Sell Side

Curtains Close on UBS Muni Bond Division

UBS AG yesterday said it would close its institutional municipal securities group after determining that a sale of the group "was unlikely in the near term."

The announcement affects about 280 people in total, according to UBS spokesman Doug Morris. About 125 bankers will be affected, sources said.

Yesterday was the last day for muni employees not included in a plan to transfer a portion of the group to the wealth management division, according to sources. A mood that at least one person described as sadness overtook the 15th floor of UBS headquarters at 1285 Sixth Avenue in Manhattan, as employees were called one by one to Human Resources to receive their severance.

The severance will include the immediate payout of the deferred compensation, according to one person.

As it did when it first announced the exit on May 6, UBS said it was shuttering the muni group as part of an effort to refocus the fixed-income, currencies, and commodities group to focus on core business areas. The decision in May came after UBS announced another $11 billion write-down related to U. S. residential mortgages, bringing its total write-downs to about $38 billion, and hired a new chief executive officer.

The firm will transfer a portion of the muni business, a secondary market trading operation of about 100 people, into the wealth management division. The traders will help support UBS' roughly 8,200 financial advisers and more than two million clients, according to the bank. The group that will remain with UBS will also include a business to advise governments and others on public-private partnerships.

UBS said it expects to complete the closure of the business in the next few months.

While the bank did not publicly go into detail about its decision to leave the municipal market, it was due to many factors, according to people at UBS.

For one, student loan auction-rate securities were housed in the municipal department and when the firm lost money as a result of failed auctions in that market, it blamed it on the department as a whole, one source said. For another, executives and shareholders in Switzerland were not firmly committed to the municipal market and did not fully understand its profit potential, the people said.

"UBS assigned a lot of the write-down they took in the student loan ARS with this department," one managing director said. "What happened in the student loan market does not reflect the fundamentals in the municipal market."

Another factor may have been a $980 million collateral posting Fitch Ratings reported UBS made in April in connection with a Florida Gas Utility prepaid gas bond sale. Fitch said that UBS posted collateral equal to 102% of bond and swap-related exposure after FGU requested the required posting following rating downgrades for UBS.

Bond documents allowed FGU to seek the collateral if UBS was downgraded by at least two rating agencies to below AA by Fitch and Standard & Poor's, and Aa3 by Moody's Investors Service.

While the potential sale and shuttering was announced in May, sources said UBS had begun shopping the unit around to potential buyers in April, or even earlier. Sources said the bank's decision to announce in May that if a buyer was not found it would close the doors, effectively undercutting any sale.

Both traditional and non-traditional buyers expressed interest, but in the end did not commit, said one source. Another said UBS may have turned down a number of buyers because selling them the municipal business might have made them too competitive with UBS's wealth management business.

Regardless, the fate of the UBS employees left without a role at the firm is uncertain, though market sources have said that many firms are hiring. Bank of America, Depfa First Albany Securities LLC, Morgan Keegan & Co., Wachovia Bank NA, and Raymond James & Associates Inc. are all said to be hiring, while Piper Jaffray & Co. has said it could use the opportunity to add talented people.

One source said UBS' housing group was one of the best on the street and might go as a unit to a single firm.

In 2007, UBS was the third-ranked senior manager, writing $36.3 billion in new business through 614 deals for 8.6% of the market, according to Thomson Reuters. Through June 4 of this year, UBS dropped to sixth most active, writing $14.4 billion in new business through 187 deals.


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