In a year of exits that has seen one investment bank leave munis, another bank bought out, and issuers getting out of the auction-rate market, the underwriting business has shifted, but not radically, at top firms.

The top three underwriters of municipal bonds didn't just see their volume drop in the first half of 2008 compared to last year, they lost market share as well, according to preliminary data from Thomson Reuters. While some of that could be attributed to an industry-wide, $3 billion overall drop in volume to $226.31 billion in the first half of 2008 compared to the same period last year, the combined volume at those three firms fell by $15.6 billion during those same periods.

Citi easily held onto the top spot, senior managing 277 deals worth $32.98 billion in the first half of the year, a $3.29 billion drop. Along with a decline in volume, its market share fell to 14.6% from 15.9%. Most of those deals, roughly $29.4 billion, were negotiated while $3.58 billion were competitive.

The top three ranked investment banks, Citi, Merrill Lynch & Co., and JPMorgan, which includes volume from the now-defunct Bear, Stearns & Co., senior managed 33.5% of all deals in the first half of the year compared to 39.9% during the first half of last year.

While some smaller firms have picked up business, the market-share shift appears to be among the top ten firms which did 76.6% of all bond deals in the first half the year, a 1.4% increase. Five of the top ten firms increased both volume and market-share. The top three firms and UBS Securities LLC, which left the muni business, and RBC Capital Markets lost market share and volume.

Fourth-ranked Morgan Stanley was among those that increased both volume and market share, underwriting some 185 deals worth $19.45 billion compared to $14.67 billion and 134 deals during the same period last year. The firm increased its market share to 8.6% from 6.4%.

Morgan Stanley's head of public finance, Stratford Shields, attributed the firm's increased market share "to staying focused on our clients and client solutions in these difficult market times, working with our clients to convert their auctions and to fix [variable-rate debt] that they might have."

"We've also made strategic hires in certain areas particularly health care, housing and utilities," Shields said, adding that the firm had recently hired four former Bear Stearns bankers and five UBS bankers.

Shields predicted that there will be a much greater concentration of volume underwritten by the top six firms now that UBS and Bear are gone.

Other top 10 firms that increased volume and market share were Goldman, Sachs & Co., Lehman Brothers, Banc of America Securities LLC and Morgan Keegan & Co.

Merrill ranked second as senior manager with 184 deals worth $22.37 billion. While the firm's overall market share shrank to 9.9% from 12%, it increased its market share of competitive deals, to 21.9% from 20.4%. Merrill senior managed $7.22 billion of competitive deals, more than twice as many as Citi, its nearest rival in competitive rankings.

Meantime, Robert W. Baird & Co., which in the first quarter of this year had climbed up to the fourth ranking from 23rd on competitive deals compared to first quarter 2007, was the fifth busiest in competitive deals in the first half of the year with 81 deals worth $1.83 billion. By comparison, the firm only did 24 deals totalling $161.2 million in the first half of 2007.

JPMorgan, which includes deals underwritten by Bear Stearns, came in third overall, senior managing 181 deals worth $20.39 billion and a market share of 9%. That was a $7.05 billion drop in volume and 3% drop in market share compared to the first six months of the previous year. JPMorgan was the top co-manager of deals with some $8.9 billion of debt.

Morgan Keegan edged past RBC Capital Markets to top the list of senior managers on issues of $10 million or less. Morgan Keegan lead managed 142 deals totalling $902.5 million while RBC, which was top ranked in the category in the first six months of last year, did 143 deals worth $830.1 million. JPMorgan took a step back from smaller deals in the first half of the year underwriting $141.9 million compared to $428.8 million in the same period last year.

Among financial advisory firms, Public Financial Management, Inc. expanded its volume and market share in the first half of the year while its two nearest competitors, Public Resources Advisory Group and First Southwest Co. saw dips.

PFM increased its volume with 425 deals totaling $26.91 billion, up from 349 deals worth $21.04 billion. The firm increased its market share by 3.5% to 17.2%.

PFM chief executive officer John White said the firm is focused on knowing its clients capital programs and needs on an ongoing basis regardless of whether or not there is a deal coming up.

"We want to find ways to add value to what our clients are doing and sometimes that involves transactions and sometimes it doesn't." White said. "The fact that we've really sought to build long-term relationships with our clients serves us well in markets that are very difficult because then they look to us for our help."

PRAG overtook First Southwest for the number two spot with 71 deals totaling $13.19 billion and an 8.4% market share. PRAG's volume dropped by $4.24 billion compared to the same period last year. First Southwest was third, working on 275 deals worth $10.9 billion, which was a $7.71 billion drop in volume compared to the first half of 2007.

With so many major issuers having left the auction-rate market, the second half of the year is likely to look different that the first half, market participants said. "You'll see a significant increase in new money financing that to some extent has been sidelined," Shields said.

Matt Fabian, managing director of Municipal Market Advisors, said that while regular bond issuers who have deferred deals to take care of restructuring their auction-rate debt would need to bring those issues to market, bankers will still be working on ARS refinancings.

"They're only half done," Fabian said. "The second half is going to be a lot harder because these are smaller more complicated deals ... it may be another year before all the auction-rate guys are restructured."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.