Reacting to client demand for Build America Bonds, Barrington, Ill.-based Arbor Research and Trading Inc. has launched a municipal group led by veterans from Citi.
Arbor is an institutional research and brokerage firm with a 22-year history. The firm declined to offer any client names, but said it offers a fixed-income trading platform for institutional accounts, including fund families, hedge funds, asset managers, pension funds and trust companies.
Arbor has been flooded with client inquiries the past 13 months as BABs have become more prevalent. It is responding with a new muni group based out of New York City.
Robert Novembre, who was hired to set up and run the muni group in January, said Arbor wants to use its offices in London and Geneva to market BABs.
“We have a really good international effort for a firm of our size,” he said. “For a firm of less than 100 people that’s been around for 20-plus years, we have a solid international platform that I’m going to work on leveraging.”
Before BABs were created last year, the foreign base for municipal products was minimal. The key selling point for munis — tax-exemption — provided foreigners with no benefit.
With taxable BABs, issuers can offer higher yields because 35% of the interest costs are covered by the federal government. Long triple-A rated BABs offered about an 80 basis point spread over Treasuries in May, according to data from JPMorgan.
Novembre said those competitive yields and the traditional credit quality of munis appeal to foreign buyers seeking diversification. He was in London last week training Arbor’s local sales force, which has been in place for about 10 years. The Geneva office has been open more than three years.
Alongside Novembre is Ken Kollar, a Citi veteran of 14 years who last served as a director. He managed the daily operations of the auction-rate securities portfolio.
For the past few months, Novembre and Kollar have been laying down the foundation for their new enterprise by registering with the Municipal Securities and Rulemaking Board and meeting with clients. Those meetings revealed significant domestic demand for tax-exempt municipal debt, so the firm has begun trading traditional munis as well as BABs.
The group recently hired Jason Hannon to be its first muni-only trader. For the prior three years, Hannon occupied a similar role for Vanguard Group Inc.
“Jason’s primary focus is to be in the market 24-7, up and down the curve, taxable and tax-exempt,” Novembre said. “And then we’ll continue to build out the desk, revenues permitted.”
Novembre, who spent 18 years at Citi and departed in January as head of auction-rate securities, said Arbor could work in tandem with other regional firms in the U.S. to help distribute BABs to a growing foreign buyer base.
“I’d like to be a hub for international distribution on their behalf,” he said of the regionals. “I don’t know of any firms of our ilk that are taking this approach. So that’s the goal — to leverage our international platform and distribution.”