Sell Side

Barclays Stresses Commitment to Munis

CHICAGO - With the exception of a change in the letterhead that now reads Barclays Capital, the 160-member national municipal group of the former Lehman Brothers, from its desk nameplates to its management team, looks for the most part just like it did six weeks ago, before the firm filed for bankruptcy.

That's the message the head of municipal finance, Jerry Rizzieri, wants to convey to investors and issuer clients, some still skittish of the firm in the wake of Lehman Brothers Holdings Inc.'s bankruptcy filing Sept. 15 that for some complicated the timing of deals and led to swap defaults and failed variable-rate remarketings.

Since the British banking giant Barclays PLC purchased most of the Lehman broker-dealer assets two days after the filing, the former Lehman team has sought to assure clients that Barclays' commitment to municipals is solid.

Barclays had a decision, according to Rizzieri. "They could keep the municipal business or not keep the business," he said. "They decided to keep the business and they decided to keep the entire business ... the actions taken by Barclays has demonstrated to us [the former Lehman staff] and to the market that they are committed to municipals."

It's a position Rizzieri hopes is bolstered by the firm's distribution to clients of a letter stating as much from Barclays Capital president Jerry del Missier, and by the unit's expeditious efforts to overcome the legal and operational challenges of a change in ownership to get its trading desk and other operations up and running.

"In the midst of the current unprecedented market conditions, the composition of the municipal dealer community has changed significantly. But change often creates opportunity. We at Barclays Capital are excited about working with our municipal clients and demonstrating our commitment to exceptional client service," del Missier wrote. "Barclays Capital's commitment to public finance is assured as we continue to offer the same level of focused client service that you have come to expect."

Skeptics might question the firmness of such a commitment given the ongoing financial crisis and might point to the comments of Lehman chairman Richard Fuld that the firm had weathered the worst of its losses relating to its holding of subprime and lower-rated mortgage securities just a few months before its collapse.

Rizzieri, 46, acknowledges such doubts given the dramatic changes in the broker-dealer landscape - and notes that competitors have not been shy about sharing such thoughts with issuer clients. But he also points out that there's a strong lure for Barclays to stick with the business. Municipals provide a reliable source of income with limited risk and there's a profitable void ready to be filled on the Street for a broker-dealer with a double-A rated bank and $2.7 trillion balance sheet behind it.


"We did lose some business," said Rizzieri, who reports up to the global credit unit. "But a number of clients are coming back." He declined to provide a tally of lost business during the transition.

The new Barclays broker-dealer marked several achievements last week. It bid and won for the first time on the largest competitive transaction to sell since the financial crisis froze the new-issue market in mid-September. It submitted the winning bid on the Florida State Board of Education's $150 million transaction, with a true interest cost of 5.41%, over five other bidders.

Florida Division of Bond Finance director Ben Watkins said the pricing was still higher than the state would have received in a more stable market, but an improvement over rates in recent weeks. He credited the efforts of Barclays' bond trading desk for getting up and running and said last week's pricing "shows the guys at Lehman are back."

"That's a good thing, because it's mostly been people going out of business," he added. "I'm hopeful that this [large competitive deal] is a catalyst to get some normalcy, some rationality back to the market because it has been very difficult. When you have underwriters willing to step up and pay the way something should be priced, that is a huge benefit to the state."

"We've been ready to go for some time, but there really hadn't been the opportunity" on the competitive calendar, Rizzieri said, noting the firm's traditional interest in larger competitive deals to fill the appetites of its institutional investor clients. He declined to comment on how successfully the firm has been in placing all the bonds, except to say the desk has been "moving the bonds."

On the negotiated side, the firm priced a $53.7 million transaction for the Chelan County Public Utility District No. 1 in Washington with a 5% coupon. Chelan was one of the issuers that had previously selected Lehman on a negotiated sale and decided to stick with Barclays.

The firm's staff has worked at a swift pace over the six weeks, putting in lengthy days to get its operations up and running to permit new issuance, remarketings, and secondary trades in hopes of stemming the drain on business to competitors.

Nine days after the purchase agreement, Barclays reopened the municipal bond trading desk and remarketing operations. Others typically take months to complete such transitions as there are complicated legal, risk, compliance, clearing, and other business issues to resolve.

In the transition, Barclays was not able to remarket many variable-rate demand bonds so many of the bonds were put back to liquidity and letter of credit providers. Some issuers moved quickly to replace Barclays while others remained with the firm. The Bay Area Toll Authority in Oakland replaced Barclays on one tranche, but unable to move quickly on replacing the firm on another has since opted to keep Barclays.

The firm plans to stick with the derivatives business, unlike JPMorgan Chase & Co., which in the face of issuer lawsuits and government probes has said it will longer structure interest-rate derivative products for governmental municipal issuers.

"We're absolutely in the business," Rizzieri said.

