Massachusetts Bay Transportation Authority Sustainability Bonds

Abstract

In 2017, the Massachusetts Bay Transportation Authority (MBTA) voted to issue tax-exempt municipal bonds through a competitive bidding process. An associate at Citibank's (Citi's) Debt Capital Markets group must define Citi's bid for the bonds. During the investor lunch, the MBTA promoted that a portion of the issuance would include the first tax-exempt sustainability bond. Green bonds were a relatively recent worldwide phenomenon, but issuances were on pace to grow by more than 70% in 2017. What exactly was a sustainability bond as compared to a green bond, and how were they different from traditional tax-exempt municipal bonds? Who would be interested in buying these new bonds from Citi, should it win the bid, and how much demand would there be? Ultimately, how much should Citi bid for the bonds to resell to its clients? Excerpt UVA-F-1911 Mar. 25, 2021 Massachusetts Bay Transit Authority Sustainability Bonds On September 19, 2017, Camila Martnez, an associate at Citibank's (Citi's) Debt Capital Markets group, had just left the investor lunch held by the Massachusetts Bay Transportation Authority (MBTA) for its upcoming municipal bond issuance. She decided to enjoy one of the last official days of summer by walking to her favorite caf for an afternoon espresso. The walk and caffeine would do her some good. It was going to be a long week. Only a week earlier, on September 11, the MBTA had voted to issue up to $ 574million tax-exempt municipal bonds through a competitive bidding process. As part of the potential $ 574million issuance, MBTA planned to issue $ 418million tax-exempt municipal sustainability bonds. MBTA began marketing the issuance on September 12, and on September 15 it published the official notice for the sale of $ 514million tax-exempt municipal bonds, of which $ 382million were sustainability bonds. At least nine underwriters were interested in participating in the auction, including Citi, and Martnez was in charge of defining Citi's bid for the bonds. The electronic bids were due the morning of September 26, so she had only a week to finalize the bid. Martnez was aware that green bonds were a relatively recent worldwide phenomenon, but issuances were on pace to grow by more than 70% in 2017. She had worked on a couple of Citi's prior green bond deals, but they were negotiated bids with different types of issuers. She was less clear about competitive bidding for these bonds when issued by US municipalities. The Commonwealth of Massachusetts had issued a green tax-exempt municipal bond in 2013, but the MBTA promoted this issuance as the first tax-exempt sustainability bond at the investor lunch, which raised more questions. What exactly was a sustainability bond as compared to a green bond, and how were they different from plain vanilla tax-exempt municipal bonds? Who would be interested in buying these new bonds from Citi, should it win the bid, and how much demand would there be? Ultimately, how much should Citi bid for the bonds on September 26 to resell to its clients? . . .