Public Finance Leadership Roundtable

Agenda

Download Agenda (.pdf)

Recap

On Thursday, June 20th, the BDA held its Public Finance Leadership Roundtable at Quarles & Brady's offices located in Chicago, Illinois. The roundtable was attended by over 30 representatives at BDA member firms and was sponsored by Quarles & Brady and Lumesis. The discussion focused on the most recent market and regulatory topics facing middle-market banks and dealers in 2019.

You can view the roundtable agenda here and a full recap of the day follows below.

Banking Discussion Topics

2019 Outlook and General Market Trends

How do you perceive the market: municipal volume and/or interest rates?
- The deal volume will be moderate for the remainder of this year and next
- Deal volume may see a pick up in 2021
- The moderate issuance environment is due to governmental entities and their financial situations and a general lack of new revenue sources
How much of your business makes up Private Placements?
- Banks are seen as less interested in the business (down 15-20 percent)
- The public market is more efficient; comparing pricing is a compelling argument to go to the public market
- Rate advantages in the public markets and the yield curve is not as steep.
- Some members see the business trending down due to the 2017 tax law changes and banks' unwillingness to enter the market
- State and local governments are not issuing as much debt as they have in the past due to a lack in sales tax revenues and trends for backlogging or deferring maintenance projects
Trends
- Consolidation is taking place in the marketplace
  - Fewer firms are underwriting
  - Investors are getting larger
- There's a continued push to divide advice and executions
  - Nothing happens too quickly
  - Spurred by MA push
  - Political/Regulatory pressure to put issuers in a box
  - BDA to develop a working group to intervene on MA issue to interface with GFOA on its best practices document
Will fees continue to get lower or work it's way back up?
Are there pockets around the country where bankers are all you need?
Are your interactions with issuers changing and evolving?

New Continuing Disclosure "Material Events" & Related Underwriter Due Diligence

Participants discussed recent changes to 15c2-12 compliance
- The aftermath is yet to be determined because it is very difficult to monitor whether someone is in compliance
How do you define materiality?
- What should be disclosed and how are you handling it?
- At GFOA's conference last month, 75 - 80 percent of issuers said they know what to do and when to disclose
- However, of those that file, only 10 - 15 percent of what is disclosed actually needs to be filed (the rest is a data dump)
Has anyone had an issuer say they do not want a public offering due to the current market environment?

Cyber Risk and Fraud Mitigation in Public Finance

Credit Implications
- Should issuers have a policy to pay a ransom?
  - Ransoms (is it legal to pay)?
  - What general risk management techniques are you currently using to mitigate cyber risk
Cybersecurity
- Should it be deemed a capital expense?
- There is a higher concentration of activity in the healthcare and higher education fields
- What procedures do you have in place when sending wire procedures?
Credit Perspectives
- Currently, no methodology exists for cyber risk
- Risk is currently assessed within your rating
- Compliance record is a strong indication of risk management
- Issuer side deemed a low risk
- Credit action in Baltimore, MD, cited as an example

Issuance, Infrastructure, and Impact: Financing for State and Local Governments

Puerto Rico decision and the challenges associated with it
- Puerto Rico: First Circuit and Appeals Court upholding second revenues
  - Very investor unfriendly (special revenue pledge and covenant structures)
Platt County disproved the value of an annual appropriation
Detroit disproved the value of a general obligation bond
Suitability and States' Unfunded Liabilities
- Illinois gas tax increase
- Large blocks for investors are not happening in Illinois (i.e. - an uptick in state and local government issuances is probable.

Underwriting Discussion Topics

The Market Discount Rule: Challenges & Opportunities

How does the tax play workout now due to the 2017 Tax Cuts and Jobs Act?
Municipal bonds with lower coupon rates that are valued at a Market Discount may underperform premium bonds and expose holders to a higher and unexpected tax liability
When realized, the market discount earned on municipal bonds can be taxed at the investor's ordinary income tax rate
A minimal amount of market discount can qualify for capital gains treatment, once the amount of the discount exceeds the cutoff amount, all of the discount is taxed at the investor's ordinary income.

Retail Mark-up and Free-to-Trade Wires

How does your firm determine when bonds are free-to-trade?
How do you announce bonds are free-to-trade?
Is your process changing from 2018 to present?
How are you documenting your free-to-trade wires?
What are some best practices used on sole managed vs. co-managed deals?
Regulators are looking more into sole manager procedures

Industry Challenges as a Result of the Increased Regulatory Burden

Challenges related to MSRB G-42 standard
- Fiduciary side (challenges)
Regulators are concerned with the customers in two parts
- Five-year look back
- Diligence standard
- Are your Risk Management Systems fair and reasonable?
  - Regulators want to see that a firm has "thought" about the process
  - FINRA doesn't regulate the customers

Managing Liquidity in a Challenging Rate Environment

Changes to State and Local Tax (SALT) deductions have market implications
- Institutional
- Retail
- Corporate
What is the definition of a "customer"?
Aftermarket trading concerns?
- Wholesale vs. Retail
- Flipping
  - What is the value of a flipping account (arbitrage account)?
Issuer standards
- Clarity among issuer and advisor is important
Retail order periods
- What is the definition of "retail"?
As rates lower, do buyers resist?
Generally seeing a trend where spreads are widening on the long end
Community banks are pushing back on shorter call structures (five-year calls)

Additional Information:

Networking Dinner: After the roundtable, participants continued networking over beverages and dinner at Prime & Provisions. Quarles & Brady and Lumesis sponsored the dinner
Upcoming Event: The next of Public Finance Roundtable will be held at our National Fixed Income Conference on Thursday, October 24th (more details coming soon!)

Quarles & Brady LLP, Chicago, IL