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M&T Bank/Wilmington Trust
Business Impacts: How Rising Interest Rates Affect Your Business
June 14, 2022
1 p.m. EST

Jess: Ladies and gentlemen, I’d like to welcome you to today’s event, Business Impacts: How Rising Interest Rates Affect Your Business.  Before we get started, I’d like to mention that today’s session is being recorded and you are currently in a listen-only mode.

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At this time, let’s begin today’s event, Business Impacts: How Rising Interest Rates Affect Your Business.  I would now like to introduce your moderator for today and that is Cris Sigovitch, Senior Vice President, Treasury Management Services, People’s United Bank, a division of M&T Bank.  Cris, you have the floor.

Cris Sigovitch: Thanks [Jess].  Good afternoon and thank you for joining today’s webinar.  We’re excited to be on with you today to discuss what we think is a really relevant topic of how rising interest rates affect your business.  For today’s session, we have a diverse group of panelists who are excited to share their perspectives and, of course, take all of your questions on things related to the economy, what you should be thinking about as we anticipate interest rates to continue to rise, to ideas on how to manage excess liquidity, thoughts on how you should be thinking about any short or long-term debt on your balance sheet.

I want to give a special welcome to clients joining from People’s United Bank, a division of M&T Bank who are joining us for the first time in this forum.  We’re excited to have you on.  Before I introduce our panelists, I’ll just reiterate a few of the housekeeping items that Jess mentioned.  In the Resources section of your screen, you will find that there is a CTP certificate for those looking to receive credit for today’s session and there are two great content pieces in there as well with relevant information supporting today’s discussion so, I encourage you to check those out.

So, without further ado, I will introduce our panel for today.  First, Meghan Shue joins us from Wilmington Trust.  Meghan is Head of Investment Strategy and is a member of the firm’s Investment Committee.  Also joining from Wilmington Trust is Mary Alice Avery who is a Managing Director in the Institutional Client Services Business responsible for introducing clients to Wilmington’s Investment Management Escrow, Corporate Trust and Entity Management Capabilities.

Next we have Gary Bukeavich.  Gary is a Regional Sales Manager in the Corporate Payment Solutions Business at M&T Bank.  Gary and his team work with businesses to provide solutions to help them manage working capital, payments and improve their cash management processes.  And finally, Tim Hardt.  Tim is a Senior Capital Markets Representative in the Interest Rate Derivatives Group at M&T Bank where he works with businesses on client education from structuring and execution of client-facing derivative transactions.

So, to get things kicked off, I will pass it to you, Meghan, to give us an overview on the economy, the fed and all things related to what’s going on with interest rates.  So, Meghan, over to you.

Meghan Shue: Thank you, Cris, and good afternoon everyone.  So, very happy to be here today.  I wish I had a little bit of a better economic backdrop to present but there are some glimmers of light and hopefully I’ll bring those to you.  I will definitely be focusing on the inflation environment, what it means for the fed and our outlook for rates.  So, jumping right into it, it’s a very challenging environment.  Inflation is front and center.  I probably don’t need to tell you all that.  What you’re going to see here actually just a testament to how quickly the environment is changing and how fast markets are moving.  Some of the numbers that you’ll see here predate the May inflation report that was released on Friday.

So, I’ll be giving you the most current commentary as I talk through that.  But the broad contours of the story and the underlying dynamics remain, which is that for many of us, including ourselves, we were expecting to see evidence that inflation is, has, or is in the process of peaking.  And, unfortunately, the May inflation report dealt a bit of a body blow to that thesis.  What we saw was the CPI hit a new 40-year high at 8.6% year-over-year for the headline inflation, 6% year-over-year for core and the inflationary pressures continue to be very, very broad-based.  So, we are seeing really strong increases in prices related to reopening sectors; so, think airfare, hotels, transportation.  The auto supply chain continues to be gnarled.  I happen to know from firsthand experience.  I had a lease run up a couple months ago and it is not a fun time to be out there buying a car.  We’re seeing similar sentiment in consumer sentiment surveys and housing.  Those are the main areas in core.

Housing is particularly important.  It is a real big chunk of the Consumer Price Index at about 32%.  A number of different dynamics, housing shortage, very low inventory, housing affordability and prices that have been quite high, all of that has led to price pressures for the housing component of the CPI.  We do think that will be coming down and I’ll talk about that in a minute but for now it’s quite firm.

And then, of course, as investors we are typically focused on so-called core inflation which strips out the more volatile components associated with food and energy.  The reason for this is because federal reserve monetary policy can’t really do much for those areas of inflation.  So, we tend to focus on core but I think for this cycle, headline inflation and what we’re seeing in food and gasoline and energy prices is very important because there we have quite a bit of pressure that is being exerted on consumers and forcing them, frankly, to start to make some choices around what are they going to sacrifice in order to pay for the gasoline that they need in their car to get to work.

