MTA Homing In On Near-Term $33 Billion Upgrade Plan (Podcast)

Metropolitan Transportation Authority. He directs the issuance of over three billion dollars in municipal bonds annually. Pat McCoy, thank you very much for being with us. Thanks for having me. Now. You're responsible for the m t a's thirty four billion dollar debt portfolio. How much of that would you like to see go into green on the initiatives? Sure well.

Our our dead outstanding is actually closer to forty billion now, so UM, look, we everything we do to move people around this city on electrified rail, be it the subways or commuter rails, is inherently green, and we've worked with the Climate Bonds Initiative to UM to issue bonds that labeled green, and as we continue to roll out our funding of our capital program through the issuance of bonds, I would expect that all of our transportation revenue bond

or dedicated tax fund bond issues will be green. Pat do you ride the subway? I do? I do. I I commute from Terrytown in Westchester, so I take Metro north to Grand Central and then I take the lex line down here to our office at too Broadway. What project would you most like to see done next? Well, you know, we have such a wide variety of projects

that we're looking to fund. Clearly the most critical our you know, signalization and our subways to improve service there and to enable us to put more trains on the rails and move people around faster. That's a big project. It's not funded, and we're aggressively looking to put that program together and find funding. How much it cost. The estimates are in the in the many billions. We don't have a firm estimate at this point, but it will

be a very expensive project. Now, you have a lot of experience dealing with the financing of a variety of projects, not only in your role is at the m T. A. But also in previous roles, what can you tell people who might be skeptical about green bond initiatives why you believe they work, and maybe explain a little bit about the attractiveness to the marketplace. Sure, you know, the green bond space, in our view is a natural fit to

what the m t A is all about. As I said, but according to the Climate Bonds Initiative Low Low Carbon Transport criteria, everything we do to move people on rails is green. That's that in and of itself is important. And I think the MTA needs to get recognition in the market for doing, for undertaking activity that is inherently green. But what does that mean when you say green? Good good good question. So we estimate that um, every trip on public transportation saves or avoids about ten pounds of

greenhouse gases going into the atmosphere. No, on an annualized basis, that's about a nineteen million metric ton number, because the alternative is taking some kind of fossil fuel based transport exactly.

So the alternative of people riding around in cars typically one person, one car, UM, so we avoid nineteen million metric tons going into the atmosphere every year, we spend about two million metric tons to provide the service that we do, so the net benefit of seventeen million metric tons avoided is inherently good for our region, for our state,

and for the for the economy. When you said that the total debt load right now is forty billion dollars, UH, I imagine it would climb considerably if all the projects you would like to see done actually get okayed. In the sign off, we had Richard Ravage, the former Lieutenant Governor of New York, on our program a couple of months ago, and he said, you know, the MTA hasn't conducted a thorough study of even what would be required to fix the subways and exactly what the costs would be.

Is that accurate? Well, you know, like, I have a lot of respect for Dick. He's a friend, and I think he is a wonderful UM UH spokesperson for infrastructure generally. UM. What I'll say is that we're in the throes of working on what we call our twenty year Needs Assessment, which essentially UH mandates that all of our agencies, Transit Authority, the railroads, bridges and tunnels undertake a really thorough top

to bottom review of all of our infrastructure needs. That will inform how we put together our next capital program, and that will be the capital program will be a five year capital program. Our current program the fifteen to nineteen period is thirty three point five billion. So, you know, I don't want to say Dick's off base on this. What I would say is that, you know, we're we're coming up with a new twenty year needs assessment that's going to really lay out what those critical priorities are

for the coming capital investment cycle. How much of that three billion dollars or so would be financed through the bond market versus through state or city funding. Sure, so, bonds are an important funding uh component to the capital programs,

but not the only thing. We rely on. The cornerstone of our capital investment cycle is the federal government through participation in the fifty three oh seven and the fifty three oh nine, the formula programs, the new starts programs, you know, for example for Second Avenue subway, and then of course the state and the city kick in. So bonds have typically been in that um what about a third. It varies, you know, it varies by program, by by revenue sources the state can identify for us to lever.

But it will be an important piece of the picture, all right. Which which train line is going to get renovated next? That hasn't been announced. I wish I could tell you. I don't know what you're looking at it hundred and sixteen Station of the Sea. I think that that's next. I'm very excited about that. Fat mcoy, Fat McCoy find insurrector for the New York Metropolitan Transportation Authority.

I sent a plaque. Yeah, that was you know, in a lot of public venues, you know, like benches in Central Park, you know, you can get someone to sponsor train station. It's true, It's true. I've I've spent a lot of my life in train stations. Pat McCoy, thank you again for joining us. Pleasure to be here. Thank you. We are here. We are very lucky to say with the chief executive and the chairman of Build America Mutual, Sean McCarthy and Bob cochrane um. And you know, it's interesting.

