Bonds

Louisiana bond panel takes GO deal competitive amid ESG fight

Rather than get entangled in controversy over environmental, social and governance issues, Louisiana decided to avoid any problems for its upcoming sale of $275 million of general obligation bonds.

The state Bond Commission voted at its Feb. 24 meeting to move ahead with the GO deal via a competitive sale rather than a negotiated transaction after a fight erupted about whether several large banks vying for an underwriting position in the state’s pool had complied with a policy of non-discrimination against the firearms industry.

A request for proposals for negotiated sale had been authorized at the commission’s January meeting, but State Treasurer John Schroder, the Bond Commission chairman, said he had no choice to but go the competitive route after Attorney General Jeff Landry called for certain banks to be excluded from the RFP process due their stance on the firearms industry.

Concerns about delaying the sale and restricting the state’s banking choices were cited as the commission voted to go for a competitive sale and avoid a fight now over ESG.

Unlike Texas, Louisiana has no law or policy that bars a firm from bidding competitively on a bond transaction.

Commission member Patrick Page Cortez, the Republican state Senate president, said that with the banking pool being so reduced “that it looks like it would probably impose higher rates ultimately on the taxpayers to pay off the bonds because the pool would be so small that you would almost have a monopoly for the one that be left standing — if there was any at all.”

He noted future implications.

“It also appears with the Garvee bonds on the horizon, we could be creating a problem in the transportation arena for the sale of bonds there,” Cortez said.

He offered the motion to price the GO issue as a competitive sale instead of using negotiation.

Landry didn’t attend the virtual meeting on Friday, but he made his views known.

Landry’s office sought to exclude Barclays, JPMorgan, Morgan Stanley, RBC Capital Markets, UBS, and Wells Fargo from the pool. The state, citing what it considers insufficiently pro-gun lending policies, has already taken BofA and Citi from its underwriting syndicate in a move Schroder spearheaded. He also took credit for keeping JPMorgan off a $700 million gas and fuel tax bond deal in 2021.

But Schroder wasn’t willing to narrow the underwriting pool so dramatically.

“We would basically eliminate eight out of the top 10 banks in America that do this kind of business,” Schroder said. “That would not be wise as state treasurer who’s looking after the money management side, to impose that on the citizens of Louisiana.”

Both Schroder and Landry are Republicans and are running to become the next governor in an election that will be held in October. Incumbent Gov. John Bel Edwards, a Democrat, is term-limited and can’t seek re-election.

Schroder, who positions himself as anti-ESG, said that “if you take eight of these banks off my list, I’m handcuffed. That’s a major obstacle that I can’t overcome. I have no choice but to go competitive. If you take out the banks, I have no other options.”

He also said there were only two banks who do Garvee deals and both of them were on the proscribed list.

Last June, the state Treasury, under Schroder’s guidance, adopted policies of not dealing with firms that discriminated against the firearms or fossil fuels industries.

“It shall be the policy of the Louisiana State Treasury not to engage in an investment relationship with any financial institution or financial intermediary whose policies or practices, beyond normal and customary credit and trading practices, endangers the constitutional rights of Louisiana residents or of the State of Louisiana, including, but not limited to, the Second Amendment to the Constitution of the United States of America,” the policy statement says.

“This special Bond Commission meeting is unnecessary and a waste of time and taxpayer money. If the objective is to seek the absolute lowest interest rate, we should have done a competitive sale from the outset,” Landry said in a tweet after the meeting.

“This entire solicitation process, including asking the banks to certify to their 2nd Amendment and fossil fuels policies, was completely useless if we were going to do a negotiated general obligation bond sale with a woke Wall Street bank regardless of their ESG policies,” he said.

Schroder said the meeting wasn’t a waste of time.

“Is it a waste of time? Not in my mind. Not in my staff’s minds,” he said. “Because we have a fiduciary responsibility and we take that very seriously. But I also know what my boundaries are — and until I get some direction from the Legislature I’m sort of left in no-man’s land for some of these decisions, which is why I brought it to the Bond Commission.”

This is not the first time Schroder and Landry have sparred over the proper role ESG policies play in state bond commission proceedings.

While Schroder has similar views to Landry on ESG matters, he has positioned himself as pragmatic rather than dogmatic when policy views clash with financial matters. He did join the red state herd notifying BlackRock CEO Larry Fink of his intent to divest all funds under his authority from BlackRock due to its stated comments to earn better returns for its investors by being aware of environmental issues and the consequences of climate change.

Last year, a bond deal for New Orleans was help up because of that city’s stance on abortion, which conflicted with the state position.

At the request of Landry and other commission members, the panel delayed a vote on the city’s request for an up to $39 million line of credit for the Sewerage and Water Board’s power plant project.

The Bond Commission approved the request at a later meeting, but it raised the ire of Schroeder.

“I want to be very clear,” Schroder said at the time. “I’m about as staunch pro-life as anybody within this state. But I also have to manage this department, manage Treasury. We have administrative things and roles that we have to get through.”

Schroder said this was confusing to deal with from a policy perspective.

“You want to send a message, I get that. But I’m just warning everybody that this is a bad, bad road to get on,” Schroder said. “I do believe that we are playing politics with this. And I don’t like it. This is a bond commission. We deal with the finances of the state. And as long as you check the boxes, then those things get approved.”

In November, the commission disqualified J.P. Morgan Chase from underwriting a bond refinancing due to unanswered questions about its gun policies. Its participation in competitive sales remains unaffected. The legislature tried again last year to implement a pro-gun litmus test for firms, but was unable to get final approval.

The state’s GOs are rated Aa2by Moody’s Investors Service following a May upgrade and AA-minus by S&P Global Ratings and Fitch Ratings.

The switch to a competitive deal may have postponed an inevitable conflict instead of solving it.

ESG continues to be a flashpoint in some jurisdictions, John Hallacy, founder of John Hallacy Consulting said in a recent article.

“It appears that if satisfactory credentials may not be approved and obtained easily by the sell side, competitive bid is the necessary approach,” he wrote.

Hallacy said that muni buyers prefer to have good selection and the ability to maintain preferences when it comes to maturities and coupons.

“There is no flexibility in this regard in the competitive market,” he noted.

Louisiana is not averse to issuing bonds for ESG or sustainable projects — as long as it benefits the state’s economy and provides jobs for residents.

In January, the commission approved the sale of up to $1.5 billion of tax-exempt bonds by the Louisiana Public Facilities Authority to finance the construction of a manufacturing plant for Origin Materials Inc. When built, the Origin 2 plant will convert forest and wood processing residues into carbon negative materials.

“Origin is a perfect example of industry poised to help lead the transformation toward environmentally smart manufacturing,” Schroder said at the time.

The company said it has chosen Bank of America Securities to underwrite the bonds and market them to investors later this year.

In August, the commission authorized the Louisiana Community Development Authority to sell up to $1.1 billion of tax-exempt revenue bonds to benefit a company that plans to make diesel fuel out of plant waste.

The bond issuance will be priced by Citigroup for Strategic Biofuels LLC through LCDA as conduit issuer later this year.

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