To put some numbers around that, food inflation is up 10%, year-over-year energy, the broad energy category, is up about 35% and gasoline is up nearly 50% on a year-over-year basis.  So, really, really significant price changes happening very, very quickly.  So, where do we go from here.  Well, you’ll see here in the subtitle we had a year-end CPI target of 4.5% on a year-over-year basis before this latest reading.  We have had to revise that up to closer to 5.5% by year-end.  We still think inflation is going to peak soon.  It’s just probably going to take a little bit more muscle from the fed in order to get inflation to drop as quickly as we need it to.

So, the reasons we think inflation is going to peak are shown here on the right.  Consumer savings.  You may hear a broad term, figure, for consumer savings quoted, something like $2 trillion in excess of the pre-pandemic trend.  And that is true.  Broadly speaking consumers are sitting on a lot of excess savings, but if you look at other measures, you slice it and look at the lower income tiers, there you see that savings is at, or even below, pre-pandemic levels.  A lot of that savings and liquidity continues to be concentrated in the top tier by income.  We look at the personal savings rate that has now dropped to below average.  Average is about 6.5%.  We’re now looking at 4% to 4.5% for the percent that consumers are saving as a percent of their disposable income.  And consumer sentiment is very, very low.  In fact, the University of Michigan Consumer Sentiment Survey hit an all-time low last week.  So, while that is, broadly speaking, not very encouraging, it does speak to consumer demand pulling back.  So, we’re going to get a little bit less of that demand push type of inflation that has been leading to higher and higher prices.

Interest rates moving higher is also something to speak about.  We are looking at about 3.4% on the 10-year treasury yield.  We’ve seen the short-end of the curve move up very, very quickly and this is all before the feds really done any material tightening.  The feds fund rate is at just 1%.  So, markets have moved and priced in quite a bit of tightening ahead of any actual fed action and we’re seeing this happening in real-time in the housing market.  Affordability when you combine prices and interest rates has really fallen sharply to levels we haven’t seen since before the global financial crisis.

The 30-year mortgage rate is creeping up towards 6% today, which if you look at where it was just to start the year, we’ve seen about 2.6% increase, that’s one of the fastest increases since the 80s.  And on a percentage basis, which I think is relevant because rates are low, but if you think about it in the terms of the percentage change, it’s about an 80% increase in the mortgage rate and that’s having passthrough effects to what consumers can afford, and it’s already starting to slow.  Mortgage demand, new home purchases, I don’t think we’re looking at any sort of a housing crisis.  We still have very, very low inventory and I think demand will stay solid but we’re definitely seeing some of the air coming out of the housing sector.  And I think this is what the fed is looking for, this is what they’re trying to achieve.  So, we think that inflation is going to start to come down.  The key question remains, some of these exogenous factors that you see on the bottom right here, a lot of them having to do with the supply chain.  So, commodity prices surging, very much related to the war in the Ukraine and some resistance on the part of US producers to pump aggressively because of some clear signals from both investors as well as policymakers.

Supply chains have also hit a bit of a snag because of China COVID-related lockdowns where the zero tolerance COVID policy is still in effect and they are really doing localized shutdowns, not quite as broad-based as what we were seeing earlier this year, trying to be a little bit more targeted, but it’s definitely having an effect on ports, having an effect on the ability of goods to get out of China.

So, what does this mean for the fed?  Well, we have a very important fed meeting tomorrow.  As I said, the fed funds rate today is at 1%.  After the May inflation report, the market started to price in a much more aggressive base of tightening from the fed, putting back on the table the possibility of a 75-basis point rate hike tomorrow, even though Chair Powell all but explicitly said that anything more than 50 basis points was off the table.  I think there is some signaling in markets that this is needed more even than it might occur that markets may actually feel a little bit of relief if they feel like the fed is going to be more aggressive upfront here.

There is, in terms of market pricing, a total of about 2.9% of fed tightening baked into markets so far.  That’s for 2022, so we’d be looking at a fed funds rate of 3.25% and 3.5% by the end of the year.  It’s also important to know that we are looking, we are just starting, which is remarkable to me actually given when the fed started quantitative easing, we are just starting quantitative tightening this month.  And what that means is that between June and September the fed will be ramping up the amount that they allow to roll off their balance sheet.  This is a fairly new, fairly untested, form of policy and we’re not exactly sure how it’s going to play out but what we do know is that they will be letting about $30 billion worth of treasuries, and about $17.5 billion worth of mortgage-backed securities roll off their balance sheet.  Again, that will ramp up into September for a total of about $95 billion per month rolling off the balance sheet.

