UBS Wealth, JPMorgan Complete First Deals

UBS Wealth Management US and JPMorgan's municipal finance group have participated in their first deal together since inking a multi-year agreement last month that brings the two together to share new-issue product and retail clientele.

Now that the agreement is launched, market participants say the union appears to be a positive move for both firms, but the lack of legal and financial details makes judging its functioning in depth difficult.

The joint venture, which was reported by The Bond Buyer on Aug. 6, gives UBS access to JPMorgan's senior and co-managed negotiated deals for its retail clientele, while JPMorgan will be able to tap into UBS' nationwide retail sales force of more than 8,200 brokers located in 400 sales offices around the country.

Under the agreement, UBS had access to the first JPMorgan co-managed deal on Aug. 12, according to UBS spokesman Kris Kagel. Since then, the firm has had access to at least 15 other deals with a total par value of between $2.5 billion and $3 billion.

Among the largest deals the partners worked on so far - and UBS ultimately placed orders for - include a $397.80 million New York State Dormitory Authority sale of revenue bonds led by Citi on Aug. 15, and $462.5 million New York State Thruway Authority personal income tax revenue bonds led by Merrill, Lynch & Co. on Aug. 27. JPMorgan was a co-manager on both deals.

As part of the agreement, UBS' retail clients will have equal access to all new negotiated deals underwritten by JPMorgan and at the same offering price as JPMorgan clients - unless UBS opts out of a deal because it deems it inappropriate for its wealth management clients.

The amount of retail orders placed by UBS for any of the deals it participated in under the agreement and the amount the firm was actually allotted is not being disclosed.

Both firms say they were happy with the smooth progress and positive outcome of the first round of partnered deals.

"We are very pleased with not only the relationship, the communication, the flow of information, and the selection and number of deals, but also in the treatment we have received," said Rodney Villella, municipal product management for UBS Wealth Management.

UBS had good retail participation from its wealth management clients, and received the same treatment, access, and pricing as if it too was a co-manager or selling group member on the deals, Villella said.

"The communication lines back and forth were very fluid and both firms were very engaged," he added. "Both sides have benefits out of the agreement and we came out of the gate running. We couldn't be happier with agreement in the first couple of weeks and we look forward to strengthening it" when public finance business increases after the season lull in activity following Labor Day.

JPMorgan is also "pleased with the immediate success" of the arrangement, according to spokesman Brian Marchiony.

Although UBS exited the municipal market when it stopped underwriting negotiated product in June, it still maintains its own full competitive underwriting capabilities and trading of secondary market product, according to Kagel.

Market participants, meanwhile, believe the agreement should help bolster JPMorgan's distribution capabilities and also give UBS prime access to negotiated product for its extensive retail chain nationwide, but without more details about the structure of the arrangement they are only speculating on its future success.

JPMorgan is not disclosing the financial and legal terms of the agreement, and is being tight-lipped about many other details of the partnership.

Courtney Knight, managing director of public finance at Rice Financial Products Co. in New York City, said the two significant players appear to be complementing each other - JPMorgan providing public finance origination for UBS, and UBS providing broader retail distribution capabilities for JPMorgan, which is largely an institutional shop.

"JPMorgan is not known as a firm with retail capability, so this adds another layer of distribution capability to retail clients," he explained. "And left without a public finance arm, this is a way for [UBS] to put on a prosthetic without creating an entirely new public finance division.''

However, without the intricate details regarding the financial structure and legalities of the arrangement, Knight could only predicted that if the firms work together as a team the partnership should flourish.

"Like a marriage, they have to each bring what they said to the table ... they have to manage their relationship so that neither feels the other is controlling the resources," he explained.

Peter Delahunt, national institutional sales manager at Raymond James & Associates Inc. in New York City, said the nuptials will help both firms boost their businesses by feeding off each other's strengths.

"JPMorgan is the handsome groom with substantial banking product, and UBS is the sexy bride with the attractive retail distribution network," he said. "It's a perfect marriage, but as with any marriage the devil is in the details, and defining one another's expectations will be important,'' Delahunt added.

"How do they plan to share in the economics? Will the UBS distribution network only be included when JPMorgan is looking at a balance, but denied access on the hot deals?" he said.

It is uncertain exactly what retail capability, clientele, or assets the firm has, and a JPMorgan spokesman declined to provide those details last week.

Issuers, indeed, should look favorably on the union when considering JPMorgan to underwrite their new deals, according to Brian Maguire, a senior vice president at financial adviser Shattuck, Hammond Partners in New York City.

With access to a wider retail distribution channel, JPMorgan can use the partnership to its advantage in obtaining more negotiated business - especially during times of heightened retail demand, he said.

"Retail in the last two to three months has been a driving force in the market," he noted.

Maguire said the arrangement is also a "win-win situation" for UBS. "They will have access to a wider and more diversified product base and won't have to take on the underwriting risk," he said.

Last year, JPMorgan ranked second and captured 12.9% of the market share when it senior-managing 345 negotiated issues totaling $45.42 billion, compared to UBS, which ranked third with a market share of 9.3% for senior-managing 458 negotiated issues totaling $32.55 billion, according to Thomson Reuters.

A New York trader, meanwhile, said the partnership between the two firms is of little significance for the overall market and is more a reflection of the two firms' own future business plans and aspirations for growth potential.

"It's just as if [JPMorgan] is making [UBS] a selling group member," he said. "The only significance is that they would let someone in on their own underwritings. For UBS, there is no liability, but they can get bonds for take down."

The trader said the partnership might work to both firms' advantage on many underwritings, but UBS might find itself shut out of certain deals simply when JPMorgan sees significant institutional appetite for an offering that turns out to be heavily subscribed or oversubscribed by its own large national accounts.

"If they need [UBS], they will give their clients bonds, and if they don't, they won't," the trader said.

Apparently, this isn't JPMorgan's first attempt and only partnership aimed at gaining a competitive edge to bolster its business.

The firm still has an active strategic alliance with Fidelity Brokerage Co. that was started back in early 2006, according to Marchiony.

That union enables Fidelity's retail and institutional brokerage clients to participate in new-issue equity and fixed-income deals lead-managed by JPMorgan, which includes initial public offerings, secondary share sales, and certain negotiated municipal bond offerings.

No money changed hands in the JPMorgan-Fidelity partnership, JPMorgan reported at the time.

Through the alliance, JPMorgan became the primary provider of new-issue equity and fixed-income products to Fidelity's brokerage clients. They include its retail customers, who at the time held approximately 10.7 million accounts, as well as more than 3,000 registered investment advisers, and more than 350 broker-dealer firms with 65,000 individual brokers through Fidelity's clearing business, National Financial.

Prior to the Fidelity union, JPMorgan's fixed-income and equity products were previously distributed primarily to institutions, hedge funds, and ultra high net-worth investors through JPMorgan Private Bank, according to a published report. The firm's private bank still exists and still has access to the JPMorgan investment bank products, including municipals, according to a source knowledgeable about the firm.

Meanwhile, the JPMorgan sold its online, deep-discount brokerage unit, BrownCo, to E-Trade Financial in 2005 for $1.6 billion.

In addition, the firm also once had a distribution arrangement with Charles Schwab &Co. - which was similar to the Fidelity agreement - but that relationship ended in 2001, according to published reports.

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