The paper looked at borrowers that have historically relied on the affected banks. It compared bonds sold on the same day with similar credit profiles and structures to those issued by governments that haven’t historically favored one of the impacted firms.
The study found that the more an issuer had relied on one of the banks that pulled back from the Texas market, the more governments paid when they had to switch. Issuers with over 50% reliance on the affected banks saw a roughly 20% increase in borrowing costs as a result of the law, it concluded. The study stripped out daily market fluctuations, meaning the broad increase in long-term yields during the period didn’t influence the outcome.
Garrett and Ivanov found that issuers affected by the law are avoiding selling bonds via auction, when underwriters compete for sales, a method that separate studies have shown reduces municipalities’ borrowing costs. Instead, they’re opting to hire underwriters in advance, the paper said.
And when they do sell via auction, they’re seeing fewer bidders, the paper said.
“The number of underwriting bidders declines sharply, the variance among remaining bids increases, and the winning bid in terms of yield to maturity increases after the implementation of the Texas laws for issuers with previous reliance on the exiting banks,” the paper said.
Meanwhile, the ranks of muni underwriters in Texas may get even thinner due to another new law, Senate Bill 13, which restricts governments from working with companies that “boycott” the fossil-fuels industry.
This measure, which also took effect in September, has caused some banks to lose out on Texas muni deals as issuers wait for the Republican state comptroller to decide which companies should be restricted under the law.
“If more banks leave, these costs will go up,” the paper said.
Garrett and Ivanov will have a chance to get feedback on the paper next month, when they present it at the Brookings Institution’s Municipal Finance Conference.
This article was provided by Bloomberg News.