(Bloomberg) – Political transition is spreading in Texas’ $ 50-billion-a-year debt market, and more banks out there may find themselves excluded by GOP legislation.
Big Wall Street banks have already been shut down from Texas’ municipal bond market, where the state and its cities raise money for policies considered unfriendly to the gun industry. Now a much larger group could be harmed by law by restricting contracts with companies that “boycott” their public finance businesses.
Banks such as Morgan Stanley and Wells Fargo & Co. have either withdrawn from transactions because of uncertainties surrounding municipal-bond deals or because of uncertainty surrounding Texas regulator Glenn Hager’s attempt to enforce the law, which is intended to protect the state. The oil and gas industry is against increasing environmental, social and governance standards.
Derrick Mitchell, head of Holland & Knight’s public finance team in Texas, said: “Issuers aren’t sure with whom they will be able to do business from start to finish.
In March and April, Republicans sent more than 150 letters to regulatory financial institutions requesting information on their fossil fuel policy. But now issuers have been wary of working with banks that received the letter for fear of derailment, even if the letter only went to an authorized bank entity, according to Texas-based bankers and bond lawyers who asked not to be named because they told reporters. Was not allowed to speak with.
Located between the Richardson Independent School District, Dallas and Plano, the $ 192 million bond sale issued earlier this month removed Wells Fargo as senior manager, replacing the company with Piper Sandler & Co., said David Pett, the district’s chief financial officer.
In his 24-year career in the Texas school district, he has never had to replace an underwriter before, Pat said. If the school district had Wells Fargo as chief manager, there would have been problems with closing the deal. “I didn’t want to take that risk,” he said. The laws “have created more challenges for me as an issuer and I’m asking questions that I haven’t had to ask in the past.”
Similarly, a Texas agency removed Morgan Stanley and two other banks from a bond deal earlier this month amid uncertainty over the law.
Read more: JPMorgan Takes First Steps to Revive Texas Muni-Bond Business
Considered as a criminal
The new law, known as Senate Bill 13, comes as Republicans across the country target Wall Street for its growing “wick” investment policy that could hurt industries like Texas’ oil and gas, the country’s number one producer.
Hager told Bloomberg News in March that he wanted banks and investment firms to be transparent in their ESG discourse and to refrain from giving different details to different clients across the political spectrum. The law requires that there be a provision in any public agreement worth $ 100,000 or more that states that companies do not and will not boycott energy companies.
Related: Texas Republicans push Wall Street over climate policy
The law is similar to a Texas law passed last year that barred the government from entering into agreements with companies that “discriminate” against the firearms industry. Firearms Act has already been passed by JPMorgan Chase & Co., Bank of America Corp. And Goldman Sachs Group Inc. Who has stopped underwriting most Texas municipal-bond deals.
In response, about three dozen companies, including Royal Bank of Canada, Wells Fargo and UBS Group AG, submitted permanent letters to the Texas Attorney General’s Office stating that they were both complying with the law, according to a list of letters posted to the municipal advisory. Council of Texas’ website.
But those certifications have been questioned with the Comptroller’s investigation, as explained by a letter dated April 27 published by the Attorney General’s Office, which oversees most bond sales. Leslie Brock, assistant attorney general and head of the public finance division, said in the letter that “the regulator’s request effectively puts the company’s standing letter under review with this office under review.”
If a government is under contract with a company under review, there should be a provision in the contract that would allow the bank to make a replacement if the company puts it on the list of controllers, the letter said.
However, it is difficult, if not impossible, to replace a Mooney Bond with a senior booking manager after pricing. As a result, Texas governments are moving away from using the affected banks, and bankers are frustrated that they can’t work on contracts for the time being, according to people familiar with the matter.
Unless otherwise proven, the companies are primarily guilty of boycotting the industry, one person said.
A spokesman for the regulator’s office, Barclays plc, Morgan Stanley, RBC and Wells Fargo declined to comment. A UBS spokesman did not immediately respond to a request for comment.
Preparing for the fallout
The regulator’s first round of investigations began in March, followed by a second round of investigations on April 11 – meaning final responses will return by June 10, and the comptroller will then decide which companies are expected to be boycotted. Power, although most claim they do not.
The listing could mean municipalities would be forced to work with fewer banks, which could increase borrowing costs on top of increasing bond yields in broader sales, acquaintances say.
The market collapses during busy times. Texas issuers passed 7 23.8 billion in new debt sales on May 7 and are now looking to start selling those deals.
While some issuers may expedite transaction deadlines before June 10 to take some risk off the table, the window to do so is closing because it takes time to sell the bond and get the attorney general’s approval for the transaction, one person said.
Some deals have already been removed by banks in anticipation of the Comptroller’s List.
The Texas Department of Housing and Community Affairs removed Barclays, Morgan Stanley and RBC from its 190 190 million bond deal in May, agency spokeswoman Christina Tirloni confirmed in an emailed statement.
“If firms respond positively to the regulator and are not added to a restricted list, they may be included in future transactions,” he said.
Read more: Laws banning Goldman, JPMorgan are spreading outside Texas Munich
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