The bankruptcy sparked major headaches for issuers with interest rate swaps with Lehman and its entities Lehman Brothers Derivative Products Inc. and Lehman Brothers Special Financing Inc. Some faced mandatory termination, while others faced optional terminations. Some issuers have paid termination fees while others are still considering their options, including entering new swaps that include the termination payment.

Barclays, whose derivative bankers have won praise for their assistance in helping issuers cope with the bankruptcy's fallout, has served as counterparties on some of those new swaps.

The terminations have followed an orderly process defined by the International Swaps and Derivatives Association and replacement counterparties are being found, according to Nat Singer, a managing director and partner at Swap Financial Group.

Rizzieri, a 22-year veteran of Lehman who took over municipals in May from the interest rate unit, said there's no plan to reduce underwriting and trading capacity, although the firm won't comment on whether it plans to enter the liquidity or letter of credit market. In addition to cutting staff, some Wall Street banks have reduced the portion of their balance sheet dedicated to the muni business.

"We actually view the municipal market as offering tremendous opportunity for us," Rizzieri said.

Barclays purchase of the 158-year-old Lehman heralded the bank's entrance into the U.S. municipal market. The sale price included $1.45 billion for Lehman's headquarters and other facilities and $250 million for the investment banking and capital markets assets. The 300-year-old bank operates in 50 countries in Europe, the U.S., Africa, and Asia.

Barclays PLC has suffered just like most other banks, and it too has been the subject of speculation over its solvency, with questions arising over the wisdom of acquiring the Lehman investment bank.

Barclays reported on Friday that its pre-tax profits for the first three quarters were slightly ahead of 2007. Profits are being helped by the acquisition of Lehman's investment banking and capital markets businesses. The bank reported write-downs of $1.94 billion stemming from credit-market related losses, but that was offset by a boost of $1.77 billion on the fair valuation of issued notes.

The bank also announced it would raise about $11.9 billion from a group of Middle Eastern investors to replace capital drained by credit-market related losses. The move allows the bank to avoid a bailout from the British government, which has set the end of the year as a deadline for banks to meet new capital requirements.

Barclays steps into municipals as the broker-dealer landscape has dramatically contracted. Aside from the absence of the Lehman name, Bear Stearns & Co. is now a part of JPMorgan Chase & Co., UBS Financial Services previously exited public finance and Merrill Lynch & Co. has been acquired by Bank of America Corp.

While some believe this offers greater opportunities for regional firms, Rizzieri believes the need remains strong for the remaining Wall Street firms.

"The product needs large institutions that can commit capital," he said, calling the firm well-positioned to compete for market share because the Lehman bankruptcy allowed the business to shed its risky holdings. "We have a clean slate."


In acquiring the municipal group, Barclays absorbs a business that was the sixth most active lead underwriter of municipal bonds in the first half of this year in $18.4 billion worth of deals, according to Thomson Reuters. The firm ranked seventh last year among senior managers on all deals with $24.8 billion of bonds managed in 252 deals. It ranked sixth a year earlier.

Since 2004, Lehman ranks sixth among senior managers on all issuance. On competitive deals, Lehman ranked third and was ranked sixth on negotiated deals. It ranked fourth in education and eight in electric power. It ranked seventh in the environmental sector, fifth in general purpose bonds, and in 10th in health care. It ranked fourth in both housing and public facilities, sixth in transportation, ninth in utilities, and second in the development sector.

Barclays has maintained all of the former Lehman offices in Los Angeles, San Francisco, Washington, Chicago, Boston, New York City, Philadelphia, San Juan, Houston, and Seattle along with its staff of about 160 professionals. The unit has group heads in areas such as banking, sales, underwriting, trading, derivatives and research who report to Rizzieri, a native New Yorker who was an all-American lacrosse player at his alma mater Princeton University.

News of the purchase was welcomed by employees who feared for their jobs after the bankruptcy filing. Lehman left out its profitable assets from the filing such as its broker-dealer, but some worried whether a buyer would be emerge.

Most of the former Lehman staff remains. So far, the firm has lost only one veteran banker, Carole Brown, who recently resigned to take a leadership position at her former firm, Mesirow Financial Inc. The public finance banking group is led by Ronald Stack, who recently started a term as chairman of the Municipal Securities Rulemaking Board.

Published reports have said Barclays will cut 3,000 jobs after the businesses are fully merged by the end of the year, although it's unclear how many would come from the Lehman group and how many from Barclays. Barclays Capital employs 26,000.

While there's overlap in the investment and trading operations of the two firms, that's not the case for municipal sector.

"I'm not anticipating any cuts," Rizzieri said, although he did not rule out some trimming as part of an annual review of the business.

Rizzieri also acknowledges there's no guarantees that cuts won't occur should losses mount amid a worsening international crisis and struggling economy, no matter how profitable the municipal business is or how committed Barclays is to it today.


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