We've seen a number of stories about unprecedented outflows from a few municipal bond funds. We've seen rates rise just across the board is as benchmarks rise, and certainly that's the same story for municipal bonds. And I want to start with Sean, what does this mean for municipalities that are hoping to finance infrastructure projects or anything else three music bi bond market? How are they dealing with or planning around the increasing rates we've seen. So it's interesting

to UM two points. The first is that interest rates are rising because the economy is strong UM. And one thing to look at is what is the revenue strength or stream that state and local governments have right now? And if we look at that over the past year, it's increased by six point seven So the capacity for municipalities to actually issue debt for new money UM has

increased the last year. Because it's really interesting that you say that, I'm just thinking to myself, is it even across the board or there's certain areas that have actually in their tax revenues increased dramatically. Well, other places have seen them DECLIMBA. Generally, it's increased in some places quite a bit more UM so that as the economy has increased, interest rates have gone up, and generally that capacity for state and local governments has increased. So if you look

at it this year. Actually, UM, there's been a fourteen percent increase in a spending by state and local governments on infrastructure. So that's a total of two hundred and ninety three billion dollars in construction, and that would be an increase of thirty six billion dollars, so it's not insignificant. Bob Cochrane, I'm wondering if you could just step back for a second and describe why you and Sean decided to start this firm. You both worked at f S

A that was acquired by Assured. What makes Build America BAM different not only in its ownership structure, but in the kinds of municipal debt that it underwrites that it guarantees rather right, So Sean and I got together. We had we've been together as business partners for over thirty years UM, even prior to f s A right build in three days and builds up at for a while. Uh So we had a lot of experience in the industry, have a love of the industry and a lot of

the people that work in it. UM. We took a couple of years off and as you know, through the financial crisis, most of the companies didn't make it. We tried to assess what we thought were the causes and results of that, and UH, could we build a better company, a better business model that would address what we thought were the problems that led to UH, some of the failures in two thousand and eight nine and Build American

Mutual was a result of that collaboration. We spent almost two years um sort of working through that plan and raising the capital to start the company, and UH, it's a BAM as a mutual insurance company, I think probably the first one created in New York and at least forty ye fifty years. And the reason we did that so that the issuers, the public entities that use insurance would essentially be our shareholders are members. And the reason for that is we're not driven by high returns on equity.

Were driven by high accumulation of capital and the safety of the bonds that we ensure for investors. So Sean, given that, and given that it's been a really benevolent backdrop to issue debt over the past eight years ten years, why is there this impression that a lot of local and state municipalities have declined to issue debt to pay for big infrastructure projects. Why are we hearing this push about the need for a cold rebuilding of American infrastructure. Well,

it's a good question. UM. First and foremost, remember that state and local governments represent nine of the financing for infrastructure in the nation. So when people think has the federal government passed to bill that's going to UH finance state and local governments infrastructure in the country, it's really state local governments that are doing that. They are the

really the engine behind infrastructure finance. UH. The thing I mentioned before is directly related to that, and that is the fact that UM municipalities, their revenue UH strength has been increasing since the recession. That happens gradually as tax bases grow, real estate values increase, and that enables municipalities to then commit to new projects when when things are in a recession, they actually are trying to claw back and make sure that they keep themselves in in a

fiscally sound position. So it's interesting for UM for for BAM because as a mutual insurance company, we do a number of things that are unique. One is that we provide credit profiles, a financial description of each credit that we do. We updated every year. It's available for free on our website, and part of the logical outgrowth of that is our green Star program. So the speaker before us UH, Andrew Wyley, was talking about um UH green bonds.

What we have recently launched is an examination within the credit analysis we already do on each credit about the credits that we analyze will qualify as green bonds into

the market. So we think that over UM the near and long term will be help the market understand and expand the green bond initiative, which really comes down to environmental and climate appropriate bonds, water treatment, water purification, UH, renewable energy exactly, and all those things I think pair up very well with what UM BAM does you know right now, we've been in writing business for six years. UH. That's UH comprises fifty three billion dollars worth of municipal

bonds for six thousand, five hundred different issuers. So when you said what's different about what we do, one of the things that different is we are looking at sort of core municipal finance, so general obligation bonds, revenue bonds from taxes. It's really straight down the middle of the

fairway in terms of what is classically municipal finance. And for the investing market that's important because they can look at us as ultimate transparency, look at every credit on our website, look at the financial strength of our double A from Standard and pores, and look at our commitment as being the only muni only municipal guaranteur. So if you think about it in those terms, what happened in the crisis, There wasn't municipal bonds that defaulted in mass

there was other things that happened. And BAM's committed to the fact that we only do municipal finance and the core of that business is state and local governments. There the engine behind the growth and rehabilitation of infrastructure in the market. And finally, if you just think about what's the demand. You know, the American Society of Civil Engineers has projected a two hundred billion dollar need for additional

