The Vermont Bond Bank has updated its general obligation bond structure for the first time in nearly 40 years.
The first bonds under the new indenture are set to price this week. The structural changes bring the bond bank in line with the rest of the country's
"I always joke that we were the first bond bank in the country, and we were kind of using version 1.0 of a bond bank, and now we're moving to version 2.0," Gaughan said.
The new indenture will shift the fund from a reserve model to a cash flow model, Nicholas Lehman of Moody's Ratings said.
The bond bank will now have three liens of outstanding GO bonds. All bonds issued before this year have been renamed Legacy Bonds and have a super senior lien. The new Community Revenue Bonds have a junior lien. The Enhanced Community Revenue Bonds have a lien that is subordinate to the Community Revenue bonds, but benefit from a debt service reserve fund with a similar structure to the Legacy Bonds.
The debt service reserve fund for both the legacy and enhanced community revenue bonds includes the moral obligation of Vermont. All three liens will benefit from the state's intercept fund, which covers 84% of the bond bank's pool of borrowers.
The goal of the new indenture is "to be essentially more efficient with our use of the state's moral obligation," Gaughan said. Beyond efficiency, Gaughan said he hopes the change can help the bank "very modestly lower costs for our borrowers, and be able to absorb any large bond issuances, either for schools or some of our more urbanized areas."
This week's issue comes in two series. On Tuesday, according to the bank's online investor presentation, it will bring the 2026 Series 2, $18 million of enhanced community revenue bonds, in a competitive sale.
Thursday is the negotiated pricing of $38.5 million of community revenue bonds 2026 Series 1.
Stifel is leading the underwriting team, which also includes Morgan Stanley, Fidelity Capital Markets, and Raymond James. Mintz is the bond counsel. Omnicap Group is the financial advisor.
Both series have maturities from December of 2026 through 2056, and have a redemption date in 2034.
Both series in the deal are rated AA by S&P Global Ratings and Aa2 by Moody's.
The change has been good for the credit of the legacy bonds, of which $703 million are outstanding. Moody's upgraded its rating on the legacy bonds to Aa1 and S&P affirmed its AA-plus rating.
The default tolerance for the legacy bonds is now 24.9%, Moody's noted in its rating report.
The structure of the new liens is conventional, according to Lehman. The structure has been widely adopted
"Over the last decade, that debt service reserve fund that they had built up wasn't able to really spin off investment earnings that were strong," Lehman said. "That just constrains the program, to some extent."
The new structure "provides a lot more flexibility in the ability to provide for more loans over time," and "insulates" bond banks "from that interest rate environment," Lehman said.
The New Hampshire and Maine municipal bond banks use a similar structure, Lehman said. Gaughan said the structure was "pioneered" by the Virginia Resource Authority.
The Vermont Bond Bank started the process of creating the new liens in 2022, Gaughan said. In order to get the new structure approved, the bond bank needed approval from two thirds of its bondholders. This is only the third change to the indenture since the bond bank was created in 1970. The last time the bank updated its indenture, Gaughan said, was in 1988.
The bondholders allowed the bond bank to layer the new liens in the same borrowing pool as its GO bonds, so the new bonds will be backed by the same 195 borrowers, Gaughan said.
The change was inspired by the mounting construction needs of Vermont's schools, Gaughan said. Many of the state's schools were built in the 1950s and they built additions in the 1990s.
The state legislature is still deliberating on the policy structure it will use to address school construction needs, Gaughan said, but the bond bank wanted to be proactive in building its capacity to address the crisis.
This week's deal is backed by loans from across the state, according to the preliminary offering statement, including a $3 million loan to the village of Barton for hydro plant upgrades; $1.5 million for Fair Haven's town garage; $495,000 for a new fire truck pumper in Greensboro; and $3 million for bridge replacement and repair and water system improvements in Hinesburg. This deal also allows the bond bank to make a $20 million loan for improvements to the city of Burlington's electric system, secured by a revenue bond.
The bond bank has a few other new initiatives, Gaughan said. It's disbursing a $7.5 million grant to encourage affordable housing development and drinking water infrastructure.
The bond bank is also leaning into its efforts to support communities after floods, which are
FEMA's reimbursement for municipalities post-flooding comes on an unpredictable schedule, Gaughan said, so in 2023, the bond bank started the Municipal Climate Recovery Fund to provide bridge loans for towns waiting on funds from FEMA.
Under the Trump administration, FEMA has
"We're also having in-depth conversations with VT Transit and other planners in the state about using our programs to provide incentives for risk reduction measures," Gaughan said, "primarily for transportation networks, where a lot of the exposure lies, because those are not traditionally insurable assets."