This is double the rate that we saw in 2017 through 2019.  So, there is definitely -- if you were to equate it to tightening of the fed funds rate, there’s a lot of debate but it’s at least a couple of 25-basis point rate hikes in terms of the equivalence when you think about the impact on markets and the economy from quantitative tightening.

So, in terms of rates, we are, as I’ve said, we’ve had a forecast for call it 3% to 3.25% for the 10-year treasury yield over the next year.  We are above that today with the 10-year treasury yield making a new post-pandemic high of about 3.45%, last time I checked.  This does surpass the May peak where we got to intraday a little bit higher but close of day about 3.1%.  The shape that the yield curve, so that’s shown on the right, this is the difference between the 10-year treasury yield and the two-year treasury yield.  It’s a really good indicator of the degree of tightening, fed tightening, that’s being priced into the markets and also recession risks.  When we made this slide we were looking at 22 basis points of differential between the 10-year treasury yield and the two-year treasury yield.  Earlier today we were at one basis point.  And generally, when you see the yield curve invert, it can be a signal of a recession to come; not a very good timing tool, it can be anywhere from six months to two years before a recession, but it definitely signals that the fed is at risk of overtightening and sending the economy into recession.  What’s interesting on rates is that we’re starting to see the market price in rate cuts beginning in 2023, which I think, again, to me speaks to market fears about a recession.  We do think that the 10-year yield could move a little bit further, a little bit higher, from here but we would not revise our 12-month outlook too much higher.  Again, because I think we’re going to start to see inflation fall.  We’re going to start to see the fed be able to move from, maybe, it’s 75 basis point rate hike tomorrow, to more like 25 basis point increments of tightening ad I think you’re also going to see the market release that growth is going to slow.  And so, the 10-year yield we expect to settle in back in this, call it, 3% to 3.5% range for 10-year.

So, before I pass it back to Cris, I just want to wrap it up with three takeaways.  We still expect inflation to come down but it is likely to require a little bit more aggressive muscle from the fed in order to get it to, not only peak, but start to decelerate at a decent clip because nobody wants to be looking at 6% inflation beginning of 2023, even if it is below where we are today.  We need it to come down at a nice clip.  So, that’s the first takeaway.  Second takeaway, recession risks have risen.  We still have not moved a recession into our base case.  We still think we can grow but that margin is getting smaller and smaller, particularly as you look at pressure on energy prices shaving off some potential growth from the consumer.  It is possible, a recessions not the worst thing in the world, especially if it’s a shallow recession, relatively short-lived, it is possible that this is the only way we’re really going to see inflation come down.  That might be the medicine necessary to cure the inflationary ailments that we’re seeing today.

Then the third takeaway, rates are on the move but we do not expect them to continue to increase at this pace.  We think we’ll settle in at somewhere around 3% to 3.5% on the 10-year treasury yield.  Again, in part because of recessionary concerns dampening the growth outlook, but also as we move into the latter half of the year it becoming clear that the feds not going to need to continue to increase quite as aggressively as it is today and pricing in some slowing of the inflationary outlook.

Cris, that’s all I have and I’ll pass it back to you to get the rest of the conversation going.

Cris Sigovitch: Thanks, Meghan.  Appreciate the overview and I hate to start here but we’ve got a question that came in that has come up in a number of client conversations that I’ve been in, and I’m sure you as well, and that’s someone used the S word, stagflation.  Maybe talk a little bit about what that means and what impact that has on businesses potentially?

Meghan Shue: Sure.  Stagflation, by definition, is a rise in unemployment with a rise in inflation, with very strong inflation.  You could also think about it as a contracting economy and inflation that continues to go up.  The market has definitely been signaling that this is a greater possibility.  I mean, if you just look at asset class returns, year-to-date, you’ve got stocks down, you’ve got bonds down.  Really the only place to hide has been in energy and that’s typically what you -- that type of asset class behavior is typically what you see in a stagflationary environment.  We don’t have too many periods in history, thankfully, to look back on in terms of reference points.  I would say we are looking -- and it depends which direction you’re moving with inflation, again, I wish we were here talking about high conviction that inflation had peaked and unfortunately the May report just didn’t give us that, but we still do expect inflation to be coming down.

So, even if we get softening growth, possible recession, I think it’s going to look a little bit different than the 70s era stagflation which was contracting economy, rising unemployment and inflation kept going up.  Again, we had some different dynamics there, a little bit of a different energy environment, much different fed philosophy.  What’s somewhat comforting is that we are getting more and more convincing rhetoric from the fed that they are prioritizing inflation.  And I think, it’s my belief, it's the belief of Wilmington Trust, that the fed would put us into a recession in order to get inflation under control.  That was not the case in the 70s when we had this rolling recession.

So, I think it’s a little bit different now.  It doesn’t mean that we’re not going to have to undergo a little bit of pain to get inflation down, but I don’t think it’s going to be a scenario that we are looking at as a long-term economic environment.

