The eligibility of some investment banks to underwrite municipal bonds in Texas is under review while the state checks compliance with its fossil fuel law, according to the attorney general's office.
The state comptroller asked 158 financial companies — including investment firms, mutual funds and others — to clarify their treatment of energy businesses. Issuers have the ability to replace banks they've hired to work on deals under certain circumstances, according to guidance from Texas Attorney General Ken Paxton’s office.
A notice to bond counsel on Wednesday said the comptroller’s request effectively puts a company’s declaration that it does not boycott energy companies under review and issuers’ contracts should allow for replacing investment banks that wind up on the state’s list of firms that boycott energy businesses.
The guidance came as uncertainty continues to swirl around new Texas laws that prohibit banks and other companies from gaining government contracts if their policies are considered harmful to the fossil fuel or firearm industries.
“I don’t think you can have a deal where between pricing and closing you could have the lead underwriter drop out and have somebody step in,” a Texas bond attorney said. “I think issuers are going to shy away from those firms until there’s clarity where they stand with the comptroller’s office.”
A law that took effect Sept. 1 prohibits state agencies from investing in financial companies that boycott energy businesses, a major sector of the Texas economy. The Texas comptroller is required to assemble a list of companies that shun or penalize a business because it engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy and does not pledge to exceed state and federal environmental standards.
Contracts worth $100,000 or more with the state or local governments require written verification from companies that they do not boycott energy businesses. The attorney general requires standing letters from companies indicating their compliance with that law and another that prohibits contracts with entities that “discriminate” against the firearm industry.
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Among the recipients were several banks that underwrite muni bonds — JP Morgan Chase, UBS Group, Wells Fargo, Barclays Capital, Goldman Sachs Asset Management, Morgan Stanley Investment Management, and RBC Global Asset Management.
In Wednesday’s notice, the attorney general’s office addressed a situation in which some bond issuers have a contract with an unnamed bank “that may appear on the state’s list of financial companies that boycott energy companies.”
Issuers were advised to continue with the contract “provided that the issuer confirms with the company shortly before closing that we can continue to rely on their standing letter and that the company intends to timely respond to the comptroller’s request.”
If a contract extends beyond the 60-day period for firms to respond to the comptroller, the contract should allow the issuer, without penalty, to find a replacement should the company end up on the list of boycotting firms, the notice said.
“There’s no way you can transfer after you price the deal the tickets that have been written for the purchase of the bonds from one lead underwriter to another one,” the bond attorney said. “I think before pricing, if those firms are under suspicion, there’s still a cloud, you’ll see them resign or the issuer will take them off of the deal.”
