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let's go ahead and introduce our panelists for today's conversation first we have john gross as vice president of corporate banking john gross is responsible for the bank's corporate banking team at fnbo serving corporate clients spanning the bank's footprint john's career began the first national bank as a merger as an acquisitions analyst in addition to buying sell side advisory services his experience is short in intermediate term investing john earned a bachelor of science degree in business administration from the university of nebraska-lincoln and a master's of business administration from creighton university next we have craig jones craig joined first national capital markets in august of 2012 as managing director of public finance craig obtained his bachelor's degree from the university of nebraska-lincoln and his law degree from the crate from creighton university school of law craig's practice focuses on taxable and tax-exempt debt issuers in the private and public sector and then lastly we have ramon rodriguez from our partner partner derivatives derivative path ramon is a sales and structuring specialist where he helps his regional and community banks and their borrowers manage interest rate risk ramon's previous professional experience spans financial markets and technology he spent over a decade working in derivative sales at a regional bank at regional and regional and global banks and ramon holds a bachelor's degree in business economics from whedon college and a master's in computer science from the university of chicago so gentlemen thanks again for joining us today before we jump into our first topic on the transition of libor let's go ahead and open up with a polling question for our audience so first pulling question do you currently have financial transactions that are tied to libor um i think there's something like 200 trillion dollars of of contracts currently tied to libor um so we'll see what uh today's sample size represents of that 200 trillion dollars i suppose so let's see where those results come in at so 63 percent of our audience today has contracts that are currently tied to libor um 23 say they don't and 9 say uh that they're not sure so with that let's kind of start with the basics um ramon what is libor why is it used and and when is it actually going away sure um so libor stands for london interbank offer rate it is a short-term interest rate benchmark index so it is intended to be a a reference that can be used in financial contracts that are of a variable or floating rate and it's intended to represent where a bank could borrow on a short-term unsecured basis so the way historically has been administered is a bank truly gets asked a major bank gets asked where could you borrow money from another bank today for one month three months whatever the terms might be and it's really just their best guess unfortunately because it was based on people submitting answers and wasn't transactionally based um there was some uh unfortunate manipulation tied to it and so for reasons trying to tie up two transactions it's being transitioned away today it does use some transactional data um but in general it is 16 different banks are polled the highest four lowest four are thrown out and then the remaining eight are averaged together from those submissions um libraries you alluded to is going away so that polling is going to continue uh today was actually formally announced that june of 2023 will be the last month that us dollar one month and three month libor are published so they're actually libor's actually published in um other currencies it's used in five other currencies those other currencies are actually going away sooner uh i believe actually end of this year those other currencies are going away but the u.s dollar or market is so large um i think the last statistic had seen was actually a few years ago 350 trillion across various financial contracts mortgages bonds loans so it is an incredibly large market and in particular us dollar libor market and so because of that regulators are trying to allow ample time for an orderly transition um but june 2023 is the last date officially as of today that it will be considered a publisher got it so john as uh as we prepare for june of 23 what are some ways you've seen lenders across the market uh prepare for that transition well i would also expand on on the the timeline here for its sun setting in november um there was a multi-agency uh bulletin that came out from the occ the fed and the fdic that really put some um real pressure on banks and the terms that were used that any contracts written with libor as the index rate after [Music] 1231-21 would result in their mind uh in safety and soundness risk or would add safety and soundness risk to banks and those are you know those are sort of serious words coming from banking regulators um so you know when that when that announcement came out it you know we were already uh as a bank accelerating our transition off of prime where we could um and you know when that bulletin came out i think it um it really sort of expedited those efforts they also added in that bulletin that um for contracts that um you know are being uh written during this year that it's imperative that it has robust fallback language and so the loan syndications and trading association which the bank is a member of uh who provide form documents relative to large broadly syndicated credits they've now provided two options uh one an amendment option that that basically says hey uh upon a triggering event we will uh get back to the table effectively