a technical picture which has changed dramatically from last year. So last year we had 45 weeks of inflows, just constant cash coming into our market. This year already we've had five weeks of outflows.

00:17:33:00 - 00:17:50:06
Angelia Schmidt

And I know in a lot of the client conversations, I had kind of the latter part of last year You know, people ask, what are you looking for? What are you concerned about? What do you know? And I would consistently say, once you see the outflows, it's time to kind of take a closer look So we're seeing the outflows.

00:17:50:06 - 00:18:18:11
Angelia Schmidt

They've totaled nearly 7 billion year to date, and it definitely puts pressure on our market. Particularly given last year, that was really the key support of the market. And that allowed us to have a really long period of sort of sustained rich valuation. So low ratios combined with historically low rates. So all of that has changed. With that in mind, we have underperformed in terms of tax exempt rates.

00:18:19:00 - 00:18:42:17
Angelia Schmidt

Looking again at the ten year tax exempt ten years, 55 higher year to date. So a pretty significant move. The two year is 82 basis points higher. Again, contrast that to the 32 and 70 I just quoted for Treasury. So we've definitely underperformed and that's in the face of pretty moderate supply year to date. We're running at just over 7 billion per week.

00:18:42:28 - 00:19:06:24
Angelia Schmidt

Historically, it's more like eight to 10 billion per week. However, when you dissect that, one interesting point I would make is it's really the taxable supply that's dropped. Last year was about 25%, maybe slightly more of the overall issuance this year. Again, not shocking given what we're seeing going on with treasuries and credit spreads, but it's now running at about 17%.

00:19:06:25 - 00:19:42:05
Angelia Schmidt

So tax taxable supply is definitely down. With all that being said, again, I think perspective wise we're still still seeing very attractive rates for issuers and we're still seeing a well-functioning market with issuers able to access the market. But in many cases, you know, having to sort of navigate through some of the choppiness, maybe limiting their exposure to the market by doing a single day execution and really kind of having to work hard to in order to sort of achieve the best outcome on any given day.

00:19:42:28 - 00:20:03:23
Angelia Schmidt

Again, Kevin, you asked about sort of forecasts. I've made the easy one that that always gets covered at this conference is supply forecasts. And the upshot UBS supply forecast is for 40 to 40, 45 billion for the year. So that is down and expected to be down from approximately four 80 that was issued last year which was a near record year.

00:20:04:04 - 00:20:19:00
Angelia Schmidt

I think in general of the forecasts that I've seen a lot of folks are expecting it to be slightly less than last year. And in general, I think there's a view that the taxable supply will be lighter than we've seen in recent years.

00:20:19:24 - 00:20:34:08
Kevin Murphy

So with that Well, thank you. Maybe we'll get back to the others supply forecast towards the end. But but picking up on those challenges that you laid out that issuers are facing large, do you want to elaborate a little on how the city in New York and issuers like it are responding?

00:20:35:28 - 00:21:06:28
Marjorie Henning

So first, I'm going to say what we don't expect to do, which I understand a lot of issuers are looking at ways to lock in to these interest rates as a hedge against expected rising interest rates with rate locks and forwards The city has never really done that. We don't try and time the market. We're in the market so frequently we borrow about $10 billion a year over our three main credits that go the New York City Transitional Finance Authority and the Water Authority.

00:21:07:09 - 00:21:38:04
Marjorie Henning

So we do not expect to be doing any forward rate locks our borrowing program and schedule, we really don't think is going to change significantly from what we planned at the beginning of the fiscal year back in July last year. In the near term, we have a multibillion dollar TSA funding that is pressing later this month. And as well as the week of March, 21st, $1,000,000,000 go refunded.

00:21:38:05 - 00:22:04:02
Marjorie Henning

And as I noted earlier, we're in the market today with an $800 million water authority refunded for our new money needs. Over the past, say, four months until the end of the fiscal year, we'll be doing about $1,000,000,000 of TSA new money, bonds and maybe one and a half billion or so ago bonds. So we're going to help with the moderate supply.

00:22:04:10 - 00:22:04:21
Kevin Murphy

In the.

00:22:04:21 - 00:22:35:08
Marjorie Henning

Next few months. So in spite of recent interest rate increases, we do expect to be able to derive significant refunding savings through the GEO and temporary fundings that I've discussed. So in order to address all these challenges, we will likely explore ways to diversify our offerings away from a fixed rate serial. The term bonds with year maturity, even though interest rates are rising.