Cris Sigovitch:  Got it, thank you.  So, maybe turning away from the doom and gloom for just a second, potentially some positives here, right?  We have a lot of clients with significant liquidity sitting on their balance sheet.  So, Mary Alice, maybe turning to you.  Seems like if I have excess liquidity or non-operating cash, what should I be thinking about and how do I think about putting that cash to work if I’m a business today?

Mary Alice Avery: Thanks, Cris.  Yes, we’ve had a lot of conversation with clients on exactly that point and I think the place to start is for clients to get a handle on what their cash situation is and that would be understanding how much they have to invest, for how long those funds can be invested and also to consider what level of risk are they willing to assume?  And these data points are all the best to be memorialized in an investment policy statement.  I might move into an acronym, we call it an IPS.

To determine how much and how long, businesses will want to take a look at their cash flows over the last several business cycles so that they can understand what liquidity is necessary and any cyclical requirements that they may have and then ultimately to identify the excess cash that can be invested.  For balances that aren’t needed day-to-day, there are solutions and it might be today, it might be a money market fund, a government or money or treasury money market fund.  Right now, with the markets being a little bit in volatility, as Meghan mentioned, we’ve got the FOMC meeting today and tomorrow.  We expect a rate hike tomorrow.  It will have an effect on markets even though a lot of it has already been baked in.

So, for those short-term liquidity needs, maybe a money market fund is the right answer.  For those funds that could be invested 18 months or longer, perhaps investing in the fixed income bond market might be the proper solution.  There are minimums to invest in the market so it’s something that clients will want to keep in mind on what an asset management minimum is for investing.

Cris Sigovitch: Thanks, Mary Alice.  To your point there, if I’m a customer who historically has kept their liquidity on the banks balance sheet or a deposit account and I’m looking at some of the options that you just discussed, how should I be thinking about the risk and the investment policy that you just mentioned.

Mary Alice Avery: Sure.  Well, it’s very important to document the investment policy statement so that an investment manager has a complete understanding of your objectives and your goals for those dollars.  And in the investment policy statement, you’ll want to spell out the permissible securities, the sector in which you would invest, the quality of those securities, the ratings that get applied to each of those bonds, the maximum maturity, how far out you want to go, the term of those securities and then any constraints on the portfolio based on your business and any regulatory oversight that might be there.  You may want to think about benchmarks, you may want to think about any legal or tax considerations specific to your business and all of this can be done with the help of an investment manager in order to provide clients with that information that clients simply just don’t have the day-to-day exposure to the markets.  So, those investment managers who are in the market everyday are able to, as Meghan has just illustrated, talk about the direction of the interest rates, monitoring fed policy, keeping a close eye on economic conditions, inflation, fiscal policy and ultimately the bond market.

Cris Sigovitch: Yeah, that makes sense.  So, then there’s different customers who are comfortable with keeping, or need to keep, their deposits on a demand account or in a bank money market account.  Gary, I guess I’ll turn to you.  Rates have started to tick up but appear to continue in that direction for some time.  When should a business customer expect deposit rates to start to move?

Gary Bukeavich: Thanks, Cris.  That’s a fair question.  It is something that we address on a frequent basis and look at.  I think most banks, like M&T, that is something that we’ll continue to monitor and we’ll continue to see what the feds actions are.  But, ultimately, at some point we’ll do that.  We would encourage companies to defer to their investment policies but it is something that we look at from a competitive standpoint as well as what’s best for the bank’s balance sheet.

Cris Sigovitch: Thanks, Gary.  Then I guess, Tim, turning to you, so if I’m a net borrower here or have either floating or fixed rate debt on my balance sheet and you’ve seen interest expense particular in the floating rate debt tick up over the last few months, what should folks be thinking about there?  And what client conversations are you having most often to that?

Tim Hardt: Yeah, thanks, Cris.  It’s certainly a question we’re getting quite often now, especially as clients are realizing their debt services is increasing rather quickly over the past couple of months.  So, for anyone that has floating rate debt out there, there’s three simple things I think that they could do that most banks or financial institutions will offer.  One is if you have any floating rate debt, be it a traditional term loan or a line of credit is to take that and convert it into a fixed rate loan.  You can do that by simply replacing the floating rate loan with traditional cost of funds fixed rate deal.  That could be somewhat costly and, I guess, attorney labor intensive to redo all the documents.  Or, there are ways through a derivative product to fix the rate or insure against the rate without basically touching the underlying debt.