and decide what the uh you know an equivalent index and rate is um or spread is uh the other is is what you're going to start hearing more of which is the hard-wired option and that's the you know effectively hey sulfur's being put into the documents and it's you know sort of a very clear transition to so for upon that triggering event so um the bank we're right now in the process of building out uh we've got a committee building out our sofa capability i think i'll let ramon get into some of the nuances and challenges relative to hedging and and swapping out term so for um contracts but from a bank standpoint most of our small and mid-market customers have been transitioned i think the last number i saw was in and around 50 and really the ones that haven't been transitioned uh 30 to 40 mature this year um and you know the the rest is probably there in some swap contract that is you know a long-term legacy uh contract but um you know we're sort of you know going full steam ahead trying to get as many folks as possible converted to prime uh at this point got it thanks for that uh thanks for that clarity um ramon what other sorts of financial instruments are are tied to libor and what implications will the eventual sun setting of it have supposedly mentioned it is used widely across financial markets so it's used in loans from you know small community business loans to very large corporate loans it is used in bond influences um it's often used as is a fallback rate and uses a reference rate in mortgages and then the derivatives market um use it as well there's there's a robust derivatives market interest raters market that uses it so it is very broadly used and one of the difficulties in the transition which john alluded to is libor had a inherent term structure you could say i want to live work for one month or i want libor for three months and those rates were naturally different and the three-month rate was higher than the one-month rate typically which makes sense somebody has your money for longer what's difficult in the transition is suffer is a secured overnight funding rate it's an overnight rate and there is no existing term structure and so you have these different instruments you have loans you have derivatives you have syndicated loans and there is some disagreement on how do you take an overnight rate and make it applicable for a term for one month or three months some say that rate should compound some say no you take the daily weighted average and so what we've seen a lot of banks doing and a lot of customers requesting is choosing an industry other than sofa which i think fmbo is looking at is prime for a lot of these transactions because it avoids some of these dislocations and it's a little more robust market particularly in the lending and borrowing side but it is a significant issue as john mentioned regulators want live work on as far as new contracts by the end of this year they don't want contracts put in place they want plans to transition away and it is very important to look into the finer prints if you are going to replace it and you have multiple contracts they may not use the same type of fallback language so taking time to make sure that those align and look in the details is a critical part of it and part of part of the difficulty can we and why banks have been hesitant to do this they've really needed to be provided by regulators because it is such an overwhelming task to undertake yeah understood john going back to your comment about the bank or fnbo switching uh borrowers over to crime when and where that makes sense maybe speak a little bit about how prime and libor have generally correlated over time yeah and i think that's you know it's an interesting conversation too to talk about what a secured overnight rate looks like relative to libor and you know as all of our borrowers saw that that borrowed off the libor when we had these market dislocations say like in march of of live board has um you know credit risk built into it whereas sulfur does not right sofa is a secured rate overnight rate backed by repurchase agreement so um there is also this kind of dynamic where there's there's not really the credit risk so i s from a borrower standpoint that should result in maybe you know a little bit more certainty about how sulfur will react although we don't we don't know because it's not been tested um but you know the the dynamic between libor uh and prime you know the biggest thing that we we sort of um uh you know signal to our customers is that you know prime is generally uh excuse me pr libor's generally going to front run um um prime right so on the way down libor is going to anticipate the fomc's rate reductions right so libor will be a little bit lower and then on the way up same thing libor as the fomc raises rates libor will you know front run uh those rate increases and so depending on the direction one way or not another it's five to seven basis points of sort of benefit on the way up and and and you know uh you know reduction and or or increase in borrowing costs on the way down if does that answer your question matt yeah absolutely um and craig maybe moving over to the bond world a little bit i think generally we're talking about libor where you know we naturally kind of associate that to the credit structure the shorter tenors when we think about you know the work that you do on the bond side we're generally thinking longer tenors what effect if any do you kind of see the sun setting of libor having on on the bond market you know you know it'll it'll be similar um but what i would say ramona and i were having this conversation earlier