Two Texas laws that bar Wall Street firms from discriminating against the firearms and fossil-fuel industries have caused some major banks to lose out in the state’s municipal financing market, according to the latest data.
One year ago this month, Republican Gov. Greg Abbott signed SB 19, which requires banks to certify that they do not have policies cutting off gun or ammunition businesses before receiving government contracts in Texas.
A separate measure that also became law last year, SB 13, requires state entities to cut ties with banks that have restricted financing for oil and gas businesses.
Since the laws took effect, JPMorgan Chase and Bank of America have both fallen sharply in the ranking of banks participating in the nearly $60 billion market for Texas municipal financing deals, according to data from Refinitiv.
"It’s fair to say the shake-up in rankings can be attributed to SB 13 and SB 19," said an industry source who asked not to be identified.
The biggest fall came at BofA, which ranked second during the first seven months of 2021 before the laws took effect. The Charlotte, North Carolina-based bank had been bookrunner on roughly $3 billion in issuances over that period, but it fell out of the top-25 banks during the first six months of 2022, according to the data.
BofA said last year that it was unwinding relationships with makers of the AR-15 rifle and similar weapons that have been used in mass shootings.
JPMorgan, which led all banks last year and edged out BofA for the top spot in the state before the new requirements took effect, dropped out of the top 20 this year with $200 million in issuances, the data shows.
Last fall, JPMorgan was taken off a $700 million bond deal in nearby Louisiana after CEO Jamie Dimon told Congress that the bank avoids doing business with manufacturers of “military-style weapons for civilian use.”
The nation’s largest bank by assets is reportedly attempting to jump back up into the Texas market. Through the law firm Foley & Lardner, JPMorgan sent a letter to the Texas attorney general’s office in May stating that it would be in compliance with the two laws,
The Texas laws went into effect in September without much clarity on the fallout for the lucrative municipal financing market. Some of the largest U.S. banks quickly pulled back from underwriting new bond issuances last fall in order to go through the certification process.
Citigroup, which made waves in 2018 after the mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida, by announcing new restrictions on gun-related business customers, has largely managed to hold onto its market position in Texas after going through the certification process.
Citi had ranked sixth in market share with more than $1.8 billion in issuances in the first eight months of the year in 2021, and has maintained the same ranking so far in 2022, according to the Refinitiv data.
Since the firearms law became effective on Sept. 1, Citi has taken a senior or co-senior role in managing 11 transactions in Texas totaling just over $1.8 billion, a spokesperson said.
Citi has vowed not to offer its services to companies that sell firearms to those under age 21, as well as to firms that sell high-capacity magazines. The impact of the Texas firearms law and Wall Street’s role in providing financing for gun makers and sellers has gained renewed attention after the May 24 shooting at Robb Elementary School in Uvalde, Texas.
One of the biggest winners from the passage of the two laws has been investment bank Jefferies Group, which rose from 17th last year to the fifth-highest share of new issuances in Texas so far in 2022, according to the Refinitiv data.
The legislation would bar firms that receive government contracts from discriminating against firearms companies. Smaller banks have quietly dropped their opposition in hopes of gaining more municipal bond business.
As competition has been shaken up, there have also been some signs that pricing has also been affected. The average coupon rate on Texas municipal bonds this year is just over 4.37%, compared with 3.6% in 2021, the Refinitiv data shows.
The shakeup in Texas’s vast municipal financing market has roiled some parts of the larger ecosystem for financing government debt.
The two Texas laws are signs that investors will have to take into account how local governments react to Wall Street stances on environmental, social and governance issues, analysts at Kroll Bond Rating Agency wrote in a research note at the end of last year.
“Stakeholder preferences on ESG issues and the related reputational risk is a growing concern for debt issuers,” the KBRA analysts wrote.
