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The US state overcame structural complexity and market volatility to raise $2.6bn in funds. Shanny Basar reports.

Against a backdrop of substantive volatility, in August this year, the US state of Massachusetts came to market with a $2.6bn social bond, the largest environmental, social and governance (ESG) municipal bond ever printed. The Covid-19 pandemic led to high unemployment and the state had to borrow from the federal government to continue making benefits payments after using the balance of its $1.7bn Unemployment Insurance Trust Fund (UITF). The proceeds of the social bond have therefore been used to repay the federal government and replenish the UITF.

The state received $2.3bn under the Social Security Act, which allows federal loans if a state’s UITF is hit by an economic crisis. After applying $500m in funds from the American Rescue Plan Act of 2021, approximately $1.8bn was outstanding and needed to be repaid by November 10 this year to avoid a cut in certain federal tax credits to employers in the state. Therefore, the federally taxable issue consisted of $1.9bn in non-callable Series A bonds and $700m in Series B “super sinker” bonds, which both mature in 2033.

Preparation needed

The bond was not the first social bond from a Massachusetts municipal issuer. However, because it involved a novel special obligation structure, it required significant preparation.

Deborah B Goldberg, Massachusetts state treasurer and receiver general, said the state could not allow volatility to impede the issuance. “We spent two years working on this issue and we were ready to go,” she says. “Everything in life is about timing and I think we actually lucked out when we issued.”

The special obligation revenue bonds will be repaid by pledged funds generated from a mandatory charge on experience-rated, private contributory employers in Massachusetts. Pledged funds were required to be at least equal to 1.25 times the annual adjusted bond debt service requirement. As a result, the structure required collaboration with the federal government and multiple state agencies. For example, the Executive Office for Labor and Workforce Development, and its Department of Unemployment Assistance, are responsible for performing the Covid-19 recovery assessments by March 1 each year and collecting the pledged funds.

Sue Perez, deputy treasurer at the Office of the State Treasurer, says building the new credit took time, including the preparation of documentation and liaising with rating agencies. The bonds had credit ratings of Aa1, AAA and AAA from Moody’s, Fitch and Kroll, respectively. “A lot of time was spent gathering information, understanding the numbers and boiling them down so we could explain them to investors and rating agencies,” she says.

Time was also taken to select joint bookrunning senior managers Jefferies and BofA Securities, and the banking syndicate. The state has a pre-qualified group of between 30 and 40 banks and sends them a request for proposal for each negotiated transaction. The request was sent in April 2021 and eight large US banks responded, which were scored on criteria including experience, analysis on structuring, understanding of the rating agencies and their underwriting and distribution capabilities.

Women-led issuance teams

The core working group consisted of largely women-led teams, including key leaders of state agencies, Jefferies and team leads for the financial advisor (PFM) and bond counsel (Mintz Levin). Six of the 10 co-managers qualified as either minority-owned, women-owned or service-disabled veteran-owned businesses. Kestrel Verifiers, which provided an independent opinion on the social bond, is also a women-owned small business.

Ms Goldberg says having women-led teams was not a requirement. “The syndicate was the result of a robust procurement process. It was just a nice outcome,” she says.

ESG is being attacked by a number of people across our country and we take the exact opposite position

Deborah B Goldberg

Despite market conditions, including an inverted treasury yield curve, there were orders from more than 130 investors, including $300m in orders from municipalities and state governments, $62m from state pension funds, and international participation from the UK and Norway. In addition, there were $118m retail orders, for which investors from Massachusetts have priority.

Ms Goldberg says the state also gave priority to ESG or social bond investors but there were still only a few in the order book, which may have been down to price. “Sometimes the price is great for us, but not for investors, and I’m OK with that,” she says.

Continued ESG issuance

Ms Goldberg continues that ESG comprises approximately 5% of the state’s annual bond issuance. “In aggregate, Massachusetts borrowers have sold $13.7bn of labelled ESG financing which ranks third among all issuers behind only New York and California, and comprises 10% of all labelled ESG issuance,” she adds.

She believes ESG issuance broadens the state’s outreach and provides a larger market for its bonds. She describes herself as a business person at heart, so evaluating risks and proactively funding to prepare for those risks makes sense given the realities of increased hurricanes, fires and storms.

“I think we set a credible example,” she adds. “ESG is being attacked by a number of people across our country and we take the exact opposite position. It makes no sense to throw out some of the tools in your toolbox.”


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