in the week libor has probably been used less and less in the bond market recently given given the rate environment and i think issuers as they strive to fix low cost capital for a longer period of time um you know the the environment has been so favorable to municipal borrowers in terms of low rates that they've been looking for for the fixed rate kind of long-term long-term issue got it well let's um let's go ahead and transition over to our second topic of the day and provide a bit of a market outlook um or an update on where the market's at and before we jump into that let's do our our second polling question so the second polling question do you think the federal reserve's actions to reduce rates and bolster liquidity in the markets has been effective i think as as we saw the economic effects of the of the pandemic take hold last march we saw the fed kind of resort to some of its old tricks that we saw in the financial crisis you know target rates dropped to zero they started buying bonds again for quantitative easing but then they also had some new tricks as well through things like their lending facilities main street lending for instance and then i think they were even opening up their balance sheet to some uni debt and corporate debt as well so um craig maybe i'll go to you any any kind of thoughts on the effectiveness of the fed's actions yeah i think uh i think it did have the uh desired effect in in stimulating economic activity um you know the the cost of capital has been so low that i think there's been a lot of opportunities and a lot of people taking opportunities to either get projects done or restructure existing debt which would then maybe allow them to do something else within there within either their city or their business um i do think there's there's a market component to that though um just because the fed necessarily cuts rates doesn't mean that equates to the market i do think you're starting to see a little bit of a tipping point especially in our world where you have a borrower in terms of an issuer and a buyer in terms of somebody investing in those bonds i feel like the buyers are starting to push back a little bit on the lower interest rate environment that the issuers have have enjoyed for the past year and even longer really if you look back to the last financial crisis um so while the fed maintains um you know that that they're going to kind of facilitate easy conditions that doesn't mean that doesn't necessarily mean the market is is going to allow that if if buyers stop purchasing bonds which will organically make interest rates have to rise to bring buyers back into the market yeah and i think it looks like the audience generally agrees 74 coming in and saying that they think the fed the fed's actions have been effective john maybe i'll go to you um what are you seeing on kind of a micro basis is is is the customer base at fnbo um generally reacting favorably to the stimulus dollars that have come in and the fed's actions and taking advantage of these historically low costs of capital yeah i mean and back to the 74 i mean the fact that the fed's balance sheets four trillion dollars higher than it was a year ago i i sure hope it was effective right and i um i i would say from first nationals lens that yeah emphatically yes i mean there are absolutely some pockets within our portfolio um hospitality and and read you know brick and mortar retail um that are you know under stress and will be um and that we have to be patient with but um you know we we've got such a diverse book with our consumer credit piece our credit card portfolio our ag and our business uh portfolios that we get a pretty good uh and broad uh perspective on um at least the economies in the markets that we serve and you know by and large our our credit quality is is really outstanding to be honest with you and it continues to trend uh in the right direction uh our treasurer uh said the other day that uh you know the consumer has been shockingly responsible with the stimulus dollars and i thought that was spot on right and i think directionally these stats are right that 35 of stimulus dollars went to deposits and 35 percent went to excuse me went to savings and then 35 went uh to pay down debt so you know 70 percent of of the uh stimulus dollars it went in a way uh to sort of bolster the the consumer's balance sheet so yeah i would say it's been it's been really really effective um ppp another program um that you know from our perspective and i know there's criticism out there but but you know on a micro basis we we saw it not just injecting capital directly into our into our customers balance sheets but but also just the sentiment and the confidence that it created uh during you know what was just unprecedented uncertainty i had to go back and sort of put myself in march and april may of of 2020 and and you know when you think about unemployment spiking it you know 23 million people um you know it was it was scary for everyone um and so that t e ppp program and others really did put a bit of a floor in in business uh and consumer confidence so you know we we see you know just across the board you know really strong consumers generally really strong businesses right now um and um we just saw an unemployment rate get printed today at uh you know six point i think 6.2 percent so you know everything feels pretty good maybe contrary to what most of the headlines and and you know news articles would tell you yep ramon um do you maybe maybe give the audience a little bit of context on just how low rates are um compared to a historical basis from a short-term basis obviously we've seen