Deadline extended for bond purchase agreement changes in Texas

BY SourceMedia | MUNICIPAL | 11/21/23 01:48 PM EST By Karen Pierog

The deadline for changes to bond purchase agreements in Texas as part of a crackdown on compliance with two state laws prohibiting governmental contracts with banks and others that "boycott" or "discriminate" against the fossil fuel or firearm industries has been extended to mid-December.

Texas Attorney General Ken Paxton's office announced last week that changes it is requiring for those agreements and for underwriters' standing letters of compliance with the 2021 laws must be in place by Dec. 16, instead of Dec. 1.

The changes came as Paxton's office intensified its scrutiny of compliance with the laws and launched a review involving several big banks and their involvement with the New Zero Alliance, which seeks a transition to net-zero greenhouse gas emissions by 2050.

Bond lawyers were advised by the attorney general's public finance division earlier this month that agreements to purchase state and local government municipal debt should include new language that puts the underwriter on the hook should it run afoul of the two laws. Standing letters are to be revised to omit language that in some way qualifies an underwriter's verification of compliance with the laws.

The later deadline will give banks more time to get the changes through their internal approval processes, a legal source said.

In the meantime, a couple of larger bond issues that priced around the time of the attorney general's Oct. 17 announcement of the net-zero review were able to close deals that included underwriters placed under that review.

Horatio Porter, chief financial officer at the North Texas Tollway Authority, said a $577 million system revenue refunding bond issue that priced Oct. 17, closed Nov. 9 with all under-review underwriters ? senior manager Barclays (JJCTF) and co-managers Morgan Stanley (MS) and Wells Fargo (WFC) ? remaining in the deal.

Morgan Stanley (MS) also remained a co-manager on a $298.4 million Texas Public Finance Authority general obligation bond refunding that priced Oct. 25 and closed Nov. 15, according to authority Executive Director Lee Deviney.

"TPFA complies with all state laws regarding the sale of municipal securities, and complies with administrative rules and directives promulgated by oversight agencies and officials," he said in an email.

Only two banks ? UBS and Citigroup (C/PN) ? have been officially barred from muni deals for flunking the state's litmus tests on fossil fuel and gun policies respectively.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.