So, a product called an interest rate swap.  You can come in and essentially fix all or a portion of the debt through a swap.  And I make sure to point out a portion of that because I like to mention that instead of a traditional fixed rate borrowing, a swap is not all or none.  So, for a rough example, if you had a $10 million floating rate term loan out there, obviously your debt expense has gone up but now rates are pretty high but you want to get some insurance against it.  You can always do an interest rate swap on a portion of the debt, so a 25%, 50%, so that you do have some hedge in there, you’re locked in.  If rates continue to go against you, you could come in and do a swap to lock in the rest of it.  Or, if rates continue to fall, now you have some of it still floating to take advantage of it.  So, that’s a swap where you’re actually locking in a fixed rate.

Another very prevalent product is called an interest rate cap, which is essentially just buying an insurance policy where if the rates on my floating rate index go over a certain strike rate, basically the bank or financial institution will reimburse you for anything over that.  There is an upfront cost to that, just like buying an insurance policy, but that’s a very quick, easy thing to do.  And, I guess while I have the attention, I’ll mention one other thing here that does come up in our conversations, which I think is a lot of times overlooked, is even if you have a fixed rate loan on now for your debt, what you need to pay attention is, is when is that fixed rate debt maturing?  Is it within 12 months, is it within 24 months?  Because while you don’t have interest rate exposure now, you could certainly have that exposure when you need to refinance that debt in 12, 24 months.  So, if you have a balloon payment coming due, your exposure is going to kick in very fast when that happens.

Again, multiple things you can do there through each of those products, [refi] financing early or doing something forward starting.  So, that’s something I want to remind everybody to keep in the back of their minds.

Cris Sigovitch: Thanks, Tim.  Maybe Meghan, coming back to you.  A question in the chat around the pace of wage increases and when you may see those start to slow down?  Obviously the war for talent is fierce right now.  You talked about the tight labor market.  So, maybe give your view on sort of the pace of wage increases and what factors we may need to see for that to start to level out a little bit.

Meghan Shue: Yeah, well the good news is we are seeing wage increases level out a bit.  So, one way that we look at it is a three-month moving average and there we’ve seen wages move from about 5% on an annualized basis to closer to 3.5%.  I believe I have those numbers correct.  So, a bit of a stabilizing and somewhat rolling over of wage increases.

The problem is that with inflation remaining high for consumers, what this means is that now they’re looking at declining real wages which is not really a great scenario or backdrop for the consumer.  We started to -- we follow a lot of companies, earnings reports, things of that nature.  The chorus of recessionary risks that are coming from several prominent executives in various industries, I think it’s starting to temper somewhat, some of the demand for labor.  And we still have job openings that look very, very high but I’d be watching the weekly unemployment claims to see if maybe some, again, in terms of air coming out of that balloon, some of the air is coming out of the labor market.  Again, this wouldn’t be a terrible thing.  We’re looking at a very, very low unemployment rate, historically speaking, and that has driven wages higher but our expectation is that that wage growth is really going to start to moderate going forward.

Cris Sigovitch: Thanks, Meghan.  Gary, over to you, a little different direction.  What strategies or processes should businesses be thinking about when it comes to operating their day-to-day treasury function, things that they should be looking at in this current environment that maybe wasn’t a focus over the last lower rate cycle of the last couple of years?

Gary Bukeavich: All right, probably a couple of things, Cris.  First, I would say in light of the current environment, I would say prepare a cash budget.  There may be more money going out than we’ve seen previously in the past.  We’ve got higher raw materials cost, we’ve got higher payroll costs, we have higher interest costs with the fed and they have higher rent costs.  So, there may be more money going out than previously.  I think the exercise in a cash budget and forecast will help put a little perspective around that.  It will also provide insight into the timing in terms of when the money is coming and going out.  If you have an abundance of time, I would also maybe stress test that, right?  What happens if inflation gets a little bit higher?  What does it look like in the worst case?  So, cash budget is the first thing I would look at.  Secondly, I would know my cash conversion cycle.  My cash conversion cycle simply tells me how long my money is tied up in inventory and receivables net of payables.

Maybe another way to look at the cash conversion cycle is it basically measures how long from an investment in inventory until I collect that receivable and if that’s getting bigger or longer, my money’s tied up for a longer period of time.  So, I would want to keep my vision on that.  I would want to know what my trends look like and how am I doing compared to relative years.  And I would also want to know how do I compare relative to my peers and your relationship manager or your treasury management consultant can get that information but that’s just a good baseline to see where my cash conversion cycle should be.

Then I would look at the individual variables within the cash conversion cycle.  I would look at my receivables days and how might I accelerate the collection of my receivables.  Again, your treasury management consultant can help you with that.  Does it matter how I get paid?  Well, it does matter, right?  If I get a check today and I get an ACH day for the same amount or real-time payment in the current environment, the float on those are all different.  So, I would want to make sure I’m reviewing that process as well and then the same thing on the disbursement side.  I want to look at my process, I want to see how things are going out and I want to make sure I’m doing that in the most efficient manner.  Then at the same time, doesn’t disrupt my vendor relationships.  And there’s ways to do that and we can help you through that process.

