The Fisc

Last week, the National Federation of Municipal Analysts held their annual meeting in Chicago. So it seems to me like a good time to discuss ways that municipal bond issuers can develop stronger relationships with their existing bondholders, while also attracting new investors in order to diversify their investor base. A common tool from corporate investor relations practices that could be replicated in the municipal bond market is to host an investor meeting every year.

Corporations are generally required to hold an annual or regular shareholder meeting under most state laws. A lot of companies, particularly the larger, higher profile ones, turn these events into an important aspect of their investor relations programs. An annual investor day is seen as an opportunity to allow company executives to connect directly with small and large shareholders, as well as buy-side analysts who may cover the company and the financial press. The strategy is to enhance the company’s brand with investors, and the focus is to ability to access low-cost capital over the long-term. In the municipal bond market, however, annual investor conferences are rare even though some large issuers like states have as many bondholders or bonds outstanding as major corporations. That’s a big missed opportunity to develop relationships with investors, showcase the issuer’s financial management team, and provide context to the issuer’s capital budget and future infrastructure needs.

Probably the most widely covered annual investor event in the U.S. is the one hosted by Warren Buffet’s Berkshire Hathaway. Berkshire has been hosting an annual investor event for the last 50 years. This year’s event saw 40,000 shareholders attend and was held in Omaha’s convention center. It was even live-streamed on Yahoo Finance. In February, Jamie Dimon hosted JP Morgan’s investors and analysts at its annual “Investor Day”. Not only does the CEO present at these events, but he regularly participates in a Q&A session with attendees. The same is true for a number of other CEO’s and CFO’s across many industries in the corporate world.

Annual investor conferences are far less common in the municipal bond market. Only a few states and a handful of cities now host annual investor events. For example, in my time with the Commonwealth of Massachusetts, we started hosting investor conferences in 2011 that regularly drew more than 200 investors and other market participants to Boston each year. The Commonwealth – which has more bonds outstanding than computer chip maker Intel - just had its fifth consecutive investor conference in December. And at each of these events the state’s governor and treasurer participate and meet with investors. New Jersey is another state whose state-level issuers come together to present to investors at an annual event each year. On the municipal side, the city of Chicago has been hosting investors annually since 2012. Chicago’s conferences include tours of the city’s different infrastructure priorities. New York City and its various financing agencies do the same. This past fall, Washington, DC held its first event. And the city of Houston hosted its fourth annual event a few weeks ago.

From my experience as an issuer and member of a few different issuer trade associations, I know there are a couple of challenges that tend to make it difficult for municipal issuers to not invest in direct investor outreach like annual conferences. First is the time and resources involved: it takes a lot of work to put on a conference. There’s also an upfront cost of hosting the event. Although growing investor relationships can provide significant benefits to an issuer over the long-term, the initial outlay of hosting an investor day can give issuers pause. Second, there’s not a lot of industry practice around engaging investors outside of a bond sale. The more typical practice is for issuers to conduct investor conference calls or even go visit a few investors in their offices, but these are mostly associated with a specific bond financing. And third, interest rates have been low for a long time now. Since the Great Recession, a lot of issuers have sold their bonds at excellent levels and don’t see the need for direct outreach to investors.

There’s definitely some validity to these points, but I still think that the long-term benefits of a proactive investor relations program to issuers and their taxpayers are true great to ignore. On the cost side, there are ways to minimize the use of public dollars while also engaging investors. For example, muni issuers can take a page out of the playbook of corporations that are now hosting virtual annual investor conferences. In 2015, HP hosted its shareholder meeting entirely online for the first time. A virtual conference also addresses the challenge of getting investors to attend and/or participate in an event for an issuer that is not located in a large financial center like New York or Chicago or San Francisco. And as I mentioned above, the more conventional practice of issuer-investor meetings is for issuers to conduct mini road shows and meet with investors in their offices right before a bond financing. These have limited value over the long-term. Investors will appreciate the opportunity to meet with an issuer and hear their pitch, but they know the issuer’s there only to sell bonds at the next sale – not primarily to grow the relationship. Giving investors access to the decision-makers of a state or a city or a non-profit on a regular basis is much more meaningful, and should be part of the IR program of large and frequent muni issuers. Importantly, it gives the issuer the opportunity to receive feedback from investors on credit issues, bond structures, etc.

Does an issuer see a return on their investment in hosting an annual investor conference? I think the answer is ‘yes’, and for evidence I would look no further than the practices of very successful organizations like Berkshire Hathaway who have made investor conferences a centerpiece of its investor relations strategy. Is this just for large issuers? No, smaller issuers in the same region or industry could join together to jointly host investors on a regular basis. I think the return to all issuers for developing relationships with investors - through investor conferences, or providing more timely continuing disclosures, or utilizing a dedicated investor website - only gets bigger over time, especially when the interest rate curve normalizes to higher rates and wider spreads, when every single basis point counts more.

But the key to maintaining access to low-cost capital, diversifying the investor base, and reducing the volatility around a bond’s valuation is to grow investor relations through long-term, proactive investment in the needs of investors. This may not produce an immediate return at the next bond sale, and issuers should not expect it to. Since governments and non-profits will almost always need investor capital to fund their infrastructure needs going forward, issuers should focus on a longer horizon. What are the first steps? Develop a five-year investor relations strategy that includes multiple tools that provide investors with what they need to evaluate your bonds more efficiently. When you do that, and provide them with productivity gains, those gains will flow back to you as the issuer.