Massachusetts intends to use Tuesday's $500 million sale of new-money, tax-exempt SIFMA index bonds to kick off a five-year asset-liability management program.
According to assistant treasurer for debt management Colin MacNaught, the commonwealth hopes to reduce its exposure to interest rate risk by creating a "naturally hedged" sheet and prudently add variable-rate bonds instead of 100% fixed-rate bonds to offset the interest-rate risk of its floating-rate assets.
SIFMA index bonds are variable-rate debt tied to the Securities Industry and Financial Markets Association municipal swap index.
Proponents say they provide more of a market-driven rate as opposed to the bank-driven London Interbank Offered Rate.
On Tuesday, the commonwealth will use a soft-put structure, though MacNaught said the structure of the Series 2014C financing is only incrementally different than structures it has previously used. It plans to structure the initial step-up dates in two and three years. The six-month call option before each step-up date provides a significant window to remarket the bonds.
Amortization is from 2039 to 2044.
"Massachusetts is taking some very sensible steps to look more holistically at risk exposures across their balance sheet, considering the joint contribution to risks coming from their debt positions and their asset positions," said Daniel Bergstresser, a finance professor at Brandeis International School of Business.
"This change in approach is extremely sensible and it will benefit the taxpayers of the commonwealth."
MacNaught said long-term credit positives include significant reduction of cash-flow volatility and reduced interest costs by using variable-rate debt in an upwardly sloping yield curve environment.
"In looking at [assets and liabilities] from a global perspective, it is clear that the commonwealth's balance sheet is exposed to interest-rate risk," the commonwealth said in an investor presentation. "In short, the duration of short-term assets [investments] is mismatched to the duration of long-term liabilities [fixed-rate debt]."
State officials, said they must continually monitor market risk, variable-rate structure performance, investor demand and execution risks.
Massachusetts has nearly $35 billion in annual revenue. Its stabilization, or rainy-day fund, is $1.4 billion, one of the highest balances in the country.
As of May 31, the state has $19.1 billion of general obligation bonds outstanding, $917.7 million, or 4.8%, of which is in unhedged variable rate debt. Massachusetts has used variable-rate debt in its capital program since 1990.
Jefferies is lead manager for Tuesday's sale.
Edwards Wildman Palmer LLP is bond counsel. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC are disclosure counsel. Nixon Peabody LLP is representing the underwriters.
Public Financial Management Inc. is the financial advisor for the bond sale.
Moody's Investors Service rates Massachusetts' GO bonds Aa1. Fitch Ratings and Standard & Poor's rate them AA-plus.
