NEW YORK - Expanding into the municipal bond market, New York-based investment bank Jefferies Group, Inc. has entered into a definitive agreement to buy wholesale the broker-dealer operations of Depfa First Albany Securities LLC from Depfa Bank PLC.
The purchase price was not disclosed.
The sale was agreed to Friday and is expected to close in the first quarter of this year, subject to regulatory approval in the U.S. and Europe.
Kenneth D. Gibbs, chief executive officer of Depfa First Albany Securities, will be president of the municipal securities division of Jefferies. Neil Flanagan, managing director at Depfa First Albany, will be managing director and head of public finance at Jefferies and Alan S. Greco, head of sales and trading, will retain that position.
Richard B. Handler, Chairman and CEO of Jefferies, in a statement commented: “Jefferies’ acquisition of Depfa First Albany will expand our fixed income effort consistent with our client-oriented focus for business development. This acquisition offers Jefferies a unique opportunity to enter the municipal market in a comprehensive and high quality way, with a cohesive team of experts. We are pleased to integrate this established public finance team into Jefferies Fixed Income Department, which now totals nearly 250 professionals."
Brian P. Friedman, Chairman of Jefferies’ Executive Committee, added: “We welcome the Depfa First Albany team, which includes one of the best municipal sales and trading forces on the Street. The group’s track record of market making and reputation for quality relationship banking will enhance our efforts to take a leadership role in rebuilding America. Jefferies has prided itself on a focused commitment of resources to serving both issuers and investors. Helping the municipal sector meet its current challenges is, for us, both a core mandate and a growth opportunity consistent with our long-term strategy. The combination of this team and our broader capabilities and resources uniquely positions Jefferies to bring a fresh view to the important realm of public-private partnerships.”
Hypo AG, parent of Depfa Bank LLC, announced late last year it planned to restructure its business — drastically reducing headcount — to focus around real estate and public sector finance through “Pfandbrief” lending, a form of covered bond. The German government had last fall stepped in to support Hypo during the global credit crisis due to problems at Depfa Bank, which relied on a short-term borrowing to support a long-term balance sheet, a strategy that is no longer “sustainable,” according to Hypo officials.
Since that time, Depfa First Albany continued to operate insulated from the parents’ problems. It served as the senior underwriter on 62 issues with a par value of $3.33 billion in 2008, which ranked 17th, compared to the $1.54 billion it underwrote in 2007 on 57 deals, which ranked 33rd, according to Thomson Reuters. The firm also has a financial advisory business that ranked 17th nationwide last year, working on 37 issues with a par value of $3.27 billion.
In addition, Depfa First Albany also increased the size of its remarketing book to approximately $7 billion from $2 billion, in part thanks to picking up $3 billion of UBS Securities LLC’s book.
Like many other investment banks that lacked exposure to the structured finance products and complex derivatives that have led to billions in losses at Wall Street’s — and the municipal market’s — biggest firms, Depfa First Albany sees opportunities in the current market to expand. When the municipals group moved to Depfa from First Albany in 2007 it encompassed 65 professionals split between bankers, salesmen. The group moving to Jefferies is approximately 75 people.
The new hires in the interim include Flanagan, who joined in August to run Depfa First Albany’s public finance department after leaving Bear Stearns & Co., where he had worked since 1990. Flanagan recently said he was drawn to Depfa First Albany because of qualities such as a strong institutional sales desk, cohesive staff, and its core focus of helping public sector entities meet their financing needs.
Among other goals, First Albany wants to build on its existing framework to increase its underwriting business. Executives say it will benefit from bringing its entire group, rather than just parts of it, over to Jefferies.
“We are a franchise that is of the municipal business. We like this business, we are part of this business,” said Gibbs. “We are a client focused franchise and we see great opportunities for client-focused people in the environment going forward.”
Flanagan added that he is “very enthusiastic about the business. We look forward to hiring more individuals to join our talented group and further grow our business.”
Jefferies, a full-service investment bank that focuses on growing and mid-sized companies, has benefited as a middle-market investment bank without many of the credit exposures that have doomed larger rivals. It’s not immune to the global credit crisis — the firm lost $538.8 million last year and saw revenue fall nearly 35% — but its large extraordinary expenses last year came from the exceptional compensation charge of expensing prior years’ employee stock awards and not large write-downs.
Jefferies last year cut its staff to 2,214 from 2,555, but has also added in certain areas as other firms have laid off professionals. It has, for instance, used the crisis to add its international equities and mortgage-backed securities trading departments.
Jefferies ranked third as a financial adviser on U.S. merger and acquisitions transactions under $100 million in 2008, working on 20 deals with a par value of $1.02 billion, according to Thomson Reuters. It ranked 14th as a U.S. underwriter on equity transactions, working on nine deals with a par value of $741.8 million.
Depfa was one of a number of European institutions to get involved in the U.S. public finance market in recent years. After building its own U.S. public finance-related businesses it purchased the municipal business of First Albany Capital Inc. in 2007 to form the broker-dealer, Depfa First Albany Securities. Hypo agreed to purchase Depfa Bank just a few months after the First Albany transaction was announced.
Depfa’s not the only company that looked to sell its municipal division last year. But UBS Securities LLC closed its municipal business in June after it failed to find a buyer for its group.