Inventory at this time is a little bit more complex.  Some companies may have had difficulties getting inventory, so they may do more buying in bulk and that’s a cash flow impact but that’s a little bit more challenging now just because of the current environment.  But, I would be looking at all those metrics and seeing ways that how can I condense my cash conversion cycle.

I can give you an example, I was talking to a company, pre-COVID, about the cash conversion cycle and his business and he said, you know what, we were probably a little lazy around that process.  And lazy was the word that he used and the reason he said he was lazy around that process is, one, because the interest rates were low, he told me, I don’t have a lot of alternatives to do with my cash and we do have a lot of cash on the balance sheet.  And what I encouraged him and what I will encourage all of the audience here to do, would be do not look at the cash conversion cycle as a liquidity play when times are tough.  I would say look at your cash conversion cycle as a long-term efficiency play.  Some of the best companies in the country, in the world, really paid diligent attention to their cash conversion cycle.  It helps them weather through storms and it helps them, sometimes, when the storms come to thrive in those situations.

So, what do they do with that excess cash from operations?  Well, they do things like fund their growth.  They do things like reduce their debt and their leverage, they pay down debt.  They do things like internally fund capital expenditures or they do things like start to build a war chest for strategic acquisition and that always happens in downturns; opportunities arise and those companies are prepared for those opportunities.  So, second, I would say focus on your cash conversion cycle and making sure that’s efficient as possible.

Then finally I would say automate processes.  Talk to your treasury management consultant and your relationship manager.  There’s a lot of things we can automate from a treasury perspective.  It might be around invoicing automation, it might be around your cash application.  It might be around your payables process, it’s certainly around your reconciliation.  So, whatever you can automate, I would look to do that especially when you start to consider the great resignation.  Maybe I have to do as much with fewer people or maybe the people I have to replace those individuals with come at a higher labor cost.  So, automate what processes you can.  So, those would be the key takeaways.  I would say cash budget, cash conversion cycle, automate and then there’s all the other stuff that might be in the parking lot.  Should I be looking at price increases?  Absolutely.  Should I be looking and watching for margin erosion?  Yes.  Should I be focused on expenses?  Yes.  Should I be buying in bulk?  Maybe.  What’s my policy around taking discounts?  What’s my policy around offering discounts?  There’s margin implications on both of those, or either side of those, there’s also a cash flow impact.  So, work through your entire process and include us in that process because I think we can bring value to the table.

Cris Sigovitch: Yeah, thanks, Gary.  A lot of great ideas here.  Tim, I want to go back to you.  So, question from the chat here, if I signed a term sheet for a fixed loan already with my bank but may not close for a few months, I’m nervous my rate may be different when we close.  What can I do?

Tim Hardt: Sure.  So, M&T and most financial institutions will offer an option to just lock the rate today.  So, do a rate lock.  At M&T we generally have a period of about six months where you can -- once the loan term sheet is signed and committed on, we can lock the rate, anything inside a six-month through a rate lock.  So, any cost to do that would just be embedded in the rate.  And one of the nice things right now that Meghan already showed before is, that very flat or somewhat inverted yield curve can make those rate lock premiums very small in comparison to where rates are and what the potential for rate movement is.

So, a rate lock could cost you maybe 5 or 7 or 10 basis points depending on the size of the deal, the term of the deal and how far out you’re going, but we’ve seen rate moves in the past three days of almost 30, 40 basis points.  So, it’s pretty small in the big picture and that flat or downward sloping yield curve generally helps those rate lock prices become a little cheaper but most financial institutions will offer some type of product like that.

Cris Sigovitch: Sure.  And sticking with you, we’ve had some discussion here about supply chain of disruption.  If I’m someone who is looking to bring in a piece of equipment or make a large capital expenditure, what should I be thinking about there in terms of how to lock that cost in?  Can you offer us anything there?

Tim Hardt:  Yeah.  So, it does become a little bit difficult.  Obviously anyone’s ability to hedge something, be it interest rates or foreign currency rates, really comes down to how well can you [predict] that cash flow or when you might need that cash or when you might need that debt.  So, the closer you can narrow in when you might need that the better you can hedge for it.  Products such as a fixed rate lock, like I said, we generally have a cap on how far we can go out.  But, you can always close on that early.  So, with the very flat yield curve, you could put that rate lock out further.  It may not cost you very much additional and then you can always lock in early.  Should that rate lock not close on time, there’s generally a way to extend it via per diem type situation or if there was a very large supply disruption, there’s ways to maybe extend that rate lock.

