Massachusetts’ $2.7B marks largest 'social' ESG muni deal yet

Massachusetts plans to bring $2.7 billion of taxable business-tax backed special obligation revenue bonds with a social designation, marking the largest environmental, social and governance deal to date in the municipal market.

The deal is also one of the larger taxable deals in 2022 in a year that has seen a significant drop in taxable issuance and muni issuance overall. Proceeds from the deal, set for the week of July 18, will go toward paying down federal debt accrued by the state during the COVID-19 pandemic. The issuer is targeting both domestic and international investors.

During the pandemic, Massachusetts borrowed $2.2 billion from the federal government to meet the unprecedented unemployment insurance demand. It now must repay those funds by November or risk the reduction of certain federal aid and benefits.

Jefferies LLC and BofA Securities are joint book-running senior managers for the deal which has received a AAA rating from Fitch Ratings and the Kroll Bond Rating Agency and Aa1 from Moody’s Investors Service, in line with the state’s overall credit quality.

State officials are expecting high demand for the “high credit quality” offering, said Kathleen Bramlage, senior debt analyst and portfolio manager at Massachusetts State Treasurer's Office. 

“The ‘22 bonds are going to manage the overall employer contribution rates and finance unemployment insurance,” she said. “This financing plays a critical role in delivering economic relief to individuals and families experiencing financial hardship during the COVID-19,” earning the new deal a "social" ESG status.

That focus on social good earned the bonds ESG-certification from Kestrel Verifiers, making the deal "the largest labeled ESG transaction to price in the municipal market to-date,” according to a press release from the treasurer’s office.

The $2.7 billion figure nearly matches the total ESG-labeled bonds issued in May alone, the latest data available. May’s total ESG issuance was $3.117 billion per SDC Refinitiv data, and ESG issuance through May 31 stands at $10.789 billion versus $12.905 billion from January to May 2021, similar to the decline in total issuance this year. 

Last year’s total ESG issuance hit $42.059 billion. While that figure remains slight compared to the overall muni market — the market saw $475-plus billion in 2021 —  it has grown substantially in recent years. In 2015, $2 billion of green bonds were issued.

In 2013, Massachusetts pioneered the sale of the first ESG-related securities in the U.S., raising $100 million from the nation's first green bonds to fund clean drinking water projects, upgrades to energy infrastructure, and other environmentally conscious initiatives across the state.

In the years since, the volume of sustainable bonds hitting domestic and global markets has risen dramatically. According to S&P Global, ESG-related securities will account for 17% of global bond issuances by the end of 2022, totaling $1.5 trillion, up from just 5% in 2018.

“This growth,” the report continued, “will persist despite stagnating global issuance volumes.”

For this deal, the state was seeking ways to pay down its federal debts. Earlier this year, official’s used a portion of funds granted by the American Recovery Act to pay down $500 million worth of obligations. The state intends to service the remainging $1.7 billion outstanding with funds raised from the bonds, according to the preliminary official statement.

Debt incurred from the sale of new credit will be serviced by a "COVID-19 Recovery Assessment" levied on a wide swath of the state’s employers that are already registered in the unemployment system.

The assessment is to be set annually by state officials and collected quarterly from eligible business, with individualized rates based on employer's quarterly taxable wages, allowing officials enough flexibility to ensure pledged funds can meet minimum debt requirement outlined in the terms of the agreement, according to the POS.

Upon delivery of the bonds later this month, officials expect $72.8 million in initial funds to be transferred to the debt service account for the new credit.

The deal is structured in two tranches: the first, $1.977 billion of taxable business-tax backed special obligation social revenue bonds, mature from July 2023 to 2033, subject to a make whole call; and, the second, $722.265 million of taxable business-tax backed special obligation social revenue bonds, mature in July 2033, subject to a make-whole call, special mandatory redemption.

The bonds' strong security features make them appealing given the uncertain economic conditions, noted Denice Rappmund, vice president and senior analyst at Moody's Investors Service. Along with the state’s diverse economy, the “resiliency” of its business tax base — which Moody’s estimated to be worth upwards of $46 billion —  give the bonds an additional layer of security, she said.

As well the state's "the active management" of the wide-reaching business tax backing the new credit is "fundamentally important" in reducing risk, Rappmund added.

“This is not a passive revenue stream; if for some reason there was another recession over the period these bonds are amortizing, the state is looking at the levy every single year," Rappmund said.

Having the authority to adjust to the special assessment meant to service future obligations ensures the state will be able to maintain the negotiated 125% ratio of debt to funds regardless of the changing economic conditions.

“If there were a small dip in the taxable wage base,” Rappmund said, “they would just be able to set the levy a little bit higher, to maintain that coverage level.”

Though the current deal allowed the state to issue additional credit until 2025, there are currently no plans to do so, according to Rappmund.

The deal’s financial advisors are PFM Financial. Bond counsel is Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. The trustee is The Bank of New York Mellon Trust Company and the underwriters counsel is Locke Lord LLP.