March 13 Massachusetts will begin selling general obligation bonds to retail investors for weeks at a time over an electronic trading platform on Monday, under a program that officials say is the first of its kind in the $3.7 trillion U.S. municipal bond market.
The state is trying to tap more directly and frequently into the rich vein of retail investors around the country who may have cash sitting on the sidelines.
Usually, states and cities offer bonds to retail investors over a one- or two-day retail order period before then selling the debt to institutional investors.
But Massachusetts' model will allow retail investors to purchase bonds for two weeks out of nearly every month througout the year.
The program, called MassDirect Notes, is modeled on TreasuryDirect, a website that allows individuals to buy Treasuries directly from the U.S. government.
Under MassDirect, investors will still need to use their investment advisors to place orders on the trading platform.
Massachusetts will sell $30 million of one series of MassDirect Notes beginning on Monday, and $30 million of a second series the following week.
Altogether, the state will sell up to $250 million of tax-exempt fixed-rate GO bonds under the program through August, with prices re-set daily. But officials aim to make the program permanent if there is enough interest, they said.
The kind of bonds sold under the program will always be the same: general obligation bonds with maturities of 10 years or less.
The new sales method runs in conjunction with traditional offerings to institutions and doesn't increase the amount of money the state plans to borrow. It also eliminates the traditional one-day retail order period in Massachusetts as investors knew it.
The program "will create the kind of competition and savings that improves the bottom line for the Commonwealth," said Steven Grossman in a statement.
Borrowing costs would be lowered over the long run because of the daily re-pricing, and because supply can more closely match demand, which will "reduce market risk and normalize our pricing spreads," said Colin MacNaught, the state's assistant treasurer for debt management.
Prices will be posted daily on the state's investor website, he said. The model will also bring in cash flow for the state on a monthly basis.
Fitch Ratings assigned an AA-plus rating on Thursday to the bonds, which have maturities ranging from two to 10 years. Fitch also affirmed its AA-plus rating on about $19 billion of the state's outstanding GO and commonwealth-guaranteed bonds. The outlook is stable.
The method of sale is a policy decision by Massachusetts and does not impact the rating, according to Fitch analyst Laura Porter.
Citigroup is underwriting the deal.
The state is paying the full takedown. But the bank is keeping only the management fee component, while the sales commission is being passed on to the investment advisor who places the order, according to the treasurer's office.
Citi is offering the bonds to retail investors through TMC Bonds, an inter-dealer electronic trading platform for fixed income markets.
That will allow Massachusetts to tap into as many as 800 different brokerage and investment advisory firms representing over 120,000 retail brokers, who already use TMC in the secondary muni market, according to the preliminary official statement.
Over the past couple years, Massachusetts has been attempting to lure investors with increased transparency, a user-friendly website and diverse offerings, like so-called green bonds, which the state sold last year to fund clean water, remediation, land acquisition and energy efficiency programs.
The state also provides full disclosure statements and holds an earnings call every 60 days.
"Massachusetts is on the vanguard of technology when it comes to issuers and using transparency and being very innovative, for both individual investors and market professionals," said Stephen Winterstein, chief municipal strategist at Wilmington Trust Investment Advisors.