New Jersey to Sell $350 Million in Self-Designated Social Bonds

(Bloomberg) -- New Jersey says it’s getting into the social-bond market.

The Garden State’s Economic Development Authority Thursday is selling $350 million of what officials have self-designated as social bonds through a negotiated offering managed by Loop Capital Markets. It’s the first social bond for the state, according to data compiled by Bloomberg.

Money raised in the sale will be used to finance school construction projects across the state, an effort that provides the “social benefits of ensuring inclusive and equitable quality education,” the authority said in bond documents. The debt is intended to “generally comport” with social bond principles put forth by the International Capital Markets Association, though the label is “entirely-self designating” and lacks “any objective guidelines or criteria,” the authority said in the document.

The state said in the document that it won’t provide investors with updates on how the proceeds were used for social-bond purposes.

“The decision was made to label these as social bonds because there was universal agreement that delivering a thorough and quality public education provides limitless social benefits for both New Jersey students and our state as a whole,” said Jennifer Sciortino, director of communications for the state treasurer’s office.

Social bond sales have been the latest trend in both the municipal and broader fixed-income markets where investors are eager to put their money to work in do-good causes. Companies and governments sold about $147 billion of securities labeled as social bonds in 2020, about a 700% increase from the previous record of $18 billion sold a year prior. States and localities issued about $5 billion of social-designated securities last year, according to data compiled by Bloomberg.

New Jersey has about $9.6 billion of school-construction debt outstanding as of June 30, according to state documents. It is the second-largest debt-service cost behind transportation bonds and accounts for about 30% of the state’s total debt load.

The Economic Development Authority is selling the debt on behalf of a state agency that runs school construction projects known as the Schools Development Authority. The SDA focuses on 31 designated districts where the state is required to fully fund new construction and renovations, including those in Camden, Trenton, Elizabeth and Newark. They also provide grant funding to any other school district in New Jersey eligible to receive state support.

Currently, the SDA has 11 capital projects in construction and development within the 31 designated districts and hundreds of grant-funded projects across the state. The bonds provide the SDA with the funds it needs to support the “the entirety of its project portfolio” which includes both SDA-district projects as well as that broader grant funding, said Edye Maier, a spokesperson for the SDA.

That lack of differentiation is an important distinction because of the social-bond label, said Eric Glass, a portfolio manager for fixed income impact strategies at AllianceBernstein L.P. He said that the social-bond label should be reserved only for bonds aimed specifically at projects in low-income district where the funds would have the biggest impact.

“The state could make this very easy but chooses not to. Playing fast and loose with the concept of a social bond is how the entire sector gets sullied and loses its meaning,” he said, suggesting New Jersey should have separated the bonds into two series: one with the social label with funds specifically for projects that would help further education in those lower-income districts and another for more general purposes.

Glass said social-bonds proceeds should be differentiated between financing for well-to-do Millburn/Short Hills and the poorer cities of East Orange or Newark, adding that he won’t place an order for the deal.

“As an investor I don’t know what I’m investing in,” he said. “And that’s a problem.”

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