this before during the credit crisis with short-term firearms coming down on a long-term basis you know you'll get long-term rates and then craig alluded to this as well it's a pretty uh unique time historically and you look back over the last decade um kindly and it's been a pretty unique time as far as being able to lock in long-term rates is lower they are and i think part of that you know there's some pain recent stories um you can see the long end of the curve has gone up treasure yields are starting to rise long-term rates are rise past couple weeks um it is painful when you look back over the last month or two historically the nominal levels that we're looking at are still unbelievable and you look back traditionally over the last 30 40 years and really how much would you care about the difference between going from you know locking in a three percent to a 325 percent rate over a 10 10-year period of time whatever it might be is that i don't care you know that that's unbelievable so um in a grand big picture you know absolutely still a huge win of opportunity um longer term rates have been backing up it is an interesting topic i would expect that would probably continue um to happen we probably continue to see some volatility i think there's a little bit of push and pull between the federal reserve saying we're going to keep things low um it's pretty clear they're biased to throw the entire kitchen sink right at the economy that there's been pretty direct comments of you can't overdo the stimulus at this point um and it's to their benefits can you say we will keep rates low and i think the market is trying to test that you get positive new coveted vaccine news coming out and you get more bond issuance coming and i think the market's starting to question will they really be able to keep rates as low for as long as they say certainly it will be low for probably immediate future but is it really going to persist as long as they would expect yeah craig um along those lines what have you been seeing on the the taxable and tax content side of bonds and where costs of capital are getting locked in relative to the last couple of years yeah um i think that's i think that's important an important distinction between the tax taxable and the tax-exempt market i think last year investors found a lot of value in the tax exam market uh relative to relative to taxable instruments um you know the 10-year treasury at one point was in the 50s and 60s where uh you know a shorter tenor tax exempt muni was maybe in 70 and 80 and then you're getting the taxes that benefit from that um i think historically i i agree with ramon um you know when i when i got into this line of business about 15 years ago the common the common knowledge was a 20-year run-of-the-mill mid-level credit maybe an a-rated credit bond issue for for a general government was probably going to yield in the 450 to 5 range over 20 years um and then after the financial crisis hit that uh that came down um and that's part market based right there was a flight to quality people started looking for a place to invest that they knew there was going to be safety in principle and and some return so in 2 2013 at that point rates were roughly in the mid twos for a 20-year bond issue just last year we did a 20-year school bond issue that came in at about a 158 so that's a fixed rate over 20 years which you know i'm i'm not the oldest guy out there but i don't know if that's ever been seen before and and we'll see if we test that again um and then to ramone's point uh rates have risen um in in late december early january the 10-year treasury was was right around 90 basis points and as of yesterday it was 154 so in a very short period of time rates have risen a decent amount great um ramon uh the feds indicated that it you know it intends on maintaining its low for long policy um while the economy continues to weather the effects of the pandemic um what does history tell us about some of the triggers the fed will look to as it perhaps looks to adjust rates and bring them back up over time historically there's been two triggers that really concern about the labor market and inflation and historically they tended to be proactive so so long as there was a strong labor market they felt unemployment was treading the right direction and there's multiple indicators that there is a strong labor market once inflation started to get close to their target they tended to at that point look to increase rates which makes sense i mean it is a the economy is a big ship to turn right so um they tend to cut significantly going down it's fairly rare that you tend to see really significant you know hikes on the way up they tend to be more measured well forecasted and so it makes sense that you think we start to slowly ratchet up before inflation hits what's a little bit unique this time is um the fed seems to be much less concerned about inflation whatsoever and pretty um direct about that and blatant um they have expressed a much stronger concern for the labor market and they've expressed multiple measures for that so i think that they are much less concerned um pella said i believe this last week within the last week explicitly you know labor market maximum strength across multiple measures um inflation at or above two percent so they don't just want to they by the time they start moving at that point it's running a little bit warm if not hot and thirdly um forecasters expect inflation to remain at that level or higher so not just do we kind of tiptoe above that or get close to it the um i think are really wanting inflation to catch a little bit so we'll see if