Though their market share has slipped since the start of the financial crisis, the top 10 managers continue to dominate the underwriting of municipal bonds.
Smaller players have taken advantage of upheaval at the big firms to poach talent and grab more business, but they have a long way to go before they get a much bigger slice of the pie.
The top 10 handled 60.8% of all long-term municipal bonds coming to market by par value in 1999. Their share went up steadily until 2008, when it reached 77%. Since then, it has fallen back. In 2011, it was 70%, according to Thomson Reuters.
In this data set, underwriters are only given credit for deals for which they were the senior or co-senior managers.
The percentage of business handled by underwriters ranked 11 through 20 has not shifted as much. From 1999 to 2008, it kept in a range from roughly between 12% and 14%. However, their share dove from 13.5% in 2007 to 9.8% in 2008. By 2011, it had risen to 12.2%.
Taken together, the proportion of work the top 20 firms have done followed a similar pattern as for the top 10. In 1999, the top 20 firms did 73.4% of the business. By 2008, it had increased to 86.8%. By 2011, that figure had decreased to 82.5%.
And in the top 20, the top three firms were out ahead of the rest of the pack. In 2011, JPMorgan, Citi and Bank of America Merrill Lynch did 38.3% of all business. The third-ranked firm, B of A Merrill, handled just 6.4% less par value of bonds than did the number one-ranked JPMorgan. By contrast, the fourth-ranked firm, Morgan Stanley, did 39.4% less business than did Bank of America Merrill.
An industry consolidation has contributed to the concentration of the industry, said Michael Decker, co-head of municipal securities at Securities Industry and Financial Markets Association.
“There are fewer firms that are actively participating in the underwriting business,” he said.
Several of the top 10 firms in 1999 have combined with other firms, Decker said.
For example, Merrill is now part of Bank of America. Lehman Brothers’ business was taken over by Barclays Capital. Bear, Stearns & Co. became part of JPMorgan.
Decker also noted that the spreads that underwriters collect to underwrite bonds — their profit — have decreased. Meanwhile, the cost of complying with ever more extensive regulations has been going up, squeezing margins. That, in turn, has led to greater concentration.
Christopher Hamel, head of municipal finance at RBC Capital Markets — ranked seventh in 2011 — pointed to issue size as one factor affecting the statistics. The percent of issues with a par value above $100 million went from 41% in 1999 to 62% in 2009 and back down to 58% in 2011, he said.
The big underwriters are more competitive in the large-issue space. Because of this, it’s logical that the historic concentration of business and the more recent dispersal of the industry has mirrored the shifting percentages of the deals that are large and small, Hamel said.
John Mazyck, executive vice president for the Frazer Lanier Co., agreed. Frazer Lanier ascended to 43d-largest underwriter in 2011 from 64th in 2010. Whereas the biggest firms don’t want to chase smaller deals, such transactions make economic sense for Frazer Lanier. “We’ve added bankers at a time when others have downsized,” Mazyck said.
Howard Cure, director of municipal research at Evercore Wealth Management LLC, offered two explanations for the dispersal of business that has occurred since 2008.
With the onset of the recession, many issuers perceived the regional banks as having fewer problems resulting from the collapse of the real estate bubble than the biggest banks had, Cure said. This allowed the regional banks to attract underwriting business.
The recession made issuers less interested in structured products like variable-rate securities that the largest banks were offering. This new attitude allowed the regional banks to compete on an equal footing with the largest banks, Cure said.
Fred Yosca, head trader at BNY Capital Markets, offered two other explanations for the dispersal of business. Many minority-owned firms that used to be co-managers for deals have been able to become senior managers in the last few years, he said. Some regional underwriters have grown through consolidation.
The shrinking of the top 10 firms’ portion of business in the last few years also reflects more direct lending by banks, Hamel noted. The recent expansion of direct lending to municipalities has been spearheaded by the largest financial firms, not the smaller ones, he said.
