Gun policies cost Citi, BAML a place on Louisiana bond deal

The Louisiana State Bond Commission ousted two major banks from underwriting an upcoming deal because of their gun policies, a move the panel’s financial advisor said could cost the state more to market the bonds.

The commission voted 7-6 on Thursday to block Citi and Bank of America Merrill Lynch from being considered as senior managers for up to $650 million in grant anticipation revenue vehicle bonds to finance transportation projects in the cash-strapped state. The bonds will be sold in several tranches.

Al Drago/Bloomberg

State Treasurer John Schroder, who chairs the commission, made the motion to prohibit the two banks from working on the deals because of firearms policies both enacted in the wake of the Feb. 14 gun massacre of 14 students and three adults at Marjory Stoneman Douglas High School in Parkland, Florida.

Citi’s policy asks new retail sector clients to adhere to “best practices” policies for firearms sales, including a minimum age of 21 for gun buyers and not selling bump stocks or high-capacity magazines. BAML said it plans to stop lending to companies that make assault-style guns for non-military purposes.

U.S. Sen. John Kennedy, R-La., who was the state treasurer for 17 years before taking the Senate seat in 2017 and first objected to the banks’ policies in April, said the Bond Commission made the right decision.

“Citibank and Bank of America are trying to impose their political agenda on the American people,” Kennedy said. “In the process, they’re trampling on people’s Second Amendment rights. If you have zero respect for the U.S. Constitution, then you don’t need to do business with the state of Louisiana."

Schroder said after the meeting that he also believes the banks' policies infringe on the rights of Louisiana citizens.

“As a veteran and former member of law enforcement, I take the Second Amendment very seriously,” he said.

Barring the banks from the Garvee bond deals could leave the state with less money to pay for needed transportation projects, and open the state to lawsuits.

Matthew Block, the governor’s executive counsel and representative on the commission, said he read a story in The Bond Buyer that quoted Brian Knight, a senior research fellow at George Mason University’s Mercatus Center, as saying that ‘“by limiting the number of potential banks [the state] will work with they will likely have to pay higher interest rates or not sell as many bonds.”’ He asked the commission’s financial advisor if that is true.

“I think what [Knight] said is correct,” said advisor Renee Boicourt of Lamont Financial Services.

Because Louisiana has a constitutional constraint on debt capacity, Boicourt said when interest rates rise more of that capacity is consumed by interest than principal, generating “less in proceeds for you to build projects.”

Block said the commission should determine what its actions against the banks would cost the state for all bond issues in the future.

“Bank of America and Citi have about 23% of our book of business for general obligation bonds,” Block said, referring to the percentage of the state’s competitive sales won by both underwriters since 2012. “We owe it, all of us, to the taxpayers to understand the decision we are making.”

Schroder said he agreed with that suggestion.

“I don’t take my motion lightly,” he said. “I know exactly what it means and what it does.”

Using the Second Amendment to disqualify the banks raises other constitutional concerns that could result in the commission’s actions being considered “arbitrary and capricious,” and a denial of the bank’s due process rights, said Sen. Jay Luneau, D-Alexandria, an attorney.

“It means that we’re opening ourselves up to litigation to be sued,” Luneau said. “If that litigation ensues, it’s going to cost us at a minimum hundreds of thousands of dollars that we don’t have to spend.”

Louisiana received proposals from 13 firms vying to be senior managing underwriters on the Garvee bonds, including Citi and BAML, and six proposals from firms competing to be co-managers.

The solicitation required the firms to answer three questions about whether they, or their parent companies, have policies that restrict or infringe on the constitutionally protected rights of Louisiana citizens to “lawfully keep and bear arms.” The commission released copies of the questionnaires along with letters from the banks.

All firms except one said they had no policies restricting citizens’ rights. Williams Capital, which submitted a proposal for co-manager, did not answer the questions.

Representatives of the two firms repeatedly told the Bond Commission Thursday they did not believe their policies affected the rights of Louisiana residents to purchase firearms.

Schroder, Attorney General Jeff Landry and State Rep. Blake Miguez, R- Erath, were among those who said that any restriction on the sale of firearms amounted to an infringement on citizens’ rights.

In a letter sent to Schroder before the commission meeting, Landry said Citi and BAML’s answers to the questionnaire were “misleading and disingenuous.”

“The commission should not conduct business with dishonest entities that discriminate against the law abiding citizens and businesses in the state of Louisiana,” Landry wrote.

Citi and BAML were senior or co-manager, or won competitive bids, on 11 of 29 state bond deals with a par amount of $2.67 billion between 2013 and 2017, according to data from Thomson Reuters. Citi and BAML were the top two senior managing underwriters for Louisiana state and municipal issuers in 2017.

Broker-dealers may find themselves squeezed on both sides of the gun debate. Earlier this year, Chicago officials introduced an ordinance that would have required city bond underwriters require other business clients to adhere to certain restrictions on gun sales. The city backed off on the proposal amid fears that it would reduce the city's market access.