DALLAS - As large Wall Street investment banking firms struggle, some in Texas think issuers may start turning to smaller, regional banks to help get deals to market.

That also assumes a rebound in volume, as the market ground to a near standstill. There remains a dearth of activity again this week in Texas, as many state issuers maintain a wait-and-see approach to getting debt to market.

"Issuers that have deals in the works with major Wall Street investment banks are now having second thoughts about working with these banks and are looking for regional banks to step in as the landscape is changing rapidly," said Tim McCormick, public finance director at Frost Bank in San Antonio.

Three of the top five ranked senior managers underwriting debt in the Southwest during the first half of 2008 either no longer do so or are merging with another bank. Merrill Lynch & Co. is to merge with Bank of America, while Lehman Brothers, and UBS Securities LLC left the business.

These changes have prompted some of the regional players to expand their public finance units.

"We're actively looking for more bankers," McCormick said.

Last month, Wells Fargo & Co. added another investment banker formerly with UBS Securities to its San Antonio office, as part of a plan to double its public finance business by 2010.

George Pedraza was named senior vice president and will focus on debt issued by Texas school districts. Pedraza is a former San Antonio city manager.

In July, the financial services company named Craig Brast managing director to lead a Houston-based team specializing in Texas school finance. Also hired then were Sonny Donaldson, Michael Bradbury, and John Young. They are based in Houston with Brast, while Larry Groppel will be based in Dallas. Before accepting the new posts at Wells Fargo, the men worked with UBS, which shuttered its public finance unit in June.

On Friday, San Francisco-based Wells Fargo reached an agreement to acquire all of Wachovia Corp. for $14.8 billion. But the deal was held up on Saturday, as Citigroup - which had a deal to purchase Wachovia's banking operations for $2.1 billion - received a ruling from the New York State Supreme Court effectively halting the Wells Fargo-Wachovia merger. Then a federal judge blocked that ruling and set a hearing for today for Citigroup to respond.

Some longtime players in Texas municipal finance think this type of turmoil and consolidation eventually may favor smaller firms that previously did more financial advising than underwriting.

"If you'd asked me five or six years ago if there was too many people in the business, I might've said yes, but I'm not sure all that's happened in the past 30 days serves anyone better ... especially in terms of liquidity in the marketplace," said one veteran underwriter in Dallas. "But now that some [banks] are getting out, I'd say it's a safe bet others will fill that gap."

Steve Young, managing director at SAMCO Capital Markets Inc. in Dallas, said regional firms may benefit from what "is truly an unusual marketplace where everyone is hanging fire until the markets get back in shape.

"With the shrinking universe that's occurring now, it's only going to help firms that survive the shakeout," Young said. "But events are changing so rapidly and on a daily basis that it's still very hard to predict exactly how it's going to play out."

SAMCO was the 44th busiest financial adviser in the Southwest during the first half of 2008, bringing $18.5 million to market through three issues, according to Thomson Reuters.

Bob Estrada, co-founder and chairman of Estrada Hinojosa & Co., also said it's still a little early to hypothesize about how everything will shake out, but he sees the role of the smaller firms possibly increasing.

"We've been saying to issuers since we started that there's a lot of reasons to use your local and regional firms instead of the larger Wall Street players. We're able to encourage and foster relationships with issuers that large banks simply cannot," Estrada said. "We're more stable within the community, within the state ... our families live here and we're going to be here before and after the sale."

"The day just a few Wall Street and global firms control the market is a sad day for issuers," he added. "It's never going to be good if issuers are held hostage by large Wall Street and international banks that dictate the markets and dictate the rates."

Estrada Hinojosa was the financial adviser on $2 billion of debt sold during the first half of this year, ranking third in the Southwest. The firm consistently ranks in the top five and advised on 46 deals worth $3 billion in all of 2007 to finish third in the region, according to Thomson Reuters.

Since being founded in 1992, Estrada Hinojosa estimates its financial advisory volume at more than $30.6 billion with an underwriting volume of more than $82.6 billion.

The Dallas-based the firm has no debt and hasn't for at least 15 years, according to Estrada, who attributes that to his partner Noe Hinojosa, president and chief executive officer of the company.

Estrada said the firm's "current net capital is the highest it's ever been" and attributed that to his partner's conservative nature.

"Maybe we could've expanded more rapidly or had more people in the offices we already have, but Noe has remained conservative and that's helped us in the current market that no one could've foreseen six months ago," Estrada said.

First Southwest Co., perhaps the largest Texas-based underwriter, also routinely sets the pace for financial advisory firms in the Southwest and was the third-busiest in the nation last year. The company had a market share of 19.9% for all of 2007, helping 410 issues worth $16.72 billion get to market last year, according to Thomson.

The firm was the only one in Texas to get debt sold last week, as the adviser to all three municipal utility districts that issued bonds in the competitive market.

Of the handful of issues on this week's schedule, First Southwest is financial adviser to at least three of the issuers, and a vice president with the firm expects the sales to proceed as planned.

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