they're playing with you know fire or not in that respect um but i think it makes sense given what they went through the financial crisis um they they are less concerned at this point very clearly with inflation so those would be the three targets though labor market broadly inflation above two percent and then the market or economist journey predicting inflation will remain above two percent very good um so before i ask this next question um you know as we were prepping for this john reminded me of warren buffett's quote that um any company that employs an economist has one employee too many and i'm not sure as an economics major or someone that works for john how i exactly feel about that but with that in mind and the fact there's still a tremendous amount of uncertainty that exists in the economy um as you guys sit here today what are your expectations for where rates are headed in the next 12 months and ramon let's let's start with you and then we'll move to john and craig sure so typically i like to kind of bifurcate between short-term rates and then the longer-term rates because i do think it can be sometimes easy to mix those together so short-term rates in the immediate near-term i think there's relatively low risk that those will increase by the federal reserve i think it's fairly reasonable expect for the next six to 18 months those will remain uh where they are from a longer term perspective um i tend to fall in a similar camp despite having worked in interest rate markets you know my career maybe because of that um it is incredibly difficult to forecast where longer term rates go over any long period of time um i would say though i think it would be reasonable expect continued volatility uh particularly in the long end of the market and part of that is in general markets tend to be much more volatile in a sell-off when prices are being sold than in a build-up and the treasury market is opposite right you you start um you know as you function too you're going to see fluctuations in rates going up and down inverted to that and so you're going to see the treasury market have a little bit more volatility particularly as this push and pull goes fed we're not moving rates we're saying can you really not move rates and so i would anticipate um more volatility in the long end of the yield curve i think it would be surprising if that went away in the short term i also you know don't put much weight behind that candidly um i think that i would defer to anybody else's opinion primarily because it is so difficult to forecast in rate markets yeah i would say that coming from a guy who was ultra short the treasury in 2009 when it was at three percent clearly i have no idea what direction uh rates are going but you know i also think about um there was a period between i think 1977 and 82 so five-year period where rates went ten-year treasury went from seven percent to fourteen percent right so doubled i mean i so the point being i think is i would agree with ramon that uh while we've been in sort of this long-term gradual decline in overall long-term rates um you know it does just feel like we're poised for some volatility one one way or another over how long uh remains to be seen craig yeah i i would echo john and ramone um you know i again our world's a little different in that it's more based on the market and less based on necessarily what the fed would decide to do so when there's a large supply of municipal bonds then investors can kind of pick and choose and maybe sit on the sidelines a little more which in itself will cause rates to go up in the in the municipal market on that and for issuers um the other thing that i think is interesting you know when when ramon touched on the the short end versus the long end we've seen because the demand for municipal bonds have been so high we've seen investors maybe take more chances from a credit quality standpoint which has compressed credit quality just seeking yield so the demand for more yield causing um more people to buy maybe riskier credits has compressed riskier credit rates a little bit you know and as things start to settle out a little bit i think there's potential maybe for some of the riskier credit bonds or or investments to to shoot up a little quicker just due to supply and demand and as yields start to rise there's going to be less people reaching for those riskier credit investments great um well before we move into our last uh topic on interest rate risk mitigation let's go ahead and pull up our third polling question for the audience um we just asked our our panelists here where they thought rates were headed now it's your chance to prognosticate along with them so where do you think rates will go in the next 12 months up down or no change um i think as you guys talked about a little bit we've seen those longer term rates starting to creep up relatively quickly the ten year hit um 150 i think this week and i just saw that this morning freddie mac had released a survey that 30-year mortgages had broke three percent um for the first time in a while so i think again as we look at where short-term short-term rates are at and continue to remain you know suppressed we're looking at the longer end of the curve rising and a steepening of this curve which has just been um you know somewhat counter to what we've experienced over the last few years we've you know worked through an inverted yield curve prior to the pandemic and then what's been just an extremely flat curve ever since it reverted we'll wait for those results to come in i think we may have lost ramon looked like we had some connection issues there so 81 percent of the