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Jefferies Emerges as Winner as Texas Gun Law Rattles the Muni Market

Jefferies Emerges as Winner as Texas Gun Law Rattles the Muni Market

Jefferies Financial Group is emerging as a clear winner of a faltering effort by Texas Republicans to punish Wall Street banks for their restrictive gun policies.

The lucrative Texas municipal-bond market, second only to California in terms of issuance, has been turned on its head since a law took effect Sept. 1 that bars state entities and local governments from working with firms if they “discriminate” against firearms companies.

With some of Wall Street’s largest banks having halted public-finance transactions in Texas because of the legislation, Jefferies is leading firms that have seen their business surge. It was the top municipal underwriter in the fast-growing state for the past four months, whereas in the same period last year it was 12th, data compiled by Bloomberg show.

“This is the biggest-growing place in the muni market -- other firms that are comfortable with the compliance will likely make a bigger play for Texas,” said Martin Luby, a professor who researches public finance at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. With the law creating an opportunity for smaller firms, “they should get a little more aggressive and will likely ramp up hiring.”

Jefferies Emerges as Winner as Texas Gun Law Rattles the Muni Market

As 2021 winds down, the Texas muni market and the bankers who conduct business with its myriad issuers, from the state to local agencies and school districts, are at a crossroads. There are signs that the turf battle is far from over, with major sums at stake for the winners -- hundreds of millions of dollars in underwriting fees just for the school debt approved in Texas in the last five years.

Last month, Citigroup Inc. underwrote its first transaction since August. The deal closed on Dec. 14 after getting the approval of the state’s Republican attorney general. The bank, specifically targeted by the gun law’s sponsor, prohibits its retailer customers from offering bump stocks or selling guns to people who haven’t passed a background check or are younger than 21. 

Restart Signal

Citigroup, the top muni underwriter in the state the past three years and still the second-biggest nationwide, has slumped to ninth in Texas in 2021. Its restart there is an indication that other big Wall Street banks whose Texas muni business is still on pause -- JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. -- may have an opportunity to recommence underwriting there as well.

Jefferies Emerges as Winner as Texas Gun Law Rattles the Muni Market

But it may not be easy to convince issuers to hire them on deals again in the place of rivals that have been making inroads in the state. 

Jefferies gets credit for underwriting around $1.9 billion of long-term Texas municipal-bond deals from Sept. 1 through Dec. 21, up from about $555 million in the same period of 2020, data compiled by Bloomberg show. More than two-thirds of its 2021 volume came after the law went into effect, highlighted by a $615 million offering in October by the Central Texas Regional Mobility Authority.

The bank is sending a strong signal that it plans to hold onto its gains, and that it’s a destination for bankers at firms that have been shut out in recent months. 

Jefferies this fall hired Citigroup’s Mark Tarpley, a Dallas-based banker who focused on K-12 school districts, a sector of the Texas market that Jefferies traditionally didn’t have a big presence in. It also brought on Pedro Ramos, a Denver-based banker who worked on Texas muni deals at JPMorgan Chase.

A spokesperson for Jefferies, which is ranked 9th this year for nationwide muni underwriting, declined to comment.

Other firms have climbed the ranks as well. Dallas-based Hilltop Holdings Inc. gets credit for about $1.3 billion of Texas deals since the law went into effect, compared with $341 million in the same period last year. That made it the fifth-biggest underwriter in that period, up from 18th in the year-earlier span.

And Barclays Plc is credited with handling $972 million of Texas muni deals since Sept. 1, compared with $208 million in the same period last year. That makes it the sixth-biggest underwriter there since Sept. 1, up from 21st a year earlier.

Representatives for Barclays declined to comment. Hilltop spokesperson Jacy Hirschfeld said via email that the law has had little impact on the bank, and instead attributed the underwriting growth to hiring more bankers, traders and sales people over the last year.

Compliance Question

Raymond James, the second-biggest underwriter in Texas in 2021, showed the extra assurances bankers need to make to issuers against the backdrop of the new law.

When Goldman Sachs dropped out as senior manager of an issue by the Texas Public Finance Authority, which sells debt for state entities, the authority evaluated the other banks in its underwriting syndicate to see who could replace Goldman, Lee Deviney, the agency’s executive director, said via email. He said he contacted Raymond James to see if the bank could comply with the gun law. 

In September and October, Raymond James banker Debi Jones emailed Deviney about the law, saying in one message that her firm didn’t have an issue complying with it, according to emails obtained through a public records request.

“I briefed them on your situation and John Carson, President of Raymond James Financial, offered to reach out to you to express the firm’s commitment to Texas and our ability” to serve “a larger role,” Jones wrote to Deviney on Oct. 1. A spokesperson for the bank declined to comment further.

Raymond James went on to underwrite the agency’s $832 million bond sale in November, the bank’s biggest transaction in Texas all year.

©2021 Bloomberg L.P.