financing over the next ten years in infrastructure. And just real quickly, in thirty seconds, do you think that that's going to be difficult to finance given the fact that rates are rising up more and potentially the credit cycle could could turn. Well. First of all, Sean, that's two hundred billion a year. More so two trillion over the

next ten years that we have to increase UM. Interest rates are definitely a factor, because if we're gonna achieve that kind of funding rate over and above what the municipal market is already achieving, which is about two d and fifty billion a year in new money financing, UM, that's those bonds. I've got to It's got to be financed with some sort of long term debt, municipal bonds or and it's got to be paid back over time

with the revenue stream. Thanks very much, gentleman. Bob cochrane, Chairman, Build America Mutual, Sean McCarthy, chief executive Officer, Build America Mutual. We are focusing today on Caterpillar, which has been a bell weather of global growth, and today that bell weather is not signaling something positive joining us now as Brooks Sutherland Bloombroock Opinion industrials columnists and brook I'm just wondering.

I mean, Caterpillar didn't boost its outlook for the year, which analysts had expected, but was it really so bad this report or our investors simply looking for the negative right now because they're feeling a skittish and are looking to take profits right now. I think it's a little bit of both. I mean, I think what's really key to keep in mind here is that nobody's saying that growth is all of a sudden going to stop and we're going to start to see sales decline at these

industrial companies. It's all about where the momentum is heading. And I think what Caterpillars report indicated is that the sales momentum is slowing, so you're not You're still going to see growth, but you're probably not going to see it at the rates that we I've been seeing. A part of that is just lapping tougher comparisons, but there's also questions about how demand is going to hold up

in some of these markets. And as Caterpillar pushes through price increases to offset some of these rising raw material costs amid the trade war, you know, could that ultimately affect demand and sort of accelerate the grows slowdown that we're already seeing naturally as we get later in the economic cycle. Brooke, if you happen to be a company that is buying or leasing a Caterpillar, let's say, off highway truck, you know, in the mining industry, or construction business.

Those items, they're like three and a half million dollars just for the one time purchase. If you're financing it, things are going to get more expensive. If you're buying it raw material inputs are making it more expensive. What has happened in three months? How come we didn't hear this three months ago in the last earnings report? You know, I think we did. I think this price cost headwind has been a matter of debate for the bulk of

this year. Is you know, people sort of digest the tariffs, and especially as the tariff actions have escalated, I think the big question is how companies are going to be

handling this. And you make a good point that you know, if Caterpillar raises its prices, those customers are also seeing rising costs on their end, so their ability to absorb those price increases as really gets to the heart of what the issue is here is are they willing to tolerate that and continue buying equipment or do they just you know, decide to hold off on some of these

replacement purchases or especially new equipment purchases. Do we get a sense of which industries were the most positive for Caterpillar and which were the most negative. In other words, are there sectors of their business that are doing better or worse? Uh? Yeah. And so they also reported their September sales on Monday night, and that's on a three

month rolling average basis. And what you saw there was a slight slowdown in construction equipment sales growth um, and that was offset by you know, pretty strong momentum in its mining segment, which makes sense because mining is coming back from a pretty severe downturn. But you are seeing a little bit of that weakness and construction and sort of you couple that with a lot of the negative sentiment that we've been hearing for home builder stocks and

for you know, construction in general. And I think that is definitely something that investors are picking up on today. And that's actually a really interesting point I was going to go to that. I mean, does this signal something broader about the slowdown in the in the home building sector and just sort of in general about some of the the industries that have reported the recovery so far really slowing down and perhaps an even more meaningful way

than people have realized. I think, you know, a lot of what you're seeing is sort of coming up on the peak in the cycle, and that affects companies in different ways. So three M also reported today and its stock is getting crushed, and a lot of the slowdown that it saw is in these shorter cycle markets, so automotive, electronics, UM healthcare as well, and some of those have had

stronger momentum for a longer stretch of time. And I would also put UM residential construction, home building in that they've they've been on this recovery track for a longer period, and so it makes sense that we might be nearing the peak of that versus some of these longer cycle businesses, like I think of United Technologies, which is also about today and it's aerospace business. I mean, it takes those orders very far in advance. You don't just show up

at United Technologies and buy a jet engine. So those backlogs, those order rates should help United Technologies and companies in those later cycle businesses maintain momentum through twenty nineteen. But as you sort of look at these dynamics, I think you can read into some of the trends we're seeing at the shorter cycle companies that that we might be nearer a turning point than Uh, than not. I want

to thank you very much for being with us. A brook Southerland, of course expert in all things having to do with mergers, acquisitions and just general corporate go ahead. Something really strange because s Brooke is talking about home builders and how there has been this slowdown. Told Brothers, one of the biggest home builders. Their shares are up