audience um thinks that rates are headed up and 16 thinks they're going down and we're sorry we'll stay flat and no one thinks they're going down which makes sense because we're already about as low as they can go um so let's move into our third topic trying to manage interest rate risk as we've talked about rates are at historic lows which as our audience just indicated there's only one way for them to generally go um john what are some ways in which businesses traditionally hedge interest rate risk yeah you know i think the the real question is what what is our what is your fix to floating rate ratio right and what's sort of the best structure from from your balance sheet and interest rate risk exposure standpoint and i think that question is uh dependent on the nature of your business right and so what we uh tend to do or advise our customers is you know really match the repayment of the debt or that interest rate risk um the life of that repayment the ability for you to increase prices if you're a distributor um you know you have some flexibility and increasing prices when inflation goes up you got you know short term uh debt that's revolving you know that makes sense to be floating you can adjust uh hopefully your pricing relative to to interest rates moving uh if you're a real estate developer obviously um with maybe fixed lease payments coming in you know that you want to fix that debt and make sure that you know you're almost you know perfectly heads or to the extent you can so um if you're you know a highly leveraged business and you want to take some of the you know repayment volatility um out of your income statement you know obviously makes sense to hedge a lot of that so you know i i think it's it's very dependent on on the nature of your business your ability to raise rates the amount of leverage that you have um and then also beyond that um you know we we tend to most of our businesses tend to look like almost like a bar bill strategy where you've got you know about 50 of your debt in a revolving capacity that floats and then the rest you know on a five to seven year um and so you're less exposed to sort of the middle part of the curve obviously that that creates some um refinance risk when that debt comes up uh but that's generally a good a good cycle to uh to be on in a good structure to to sort of carry um on your balance sheet yeah and along those lines ramon welcome back first of all um uh and then second uh maybe maybe walk us through as we think about ways to hedge interest rate volatility um one of the most common ways is through a swap maybe walk the audience through just in its simplest form of a plain vanilla swap so a good portion of my time is spent working you know with borrowers oftentimes it might be the first swap they've done so um this is a high level usually have a more extended conversation but the general idea is a swap locks in or fixes the cost of a variable rate index so traditionally that was libor the libor changes every month i'll use that as an example but you could use any replacement index so one month libor for a five year term you have 60 different months during that five year term and so 60 different chances for that index to set at a different rate a swap contract just by itself is an agreement to swap fixed and floating cash flows so you might agree to pay fnbo a fixed rate and in return they would pay you one month libor every month and i said well why would i want to do that and the reason you would do that is if you pair that with a floating rate loan those floating interest rates are going to cancel each other out so if in a swap you receive a variable index like libor and you pay that same index on a loan you've locked in that cost those are a pass through so effectively you can think of a swap rate is is it's a longer term rate that you're locking in for that index so there is no five-year liabort rates there is no five-year prime rates but the swap rate you're locking in is here is where the market could give you a fixed rate for that same term and so a common question like well why would i do that when i can just get a traditional fixed rate loan possibly and generally there's a couple reasons um one is a bank may be hesitant to go out for that long of a term with a traditional fixed rate loan candid y the bank owns interest rate risk if it does that most banks fund themselves on a floating basis so if the bank receives a fixed rate and short-term rates go up the interest margin on that asset to the bank the loan it gets smaller and smaller can become negative so um banks like offering a floating rate loan and then offering a swap to the customers because allows the bank can only protect its own margin more effectively so you tend to get longer terms available you tend to get better pricing because behind the scenes banks use swaps themselves to manage their balance sheet so rather than doing this on a portfolio basis it tends to be done deal by deal and so you get better pricing that way typically another option is is the flexibility so a traditional fixed rate loan once you lock in that rates you have fixed rate debt that's it um an interest rate swap is very customizable so you can express a particular rate outlook if you have one for example in the current rate environment and we work with many borrowers who say i'm not worried about interest rates today i'm worried about interest rates for the last six years of my seven year deal so that's fine we could structure an interest rate swap that doesn't start for one year out you float for the next year and so you have a floating rate loan it's independent you've locked in the debt that you care about and then you have a separate conversation how do you want to manage that rate risk and generally it's customized to match that so high level it fixes a variable rate loan and it provides a lot of customized solution around that and it tends to be attractive pricing and term that you can get with it at a high level yeah craig as uh john and ramone you know kind of talked about this alignment of assets and liabilities and you know banks working with their customers you know through that because there's there's two sides of the equation so to speak that asset liability mix has to work for both parties on the borrowing and the lending side as you look at um uh the public debt side of things um there's oftentimes a different funding base um outside of banks that you're placing debt with be it insurance companies pension funds folks that have a longer-term investment horizon that you can then align um those assets and liabilities with what sort of structure are you seeing that market accept um today versus what you've seen over the last few years yeah that's a good question i think um not unlike the conversation or the statement i made about maybe people reaching a little bit on the credit side to find more yield the demand has allowed some investors or some issuers to seek more favorable terms and more flexibility so low rates have kind of been a given for the last year but the other the other kind of levers within a deal whether it be prepayment flexibility call provisions the ability to not fund a debt service reserve fund which has been a mainstay in revenue bonds forever um you know the market is kind of accepted that we don't need you to set aside that cash anymore um so i just think you've seen behavior on the investor side that has really benefited the issuer side um and and then you know it's going to be interesting as people stop to reach for yield as rates start to rise and the demand starts to to go down a little bit to see if some of those levers kind of come back in that people start to demand more strict prepayment terms and and more reserves set aside stricter covenants in terms of debt service coverage ratio on some of those ends got it and i know in the audience today we've got a number of folks from you know non-profits um public agencies uh municipalities so to speak that um that that you know are potentially locked into fixed rate deal today on the bond side um for borrowers that locked in uh rates in a different rate environment um what what should some things are what are some things they should be thinking about um in today's rate environment and what options might exist for them for potentially doing advanced refundings or things of that nature yeah great question so uh one real interesting i think um thing that's come out of the market recently or over the last year is the compression of yields between the tax exempt market and the taxable markets that's that's allowed for a lot of um opportunities to maybe do some non-traditional financings for either issuers or non-profits that that are tradition traditionally used to borrowing on a tax-exempt basis at that lower rate so it's made sense we've seen a lot of issuers refinancing what was originally tax exempt debt with now taxable debt which just seems counterintuitive but that again just lends to the market environment we've been in um you know i think it was 2017 during tax reform is when the elimination of uh and tax exempt advanced refunding um came about which in the past prior to that one time throughout the life of an issue issuers could execute a tax exempt advanced refunding and lock in that cost even prior to their call via escrow and defeasions but again recently especially over the last year the tax taxable rates have been low enough a lot of issuers have executed taxable advance refundings and seen a cost benefit to that a savings in terms of interest now as as the administration changes there's been a lot of discussion about this administration potentially bringing back tax-exempt advance refundings which are a good which is a good thing for issuers and borrowers and frankly taxpayers because the whole the whole genesis behind that is to save money um but that hasn't been a priority there's some other things going on right now um but i do think that the discussion is starting to ramp up i also think that the ability to maybe execute on a taxable advanced refunding is dwindling a little bit primarily because of the main topic we've been talking about today interest rates are starting to rise specifically in the taxable market um taxable deals are often spread to that 10-year treasury so 10-year treasury may be as a base and that credit spread to that and as those rise those taxable advanced refundings become less and less realistic and the savings start to go away got it thanks craig um well let's move into uh our q a session with the audience and just a reminder that as we're posing a few of these questions feel free to uh to send additional questions in via the chat function um so a couple questions around so first specifically so john i'll point this one to you first um and you alluded to this earlier but um when when does fnbo anticipate potentially using sofer for its customers that's a that's a great question i i think you know the that remains to be seen but i would i would hope and suspect that we have something stood up and and ready by the end of the year i think operationally there's still some issues that ramon um he alluded to to some of them but you know one one of the concepts is is pegging the term sofer to some sort of historical five-year you know look back