As the Washington DC region’s transit system struggles to regain ridership to pre-pandemic levels, its operator is tapping the municipal-bond market for the second time this year to finance sustainability projects.
The Washington Metropolitan Area Transit Authority is selling $798 million of debt on Tuesday to help fund its zero-emission bus transition plan. Transit agencies like WMATA are seeking other sources of revenue as farebox sales continue to lag due to a slow return to office for commuters who have grown accustomed to working from home.
WMATA is projecting a budget shortfall of $750 million in fiscal 2025, according to a June financial report. That gap is expected to grow through fiscal year 2035 even if ridership recovers. Weekday rail ridership has only reached about 50% of pre-Covid 19 levels.
The agency did not respond to a request for comment.
The deal comes as the $4 trillion municipal-bond market saw one of its worst weeks of performance in more than three months and outflows persist. Benchmark muni yields, which jumped up in the week ended Friday, have since stabilized and even inched down in early trading on Tuesday.
Dan Solender, head of municipals at Lord Abbett & Co., said now is a good time for transit deals. The supply of bonds has dwindled, so “if the deal is priced correctly there should be plenty of demand since they are strong credits in most cases,” he added.
Municipal-bond issuance for mass transportation totaled about $5.9 billion this year, down about 40% from the same period in 2022, according to Refinitiv data as of August 7.
Dora Lee, director of research at Belle Haven Investments, said investors have cash on hand so they will want to spend.
While S&P Global Ratings has a negative outlook on WMATA, the company grades the new series of bonds AA with a stable outlook. The debt is backed by dedicated capital funding revenues appropriated by DC, Maryland and Virginia, according to offering documents. Kroll Bond Rating Agency also has a AA rating on the series.
The bond sale, which is labeled as “Sustainability – Climate Transition,” is part of a broader effort by public transit agencies across the US trying to reduce their carbon footprint. Public transportation is viewed as an environmentally clean way to travel.
ESG investors say it’s important that green bond issuers authenticate how proceeds will be used for environmental or social purposes. WMATA hired BLX Group LLC, a municipal consulting group, for that purpose.
The agency will use money raised from the bond sale to create a 100% zero-emission bus fleet by 2024, deliver 10 megawatts of renewable energy to local communities and finance a plan to annually reduce the authority’s carbon dioxide emissions by 160,000 metric tons by 2025, bond documents show.
This year, the muni-bond market has seen a growing number of deals with ESG labels, which has drawn political criticism. Republican leaders have attacked ESG, saying the investment strategy is a way to move money for a liberal agenda.
“The green/sustainable labeling isn’t a negative on a deal, but at this time it does not give an issuer any material pricing advantage as opposed to not having the label. That could change in the future as demand for sustainable muni bonds grows and it is possible that could happen but not over the short term,” Solender said.
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