today nearly two per sense, so go figure. There actually is some strength today and home builders, even though there is a generally negative sentiment and frankly homebuilder stocks, as Dave Wilson has pointed out in his chart of the day, actually a editor bear markets. So perhaps some people are seeing some opportunities. President Donald Trump is set to meet with the Chinese President Jijing Ping at the Group of Twenty Nations summit in Buenosaurus. The topic, of course, is

going to be trade disputes and the uh. The information comes from the White House Economic Advisor Larry Cudlow, and here to tell us more about the dispute and whether it presents some opportunities is John Authors of Bloomberg Opinion. John welcome as always and as the senior markets editor for Bloomberg. I wonder if you could just describe emerging markets. Does China still count as an emerging market? Yes, I

mean to something extent. There's still an argument about whether it's even as far as emerging, given that it still doesn't open its markets as freely to to the outside world as it should. That's why we've had the annual excitement over whether ms c I is going to, you know, the the index group that largely controls the description of emerging markets, whether MSc AND is going to be including

a Chinese A shares in its index. But it doesn't really matter terribly which measure of China you take at the moment there, they're all down quite badly over the last six months. Yeah. John. First of all, I want to just welcome you to Bloomberg because you spend nearly three years at the financial time a variety of positions, and it is a coup for us that you joined us.

So I just want to say congratulations. Um John, I want to just take a step back and look at the broader cell off today in markets, and on a certain level it's almost comforting, and I'll tell you why, because you're not seeing bonds and stocks all off in tandem. So I'm wondering from your perspective, do you think that this is actually um somewhat more predictable, that basically this is the market more broadly saying to the photo reserve,

slow down. Growth is going to slow going forward. Higher input costs are going to weigh on companies, and things are just going to take a breather for a minute. I mean, is that the interpretation here, that's one interpretation of it, certainly, you know, not not necessarily an unreasonable one.

Another way of looking at it, which would be relatively healthy, although it would suggest that the President might have been a little unwise to make the stock market such a measure of his success is that we might finally be getting to the long awaited point when Main Streets gains somewhat at the expense of Wall Street that you're seeing, uh, You know, a number of the companies that have disappointed and endings have cited the problems of rising costs, including

labor costs. Obviously, that's good news for the very many, very frustrated people here in the US who have suffered sluggish wage growth for a long time. Similarly, as the economy strengthens and and rates go up, that makes it harder harder sledding to a harder sledding to make money out of the stock market. But it's it suggests that there is more genuine robust health out here. So to some extent um, this is what had been hoped for for a while. You could argue, yes, that it's a

that it's a healthy form of growth. The problem, there is a problem. The problem probably arises with, as we mentioned earlier, what exactly is going on in China. We're in a bipolar world in many senses in the moment that there are two economies that count, the US and China, and some of the things that are happening in China cannot be ascribed merely to trade tensions which are yet seriously to bite, and they play in the art. Concerning John, you're famous for taking the long view, and you're an

investor that takes the long view. Where would you be telling people to look for prospective assets to purchase somewhere other than the US, more or less anywhere other than the US. Frankly, I mean in terms of in the very long term. The it's very hard to dispute the notion that the single most important factor in the return you'll get in the end is how much you paid for it at the start. There are almost no stock markets out there that look particularly expensive other than the US,

which I've been in various arguments with the people. Now that my blue and my email is starting to regularly go out from from Bloomberg, and so Bloomberg readers are discovering because I think US stocks are overpriced. My beloved FT readers have known that for a while. If US stocks are plainly overpriced, if you don't believe it, don't believe it, send me in an email and I'll try to convince you otherwise. But but, but outside of the US,

most of the world has interesting characteristics to it. You can certainly argue whether some of them, more apparently cheap markets are value traps. The fact that the cheapest mainstream stock market at the moment is Russia does tell you something about why it might be cheap right there. But outside the US, they're interesting opportunities. So is Italy interesting or is it Italy is fascinating? I would even say

it's very entertaining. You have to be entertaining. No, No, it's it's really if you want to make it, if you if you want to try to be clever and make an opportunity by opportunistic by don't do it now in Italy because I don't see a way in which this political standoff is resolved quickly. This isn't Greece. The Italians really can try to call the Europeans bluff, and the Europeans really can't have bring the kind of leverage against Italy that they used against Greece, but the bond

market can. So this is this is not the time to dive in yet unless you really feel like you might like mega millions. It might work out for you, but I wouldn't recommend it my feet. It might be trying to get the jackpot for one point six billion dollar uh pool that's out there for the lottery that nobody has won yet. John Author's senior markets editor for Bloomberg. We welcome him to Bloomberg. We're thrilled that he has joined us. We really appreciate you joining us right now.

Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio