Seeing an increased appetite for munis from individual buyers, Fidelity Investments has ramped up its underwriting capabilities in recent years, saying it wants to give clients quicker access to new product with better prices and more transparency.
The Boston-based brokerage and mutual fund behemoth has been involved in underwriting municipal bonds since the late 1980s through its trading arm, Fidelity Capital Markets. In 2007, FCM opened a public finance division to boost its negotiated underwriting business.
Thanks to heavy retail demand, Fidelity quadrupled the volume of deals it participated in between 2006 and this year, with an emphasis on the co-manager role.
It was co-manager on 482 deals totaling $4.42 billion so far this year. That’s a 20% increase in volume from the $3.69 billion it co-managed in 2009, according to Thomson Reuters, which gives each participating underwriter equal credit. Total par value of the 2010 deals exceeded $37 billion.
In the year before launching the new division, Fidelity was co-manager on 128 issues totaling $965 million.
Fidelity has also ramped up its senior managing efforts, leading 112 borrowings since 2009 worth $1.34 billion. Its public finance efforts originate out of offices in Chicago, New York, Austin, and San Francisco.
“Our agenda is to provide improved access to the primary market for Fidelity’s brokerage channels,” said Timothy Coffin, the managing director of municipal finance who was hired in 2007 to lead the growth effort.
Participating in the underwriting process gives clients access to the retail order periods. That offers individual buyers priority in the primary market at the same pricing given to institutions, Coffin said.
“The more broker-dealers that embrace this idea, the better it is for us,” he added. “It’s good for investors, good for issuers, and ultimately good for the market.”
Patrick Sweeney, managing director of fixed-income trading for FCM, said the appetite from retail is clear, given that household holdings of munis passed the $1 trillion mark earlier this year.
“With an aging population and the prospects for higher taxes in the near future,” he added, “we expect demand to continue growing as many investors turn to muni bonds for such potential benefits as income in retirement and reduced volatility in their portfolios.”
Federal Reserve data indicates that household holdings of municipal debt increased 15.5% from 2007 through the second quarter this year, almost double the 8.59% increase in total municipal debt.
Whereas Fidelity is a broker-dealer becoming more involved with underwriting, several underwriters have also been motivated to strike partnerships with retail-oriented brokers.
Goldman, Sachs & Co., known for its institutional sales, recently announced an exclusive partnership with Chicago-based distributor Incapital LLC. JPMorgan, another top muni underwriter, tapped into the retail network of Charles Schwab and extended an existing agreement with UBS Wealth Management.
Fidelity has also helped underwrite 50 Build America Bond deals since the taxable securities were introduced last year. Because of their typically long maturities, BABs have been more popular among institutional buyers, but Coffin said retail buyers are getting over the learning curve and seeking BABs whenever shorter maturities are offered.
“We are definitely seeing genuine retail interest in BABs,” he said.