Post-downgrade Maryland goes to market

vpietronico

Market reaction to a recent Moody's downgrade will play out as Maryland sells $1.56 billion of general obligation bonds on Wednesday while the state reels from the ongoing side effects of the Trump administration's attempts at downsizing the federal government. 

"The Maryland deal should see a reasonably good reception so long as it is priced with spreads indicative of a 'AA' credit," said Michael Pietronico, CEO of Miller Tabak Asset Management. "The new issue calendar has been heavy lately, so the pricing of this deal and others is particularly important in this environment." 

The general obligation bonds are designated as state and local facilities loan of 2025. The sale is broken down into $900 million First Series A, and $661.6 million First Series B refunding bonds.  It will be a competitive sale of tax-exempt securities rated AAA by S&P Global Ratings, AAA by Fitch and the more problematic Aa1 from Moody's.

The two series total out at $1,561,650,000. Public Resources Advisory Group is serving as the municipal advisor and Kutak Rock LLP is the bond counsel.

PRAG is looking for a strong showing, "We believe that the state's general obligation bonds will be well received by the market," said a PRAG spokesperson. "We expect significant interest in the bonds being sold on Wednesday, with pricing aligned with Maryland's historical performance in the municipal market."   

"Investors are very familiar with Maryland's credit and have historically shown confidence in its long-term financial health." 

Proceeds of the new money will be used to buy and build state facilities, provide capital grants to local governments for schools, jails, hospitals, and cultural projects. 

The refunding dollars will be held as cash or used to buy federal or agency securities for deposit into escrow accounts and applied to the refunding of outstanding general obligation bonds of the state. 

Analysts believe the secondary market conditions may also play a role in what happens on Wednesday. 

"There hasn't been a huge amount of Maryland paper floating around in the secondary market so that's a positive for this deal in terms of its potential reception from the market," said Pietronico.  

As of March 31, 2025, the state had $12.4 billion of state-supported debt outstanding with general obligation bonds accounting for $9.2 billion. Debt service is mostly shouldered by state property tax. 

The state has enjoyed straight triple-A credit ratings from all three major rating agencies until last month when Moody's announced it was downgrading Maryland's issuer rating and general obligation bonds to Aa1 from Aaa.  It was a move that some analysts perceived as a fall from grace while others still predict good news on the buy side. 

"The state's bonds remain a solid credit that can be a core holding for many muni portfolios," said Pat Luby, senior municipal bonds strategist at CreditSights.  "Given the size of the deal, the relatively short amortization schedule should make it easier for the market to digest." 

Buyers will likely be a mix of retail and institutional. "I think we will see interest from both types of buyers, and I look for the deal to get priced at a slight concession to current levels," said Luby. 

Following the downgrade the state's treasurer suggested terminating relations with Moody's. Governor Wes Moore blamed the downgrade on the Trump administration, and its attempts at downsizing the federal government. 

At the time he said, "To put it bluntly, this is a Trump downgrade. Over the last one hundred days, the federal administration's decisions have wreaked havoc on the entire region, including Maryland. Washington, D.C. received a credit downgrade." 

"Thousands of federal workers are losing their jobs. Actual and proposed cuts to everything from health care to education will continue to exact an incalculable toll on Maryland and states across the country." 

Moody's saw it more of a comparison as compared to the other AAAs. "The downgrade was driven by economic and financial underperformance compared to Aaa-rated states, which is expected to continue given the state's heightened vulnerability to shifting federal policies and employment, and its elevated fixed costs." 

S&P Global Ratings remain bullish on the state and the sale citing Maryland's legacy of wealth and stability. 

"The GO rating reflects the state's historically resilient economy with a strong government presence, high wealth and income levels, and a highly educated workforce," said S&P. 

The optimism is tempered with a still uncertain status of the federal workforce and a budget shortfall earlier this year that forced a cutback of some state programs. 

"Timely adjustments to close budget gaps, steady revenue collections due to the state's relatively progressive tax structure, and other recent budgetary actions taken to ensure a sustainable structural balance and adequate cash reserves will be key to rating stability," said S&P. 

Fitch backed up its AAA rating by extolling the state's other economic engines.  

"Maryland's economy is relatively wealthy, diverse and service-oriented, with a robust economic profile, coupled with mid-range growth trends relative to other U.S. states."

"In addition to world-class trade centered around the Port of Baltimore, the federal government is an anchor and long-term economic stabilizer to Maryland's economy," said Fitch. 

"While spreads for the state's bonds have widened, I think that many accounts would want to see the new bonds get priced at slightly wider than current levels in order to hedge against the risk of an additional downgrade," said Luby.  

"The question will be how much of June reinvestment demand is insensitive yield?" 

The state sold a $200 million of tax-exempt Department of Transportation Consolidated Transportation Series 2025A bonds on June 4 in a competitive sale. Yields ranged from 2.84% to 4.3%.