spread so if it's you know one year or something like that we look at you know sulfur to libor and then peg that spread based on a five-year look back and so there there are still some you know operational challenges around that and making sure that um there aren't unintended consequences so i think that you know right now uh the hope and plan is that we have something set up by the end of the year the market generally the big banks will will drive a lot of this too right i mean um they're the ones generally that are the you know agents on these big syndicated credits once they start to convert to sofer we will you know have to follow everything else i think it makes more sense for borrowers especially if you're not um you know needing to you know swap or or hedge um get into prime it's it's you know much more stable uh there's a you know long track record and it's you know hey you know exactly where the effective fed fund rate is at at all times you know it's very clear it's transparent um and and prime is just effectively a spread to that so um i in a long roundabout way i didn't answer the question matt but you know the point is we're working on it and and we're trying to you know we're trying to stand it up yeah bank bankers are a little bit like politicians we can say a lot without actually saying anything sometimes right john exactly you know one thing with that i feel like you guys are well prepared for it um you know durative path works with a large number of banks you know over 130 across the nation i have not spoken to one bank that has said we're all ready for sofa let's start doing it um it is a uh clients are uneasy within there's a there is a dislocation so i think you get your spot on john that you'll have you know you guys are ahead of the curve as far as having you know plan in place for what we see and your customers should take comfort in that um but i agree with you prime tends to be you know unless you're a major global money center bank that's being told you have to use sofer i haven't seen anybody raise their hands and say can we please start using it so i think you guys are well in line and probably better off than many others that we work with ramon to that point and and there was another question kind of specific to the derivative side of things um you touched on earlier just the number of for the amount of of derivative contracts um interest rate spots maybe specifically that are still tied to libor maybe just speak specifically what the transition away from libor on those um on the swaps looks like and the index that that you know is expected to be used whether it's sofa or something else sure so if you do have an outstanding interest rate swap or derivative um that references libor uh whether it's fmbo or another bank um you will need to touch that contract similar to how you know the loan may have to be so a lot of loans have fairly broad fallback language you know existing if this index goes away pick something else um the derivatives market is a bit more structured and so at the top of the market the very high level participants dealers the largest players in the market they have adopted specific fallback language to use sulfur and they have had to elect to choose to use that so inter dealer transactions all have a standard fallback to a very specific definition of how software will be used for different terms most borrowers or corporate end users probably will not have seen that same type of adoption and will probably need to work with their bank on how to use that so one the the key there if you do have a swap is it's probably hedging a debt it's a loan of some piece the key is you want to make sure that that loan and swap stay in sync and so the piece you want to avoid is well i'll agree on my swap to go ahead and convert this to sofer but this bank xyz is saying we'll change the loan to prime now you have a mismatch between your swap and the item you're hedging and it creates risk for you it can create accounting issues so the intent is to keep those in line one way to do that is to adopt the same fallback language if the loan and swap both say hey if this goes away we agree to replace it with this exact same rate now you're you don't have to worry about it the other way is to actively just change that transaction i want to get rid of a libor based transaction replace it with a prime based transaction and in that case if you actively choose to do that you no longer are subject to library going away because you don't have a library contract anyways so that those are the two most common ways we tend to see that being addressed you will want to look at each deal individually you'll want to work with your banker on that but i will say that is a common transaction that we're doing is to say let's go from a live war based transaction to a prime based transaction just we're talking earlier it is much more common um if you are going so far you just want to make sure that the definitions are aligned it can be a bit technical but it's something they can be overcome for sure all right thanks ramon um and with that we'll go ahead and kind of wrap things up for today's session but again want to thank our audience for tuning in today i want to thank all of our panelists for joining us fnbo business insights will be back um later this spring and and through the rest of 2021 um covering a number of topics um everything from business succession planning to cyber security and fraud um even community investment and kind of corporate philanthropy so uh we'll look forward to seeing everyone throughout 2021 and thanks again and have a great weekend thank you thanks matt