Another way to do it there is we see a lot in types of construction loans or multi disbursement-type scenarios where there may be some draw period or some period of interest-only is we can execute what’s called a forward starting swap.  Think of it very simply like a construction period where it may be 18 months before you build a project, until you go to the permit period.  You’re going to be drawing during that 18 months but then you’re going to go into an longer fixed rate portion or term period and you can lock in the rate today for that future fixed rate period.  And generally, on a swap, there’s no limitation to how far out you can go.  Again, you’re limited by how well you can predict when you need to lock in that rate but it’s, again, a very flexible product where it’ll allow you to stay interest-only for quite a portion of time and then have a fixed rate portion through a swap or even a forward starting interest rate cap when you need it.

Cris Sigovitch: Sure, thanks, Tim.  Meghan, turning back to you.  There was a question in the chat earlier about the labor market again and this sort of concept of how present and how available the labor market was pre-COVID and felt like a lot of the stimulus programs drove away that availability particularly in the restaurant, hotel, hospitality space.  What’s your view or outlook on that class of the labor market?  Is anything that’s going on today with interest rates or any of the effects that we may see over the next couple of years, does that have an impact on bringing that employee or that individual back to the labor market?

Meghan Shue: Yeah.  So, this is a really interesting question.  We looked at this in depth as part of our 2022 capital markets forecast.  And really the dearth of employees and the shortage and the difficult in finding labor, it’s definitely still present.  We all see it, either in your own businesses, or -- I took my kids to the Y the other day to swim and two of the pools are closed because they can’t find lifeguards.  So, what’s going on?  Well, the good news is that the labor force participation rate, which is an indication of how many people are either working or looking for work.  So, it helps capture how many people are active in the labor force, that really fell off a cliff during the pandemic.  It has since recovered and we are looking at really pretty much back to pre-pandemic levels for that 25 to 54 key working age population.

One of the things we did see was an acceleration of retirements where we knew that the baby boomers were going to be exiting the workforce gradually over the coming years, but really strong performance in the stock market, up until this year, generous unemployment benefits, COVID, frankly COVID headaches, really accelerated a lot of retirees.  Childcare has also been an issue and it’s a little bit of a negative cycle, if you will, where we have this shortage of workers so other people can’t go back to work because they don’t have anybody to take care of their kids.  I think some of that is alleviating and, again, we’re seeing that in the labor force participation numbers.  I do think some of those people who maybe thought they could make it as a stock picker or a bitcoin trader or what have you, something that worked in the time of tremendous liquidity from the fed and from fiscal policy, they might be drawn back into the workforce as well.  But a big chunk of it, unfortunately, is retirees who are not likely to come back in force.

Cris Sigovitch:  That makes sense.  And then I guess sticking with you here, you talked a little bit on energy prices earlier and the impact.  So, whether you and I are trying to fill our tanks up or businesses who are heavily reliant on transportation or transporting of goods, obviously that’s a big line item that has increased.  How do you think about energy prices, whether it be home heating oil or paying at the pump?  Do we see any relief there and how is that tied to everything that’s going on?

Meghan Shue:  Yeah, the energy market has been a really challenging space because of a number of different elements coming into play.  We came into this year, by the way, even before war in Ukraine, another set of lockdowns in China, we came into this year looking at tightening backdrop for energy.  In other words, increasing demand as you get reopening and people wanting to get back out there, and somewhat restricted supply.  Then the war in Ukraine is obviously taking out, potentially, a key player in the oil market.  What we’re seeing though is that despite sanctions, and oils a little bit different than natural gas, but when it comes to oil it’s a bit more fungible and that’s because of the ease of transporting it over natural gas.

So, whereas the U.S. and European countries are basically weaning themselves off of oil out of Russia, China and India are stepping up and buying more from Russia, probably at a discount mind you.  So, there is a little bit of that that’s kind of helping, from an oil market perspective, to keep some supply on and helping keep the prices from going crazy.  But demand for travel, demand for getting out there is still really strong and then we’re looking at China reopening as well.  So, all of that has contributed to some higher prices, the potential for some disruptions related to hurricane season are definitely a possibility, and we’re just in a little bit of a fragile state when it comes to energy.  And U.S. energy companies, in particular, they’re being much more disciplined in pumping.  They’ve learned their lesson the hard way through various cycles where as soon as prices increase and they turn on the spigots full blast, it’s self-correcting.  Prices come back down and they’ve really been punished by investors.

So, what investors have been telling them for the past few years is capital discipline, don’t go crazy with capital expenditures to put on a bunch of new projects.  And unfortunately, what that means is that unless prices stay where they are for a decent amount of time, we’re unlikely to see U.S. producers really fill that gap.

Cris Sigovitch: Yeah, that’s unfortunate, I guess, for our wallets.  Mary Alice, a question just came in that I’ll direct your way.  If I’ve historically only been comfortable keeping my company’s excess liquidity in a bank account and I’m thinking about alternatives, what should I look for in an investment manager and what’s the benefits to hiring one?