00:22:35:28 - 00:23:01:07
Marjorie Henning

We expect to continue to use variable rate bonds at the long end of the real of the yield curve to displays our most expensive fixed rate debt. Unlike most issuers, we do issue variable rate bonds pretty consistently in all market conditions. And our goal is to maintain from ten to 15% of outstanding debt of each of our three credits in the short end of the yield curve.

00:23:02:20 - 00:23:33:27
Marjorie Henning

We use variable rate demand bonds, and we recently developed a new product back in October of 2019. We developed an adjustable rate product that we call adjustable rate. We marketed securities they have a daily interest rate reset based on market conditions, just like the DBS. And the holders do have the ability to ten year bonds for repurchasing at par with seven days notice.

00:23:34:09 - 00:23:57:06
Marjorie Henning

But if tender and part bonds cannot be marketed after a specified time period, the interest rate increases to 12% until they can be re marketed. So there's no put on these bonds. It's just a step rate, stepped up rate since the city is not required to pay the purchase price in the event of a sale remarketing. We don't need bank liquidity for these instruments.

00:23:57:21 - 00:24:26:24
Marjorie Henning

And because we were such heavy users of bank liquidity in the past, we had at one point our total variable rate portfolio of the R DBS essentially over the three credits was over $13 billion Our fees were much higher than they should have been for Double-A rated credit. So all of our credits are at least double A-rated. So we really wanted to diversify away from the VRT needs a little bit to bring those fees down.

00:24:28:15 - 00:24:59:16
Marjorie Henning

So these bonds are ours are not money markets eligible, but we have getting quite a bit of market acceptance of this product among short term bond funds and they pay a little bit more than we are DBS because there is no big support. So, you know, in the short term market and rates were close to zero The fact that these were about 15 basis points over they have been averaging you know was looked at is very attractive.

00:25:00:18 - 00:25:35:11
Marjorie Henning

So since our first issue of ours back in 2019 we have issued another 100 million of ours on the New York City Water Finance Authority credit that was just a few weeks ago and we have a total of 360 million shares outstanding on the geo credit. So over the past few years we've also reduced our voids outstanding by periodically converting variable rates bonds that are maturing within 15 years or so to fixed rate bonds.

00:25:35:20 - 00:26:09:18
Marjorie Henning

And that was to take advantage obviously of the very low rates in that part of the curve as a result of these conversions and the issuance of ours and some arm-twisting. People like Kevin we have really been successful for and seen our liquidity fees come down by about 30%. So that's been really great. Sorry We will continue to be very busy with the quality, but we're also going to continue to issue ours and other short term products to help diversify our offerings.

00:26:10:11 - 00:26:39:20
Marjorie Henning

In addition to variable rate offerings, we expect to explore the use of other types of financings that enable us to make big deals smaller by offering different types of bonds in our large offerings. The Water Authority, for example, is used what it calls the Thunderbolt principal installments for lawyers out there, like a balloon indebtedness type of concept, fixed rate maturities, usually in the five to seven year range to diversify their new money offerings.

00:26:40:07 - 00:27:12:27
Marjorie Henning

So the bulk water authorities, new money financings are usually three year term bonds by issuing shorter maturities they're able to access retail and other demand in that part of the curve and lower their overall debt service costs for the city. And TSA, we will likely be exploring friends, fixed rates, coupon bonds. In addition to variable rate bonds. And we, our office would also like to use ESG bonds to attract a growing number of ESG investors.

00:27:13:19 - 00:27:42:07
Marjorie Henning

There are challenges for us to use ESG to label our bonds as ESG bonds, because typically we borrow to finance cash flow, capital cash flow from the city's general fund and we don't borrow for specific projects. So when we issue bonds, we may not know exactly what the proceeds of those bonds will be used for. So that's one of the main reasons the city has not really been active in the ESG market.

00:27:42:07 - 00:28:05:25
Marjorie Henning

But, you know, I continue to think where there's a will, there's a way, and we're going to continue exploring the possibility of trying to figure out how we can issue ESG bonds. Recently, we've been looking at designated in the bulk of our taxable borrowing, and we do do a fair amount of taxable borrowing, mostly for affordable housing and economic development.

00:28:07:04 - 00:28:31:26
Marjorie Henning

Projects that have private use. And so we have been exploring designating some of our taxable bonds of social bonds since almost all the proceeds are applied to affordable housing programs. And of course, we will continue to issue current funding bonds to lower our debt service costs and achieve budget savings in addition to the three recent things we're doing this month.

00:28:32:00 - 00:29:04:02
Marjorie Henning

We expect to have two more TSA funding issues in the summer. One for the future tax secured, credit on the TSA bonds, and another for the building need revenue bonds. And we will probably be doing another geo refunding in December. Finally, I would like to note and enjoy alluded to this that even with the recent sharp increases in interest rates, both 30 year M.D. and 30 year Treasuries are currently below their averages.

00:29:04:02 - 00:29:29:22
Marjorie Henning

Looking over the past ten years. And ten year Amundi is also below its ten year average ten year treasuries right now, or at their ten year average just as of yesterday. So, you know, when you take the long view, I've been doing this kind of a long time for people who've only been in the industry about ten years, you know, kind of have a different perspective because rates are so low for the past ten years.

00:29:29:23 - 00:29:46:04
Marjorie Henning

But you take the long view rates are not quite as scary as you might think. Although, you know, I will say the volatility is definitely an issue with what we're in the market Thank you.

00:29:46:20 - 00:29:47:01
Kevin Murphy

Go ahead.

00:29:49:18 - 00:30:02:15
Natasha Holiday

I think Angela and Marge just really outlined some really important kind of technical features of the market place. And really for issuers, I mean, this is a time where you really have to be nimble and you really have to put all.

00:30:02:15 - 00:30:03:17
Natasha Holiday

Your tools on the table.

00:30:03:26 - 00:30:40:17
Natasha Holiday

Right. So, I mean, we're just talking about lots of different product utilization, trying to get to different pieces, places on the curve. All that can be really important But I think one of the things that's really interesting, the first step back and talk about that, right. You know, I think we have to acknowledge that our marketplace has actually seeing a significant concentration of capital, which kind of exacerbates when people want to step into the market and actually deploy capital versus a market right now where there's tremendous uncertainty and volatility is driven in part because people are trying to step back.

00:30:40:19 - 00:31:00:29
Natasha Holiday

And so I just think that, you know, a lot of investor outreach, I think, is going to be really important, giving yourself time in the marketplace to have those conversations and to get a little bit of extra time to to to try to get investors to the table, to have conversations Thank you.

00:31:01:02 - 00:31:23:06
Kevin Murphy

And touch it. Also, one of the things we've seen the past couple of years is focus on risk. The issuers of external pressures like climate change. And can you talk a little bit how issuers you worked with are thinking about that and disclose disclosure of that and also what they're doing on the ESG front broadly, either in marketing the bonds as this march was talked about?

00:31:23:14 - 00:31:23:22
Kevin Murphy

Yeah.

00:31:24:13 - 00:31:54:26
Natasha Holiday

I mean, our clients have been early adopters disclosing risk associated with climate change and cybersecurity. I mean, currently issuers are outlined in general terms of risk associated with climate change and cybersecurity in response have strategies that are either completed or underway to respond to those risks. I think that, you know, where the market is right now is definitely an area of focus is around, you know, what qualifies for disclosure.

00:31:54:27 - 00:32:26:07
Natasha Holiday

Right. So what is materiality? You know, how far to go as far as what you disclose. And there are investors, there are people in the market that have a keen focus on disclosing those risks, enhance climate, secure cybersecurity. And then for issuers, I think the challenge is that, you know, that their responsibility is to provide uniformity in what they're communicating to the marketplace as well as, you know, there's just not a lot of concrete analysis.

00:32:26:08 - 00:33:05:25
Natasha Holiday

Right? I mean, a lot of these restarts are indeterminate and subject to probability. And so those are really some of the challenges, I think, around disclosure. But I do think that because our market right now is doing disclosure or even ESG certification as an example, are some and self-certification some by third party certification. And and there's not a standardization around what qualifies as ESG that does present potential risk to the marketplace for, you know what, if there's not compliance with the ESG designation in the future, you know, how is that addressed?

00:33:06:04 - 00:33:28:20
Natasha Holiday

I think the other challenge there is you've seen if you look at the corporate market from ESG perspective, the standardization around the metrics for ESG has actually allowed them to see pricing benefit. So, you know, I think clients in our market are actually looking for I'm going to go forward and kind of go through the process of certification that I would like to see some type of benefit.

00:33:29:18 - 00:33:35:04
Natasha Holiday

And so, you know, I do think standardization has a role in our marketplace that hopefully, you know, in the.

00:33:35:04 - 00:33:36:06
Natasha Holiday

Next 12 to.

00:33:36:09 - 00:34:07:06
Natasha Holiday

18 months will become a clearer picture for our market participants. You know, I think one area that is kind of underreported on and I think the Treasurer, I spoke to it earlier is this ESG, the social piece. And one thing that I think the last 18 months has presented to us is that disruption, whether it be civil unrest, economic inequality has inherent risks to our municipal entities.

00:34:07:06 - 00:34:44:15
Natasha Holiday

Right. And so, you know, the question again is how do you disclose that? How do you quantify that in those key impacts? But we have to get ignored. I think that that's one thing that has become more clear you know, I think SeaWorld would say oh, I went down pretty quickly. Okay. So, yeah, one thing, the march on the banks I want to turn to to talk about is in the ESG space.

00:34:44:18 - 00:35:17:00
Natasha Holiday

What are the emerging and fastest growing products? Right. So one of the areas of product is sustainability linked bonds. And why it's important because a lot of our issuers have the same problem and challenge that New York City does. They don't want to try to link to a specific project. Right. Sustainability linked bonds, which is one of the fastest growing segments in the ESG space, allows you to to to focus on the principles and goals and broader objectives that a city outlines for their ESG objectives.

00:35:17:00 - 00:35:39:13
Natasha Holiday

And so that gives a lot more flexibility. That is not specifically project project focused that you can really focus on a longer term outlook around improving the sustainable environment in which our city and state governments are operating You know, I think in that way met in that particular structure. What you have is a coupon that remains the same.

00:35:39:21 - 00:35:59:05
Natasha Holiday

You don't experience, you know, if you meet your objectives and there's no step up in that rate. You know, so one of the things that we spend our time with our clients talk about is, you know, how do you outline the next steps in your ESG journey? And so, you know, we really start with focusing on a framework, building your framework, really, what are your goals?

00:35:59:05 - 00:36:30:21
Natasha Holiday

What are your long term goals? What do you find your goals? What are your long term aspirational goals? And really establishing a framework that nearby the market can kind of have an insight into what you're trying to accomplish from an ESG perspective. The other point is making sure that you're aligned in the standardization, the icing on the ice as you make international capital markets association principles.

00:36:31:00 - 00:37:06:10
Natasha Holiday

Again, this is focused on standardization that allows the market to digest your objectives in a more concrete way. That allows the market to actually compare your objectives to two other issuers of the marketplace and derive more value. So I think that that's another area that is important to focus on. You know, we have a global sustainability finance group that we work pretty closely with in our industry to outline some of these global trends in the marketplace so that so that our issuers can continue to advance.

00:37:07:26 - 00:37:26:10
Kevin Murphy

Thank you, Natasha. That's great. And we heard about Kevin's bank and what they're doing on the ESG front. I guess if anyone wants to jump in on that, otherwise we can open it up for questions to the panelists Yeah. Okay.

00:37:29:02 - 00:37:54:26
Marjorie Henning

And as of ESG disclosure, we're in the midst of responding to the MSRB request for comments on various questions as to how and whether to standardize ESG disclosure. And, you know, the environmental seems fairly straightforward, but for social and governance, I've really been kind of struggling with how to kind of extract those factors from just general credit worthiness.

00:37:55:07 - 00:38:22:02
Marjorie Henning

I mean, the city has a lot of income inequality but there's also a lot of wealth and, you know, an economic diversity. So, you know, our our credit is strong. And, you know, how do you really isolate, say, governance risks from general credit quality? We have a very strong managerial framework institutionalized since the fiscal crisis in the seventies.

00:38:23:06 - 00:38:47:15
Marjorie Henning

You know, but when you have governance challenges the last administration, the mayor and the mayor and the governor famously did not get along. You know, at what point does that, you know, rise to the level? And it really is material. And, you know, I don't think it did for New York City, but I think it is kind of hard to tease out some of those back.

00:38:49:21 - 00:38:50:00
Kevin Murphy

Sure.

00:38:50:26 - 00:39:18:00
Natasha Holiday

Yeah. No, I think you're right. And I think in some ways on on the government side, it really kind of rests in the same space that I think our current disclosure for general ESG principles, it's kind of an acknowledgment more so than trying to kind of outline all the mitigating steps. And so I think that's probably a first step because I just don't think we can continue to ignore the role that you know, governance and social.

00:39:18:00 - 00:39:18:16
Marjorie Henning

Play.

00:39:19:09 - 00:39:48:19
Natasha Holiday

In a lot of, you know, quality of life workforce development areas as far as affordability of affordability. I mean, we saw some tremendous shifts, right, in where people decided to migrate based on possibly cost of living, quality of life factors. And and that's going to have a longer term impact, a longer term outlook. And our outlook on our marketplace on a city by city basis as well as a statewide basis.

00:39:51:00 - 00:40:07:28
Kevin Murphy

Right. I think that. So open up to questions for any of our panelists. Got the commercial bank perspective, the issues perspective, the underwriters Are there any questions you could Sure. Sorry.

00:40:08:26 - 00:40:11:05
Angelia Schmidt

Okay. Since we started.

00:40:11:05 - 00:40:13:24
Marjorie Henning

Talking about ESG disclosure.

00:40:14:01 - 00:40:15:05
Angelia Schmidt

I said more of a comment.

00:40:15:05 - 00:40:20:11
Marjorie Henning

Than a question. But if you have something to say back, there's a whole nother world out there.

00:40:20:24 - 00:40:23:04
Angelia Schmidt

Competitive in the bond market where.

00:40:23:14 - 00:40:25:06
Marjorie Henning

We as underwriters are looking.

00:40:25:06 - 00:40:25:20
Angelia Schmidt

To see.

00:40:25:23 - 00:40:32:11
Marjorie Henning

What are we going to do with this whole disclosure question. And it's great when you're working with clients, you're helping them, guiding them. You know.

00:40:32:24 - 00:40:34:02
Angelia Schmidt

On our negotiations, I would do

00:40:34:02 - 00:40:35:13
Marjorie Henning

That when competitive.

00:40:35:13 - 00:40:40:09
Angelia Schmidt

Market I've been trying to outline, you know, where people are disclosing stuff is a.

00:40:40:09 - 00:40:41:27
Marjorie Henning

Huge geographic difference.

00:40:42:14 - 00:40:45:02
Angelia Schmidt

Even finding out, you know, different parts of the country.

00:40:45:02 - 00:40:46:27
Marjorie Henning

Do a lot more but once.

00:40:47:09 - 00:40:53:27
Angelia Schmidt

It comes down to being required, needed, desired. I'm not quite sure how the underwriters are ever going to say.

00:40:54:04 - 00:40:58:09
Marjorie Henning

How do I know if the city of Reno is actually disclosing their governance.

00:40:58:09 - 00:41:00:20
Angelia Schmidt

Issues? It's a.

00:41:01:09 - 00:41:04:03
Marjorie Henning

It's a difficult question just to say that.

00:41:10:03 - 00:41:22:24
Kevin Murphy

We'll have to have you on the next panel It's a good question and I'll go ahead Getting back to ESG.

00:41:23:16 - 00:41:27:04
Kevin Dunphy

Most of the discussion and most of the focus tends to be environmental.

00:41:27:04 - 00:41:28:21
Kevin Murphy

Green, social action.

00:41:28:21 - 00:41:32:11
Kevin Dunphy

Etc. But I think if you look at what's going on right.

00:41:32:11 - 00:41:39:26
Kevin Murphy

Now in Eastern Europe, what's the main focus that we're that everybody's focused on today is cyber. And I don't hear that.

00:41:39:26 - 00:41:43:12
Kevin Dunphy

A lot being discussed by municipal issuers. But if you think about the G and.

00:41:43:12 - 00:41:56:09
Kevin Murphy

ESG, that's governance. An important part of governance is cyber and protection. What steps are you taking to really get your hands around that? But I believe in our market, when I look at the corporate issues, they spend a lot of time on that topic.

00:41:56:15 - 00:42:00:16
Kevin Dunphy

We don't really do that. So I'm curious if someone has an opinion on that of how we could change that.

00:42:02:28 - 00:42:31:05
Marjorie Henning

You know, we have had some pretty separation or disclosure for a few years now. And it does get tricky because, you know, the city does a lot on that front. You know, obviously, you can't you can't tell people too much because you don't want to give anyone a roadmap. But, yeah, I think that is there's a lot of vulnerabilities and they're difficult to protect against.

00:42:32:08 - 00:42:36:27
Marjorie Henning

So I think that is an issue here.

00:42:36:27 - 00:42:37:20
Natasha Holiday

I think that the.

00:42:37:20 - 00:42:38:20
Kevin Dunphy

Challenges and.

00:42:38:28 - 00:43:05:02
Natasha Holiday

Probability, right, there's there's a certain level of fundamental risk that I think we all understand when it comes to cyber. But then there are the unknown unknowns, and that's hard to quantify in a disclosure document. And it would be really hard. I mean, that puts probably an undue burden on our issuers to try to quantify that have come up with some type of mechanism, particularly if it's not a standardized mechanism around cybersecurity to have to disclose.

00:43:06:10 - 00:43:08:20
Angelia Schmidt

I think that's a very, very good point.

00:43:10:21 - 00:43:36:09
Angelia Schmidt

You know, it was something that was really not focused on at all until, say, two, two or three years ago when there were a couple kind of headline type events in our space. And I think as a result of that, we did start seeing a lot of focus on it, particularly on the disclosure. But I agree with you, it's not something that seems to be actively talked about, particularly, you know, given all of the discussion out there on ESG.

00:43:36:19 - 00:44:00:19
Angelia Schmidt

And I wonder, to your point, given what we're seeing happening currently, is that will be a refocus. And, you know, ESG is complex, right? It's difficult. I do think, you know, you had asked at the beginning what are the biggest risks or challenges? I think ESG falls into that bucket as well as the other bucket, which is what is the biggest opportunity or one of the biggest opportunities we have?

00:44:01:29 - 00:44:28:23
Angelia Schmidt

I do think we're sort of lagging in some ways relative to, say, the corporate bond market where they're getting a pricing benefit. And that's for household names that don't seem nearly as ESG as most of the issuers in our market. So I do think there's an opportunity it's not without challenges, not least of which is sort of developing a market sort of vocabulary or language and how we talk about it.

00:44:28:23 - 00:44:48:25
Angelia Schmidt

So that we're clearly talking about, you know, disclosure, which basically all issuers are subject to and is where a lot of the challenges and complexity comes in as well. As those that are looking to self label to promote or market their deals in that way. And ultimately, I think we'd all like to see a pricing benefit for that work.

00:44:48:25 - 00:45:13:09
Angelia Schmidt

That's being done. So there's a lot, a lot that needs to happen. But I totally believe in the intelligence and creativity of this market and all of all of those in this room to continue to work forward on that, because I do think it benefits our entire market, whether it's bringing in new buyers you know, mitigating, risk sharing, best practices, you know, there's a whole host of ultimate benefits.

00:45:13:27 - 00:45:19:19
Angelia Schmidt

But again, appreciate that. It's difficult, particularly for certain stakeholders in our space.

00:45:21:04 - 00:45:48:28
Kevin Dunphy

I think it's valuable to bring it up more airplay. It's the more it demonstrates the need that's on its most basic level, and we think about the decision makers often they're not the best technology people in our respective firms. And on a base level, it's difficult to understand It's very expensive and it's time consuming to implement. So the more we talk about the need and hopefully we won't have a demonstration of how important it is, it's important to have discussions about it in forums like this.

00:45:51:22 - 00:46:05:08
Kevin Murphy

Thank you. And maybe one more question or just I it's a two part question. Are you seeing public safety in any changes in.

00:46:05:08 - 00:46:10:20
Kevin Dunphy

Public safety affecting the markets for any issuers? And if so, is.

00:46:10:20 - 00:46:19:11
Kevin Murphy

There certain data that issuers could report that might advantage them just.

00:46:24:04 - 00:47:18:27
Marjorie Henning

About safety is a huge political issue in New York City. As you know, And, you know, I will say that perception is more important than reality here. New York City remains the safest large city in the United States by far. And, you know, the there has been an increase recently in violent crime It is reported a lot. But, you know, I think the the problem is much more of a perception problem than is a reality problem, especially, you know, when you look back not that long ago I moved to New York City in 1983 and crime rates are way way way below one they were that you know again almost like the social kind of our

00:47:18:27 - 00:47:54:07
Marjorie Henning

governance aspects it's really hard to kind of separate out issues related to kind of attractiveness of a place to live from. You know the perception of problems in the public safety arena from issuers creditworthiness. I mean if you were to see a lot of you know an exodus from New York City because you know people want to move somewhere that they perceive as safer or good luck because most mid-sized cities have much higher crime rates per capita basis than New York City.

00:47:54:07 - 00:48:06:03
Marjorie Henning

But, you know, that said, you know, at some point it could become a credit issue and would have to be disclosed. I don't think we've we've reached that point at all.

00:48:08:06 - 00:48:25:03
Kevin Murphy

All right. Well, I think we just about use up our times unless there are any burning comments from the panelists, I think. Thank you very much for the question. Thanks to all our panelists. We'll wrap up and we have a ten minute break and then back at 1054 to talk about infrastructure. Thank you.