Mary Alice Avery: Sure, thanks, Cris.  When you want your investment manager truly to be a partner for you in identifying opportunities for you and always keeping an eye on your objectives and your goals for those funds, an investment manager simply has the time, talent and the tools that companies typically do not have within their four walls.  And so, hiring a person who’s in the market everyday who has the tools and resources available to them to help you navigate through the risks and rewards of investing is really invaluable.

I mentioned earlier that our conversations always begin with a full understanding of goals and objectives and risk tolerance and it’s documented through an investment policy statement, an investment manager can help review an existing investment policy statement to ensure that that document really does align with your articulated goals and objectives and current market conditions.  Or if you don’t have an investment policy statement, an investment manager can assist you in developing one based on the conversations that you have with them.

As I mentioned earlier, an investment manager will be able to bring in the current market environment and the know-how relative to fed policy, economic conditions and all those great things that Meghan’s been speaking about today.  They would also construct a solution.  It’s really a solution, a solution that is tailored to your needs, not putting you in a product that might be available to others.  So, I think that those are really the important things; the partnership, working with somebody who has the breadth and depth of the markets to help you in making those decisions and really being your partner through that process.

Cris Sigovitch: Thanks Mary Alice.  Tim, one for you that I’ll direct over, I think you covered this somewhat in a prior comment but I’ll pose it to you is, the question is my current loan matures in a year and will have a balloon payment I need to refinance.  Can I do anything about rates on that refinance now?

Tim Hardt: Absolutely.  So, we see this in our daily course of business come up a lot.  There’s quite a few things that happen is, one, you can, like we talked about before, we can execute some type of forward starting product out there for when that balloon hits, assuming you -- I would do it assuming you’re refi-ing the loan again with our finances --  But the other thing that’s happening now is we’re seeing a lot of pure refinance; rather than wait for that balloon, we’re seeing those loans basically being torn up now and put out for new maturity dates, whether that’s a fixed rate loan or a floating rate loan, because you can incorporate new funds that need to be borrowed and you can push the maturity out even further.

The one thing that I’ll just bring up there to mention is the change of floating rate indexes.  So, I’m not sure how many are aware of this on the call, most probably should, but the majority of floating rate loans out there right now are LIBOR-based and anything now that you see coming from a bank is going to be most likely SOFR-based, secured overnight financing rate that has now been introduced to take over LIBOR.

There’s going to be this transition period where a lot of language is going to be put in the documents to allow for that fallback.  But what we’re seeing is a lot of those documents basically being rewritten now for that new SOFR index because we’re technically not allowed to lend any new LIBOR exposure.  So, we’re seeing those refinance now, basically recast for new outstanding terms, and then we’re coming in and doing any of those interest rate products, be it the interest rate swap, the interest rate cap and then obviously a new [across] funds deal.  If you’re not doing them early then obviously we can do any of those forward starting products.  Sometimes though, like I said, there’s a limitation on those fixed rate locks but anything floating, a year, two years beyond is not an issue.

Cris Sigovitch: Great, thank you for your perspective there.  Meghan, a question here for you.  We’ve seen a lot of headlines particularly over the last, I guess, 12-plus months in IL bonds, what’s your take on that in today’s market?

Meghan Shue: So, the question is about inflation-linked bonds.  These are an asset that basically protects you and you actually get paid more as inflation expectations increase.  So, the interesting thing about inflation-linked bonds is that they do tend to get a lot of attention when inflation is quite high but that is not when they perform well.  They tend to do well when inflation is low and then rising.  But if inflation in today’s environment is very high, whether inflation peaks next month or the month after that, it is going to peak soon, it is going to start coming down.  And in that type of environment where inflation is high and falling, that is actually a very poor environment for inflation-linked bonds.  You’d be much better off just in traditional nominal bonds in that scenario.  We are also just holding excess cash in today’s environment as well because with all the volatility, we are finding cash to be an attractive asset.  But in this environment, I probably -- honestly I’d probably be looking to get more interested in inflation-linked bonds when inflation craters and, you know, maybe we find ourselves in the next recession, that’s when you would want to be a little bit more interested in that asset class.

Cris Sigovitch: Thanks, Meghan, appreciate your perspective there.  So, we’re coming up against time.  So, I want to thank all of our panelists for their participation and most importantly our customers and prospects dialing in today.  With that, Jess, I’m going to turn it back to you.

Jess: Great, thank you so much, Cris, and thanks to all of our panelists.  Just a quick reminder that once we close of four session here in just a moment that you will see a survey pop up on your screen and we would greatly appreciate your feedback on today’s session.  Thanks again for joining us and have a great rest of your day.

Disclosures:

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