CHICAGO – Chicago-based William Blair has decided to shed its municipal bond business, abandoning an effort that started four years ago to expand the public finance practice to new regions.

Blair, which is both an investment bank and asset management firm, made the decision public Tuesday. Staff was also informed Tuesday of the decision to exit the municipal sales, trading, and underwriting business.

Ajay Thomas, head of public finance, William Blair.

The firm’s leadership decided after a strategic review that the municipal securities business “did not align with its core businesses and did not adequately complement the firm’s existing platform of products and services,” a statement read.

“We appreciate our relationships in the municipal sector and are grateful for the opportunities to have served clients’ needs over many years,” firm president and chief executive officer John Ettelson said in a statement.
The municipal business contributed less than 3 % to overall revenue in 2016 and municipal staff accounted for a similar level of overall staff, the firm said.

The firm will continue to engage in taxable fixed income sales, trading, and underwriting businesses. “We remain committed to continued investment in support of growing and expanding our core businesses,” Ettelson said. During the past several years, the firm has seen steady growth with total revenue approaching $1 billion and client assets of $90 billion.

The firm will complete work on deals in the pipeline at least through July 31, with some professionals staying longer to wrap up the work, spokesman Tony Zimmer said. The firm couldn't say how many professionals might be offered positions elsewhere in the company, though it said all those cut due to the decision would be offered outplacement services.

While the firm is following others in leaving behind a business that has become less profitable due in large part to shrinking underwriting spreads, it marks a sharp turnaround from its prior stated committed to municipals. That commitment was underscored by an expansion into new regions including California, Texas, and Ohio and sectors that led to deal growth.

PRESSURES
Market pressures, such as narrowing spreads, expenses, and heavy competition, contributed to the 82-year-old independent and employee-owned firm’s departure from munis, according to industry sources.

“Public finance business is very competitive and spreads/margins have narrowed a lot,” said Peter Delahunt, managing director of municipals at Raymond James & Associates Inc. “The overhead to carry a public finance business is costly. UBS is getting back in the business which could cause further narrowing.”

Delahunt said he was not surprised by Blair’s decision, given these market circumstances.

The firm’s history dates back to 1935 when William McCormick Blair founded it amid uncertainty following the stock market crash of 1929 and the Great Depression. It was established at a time when investment firms had decreased in size from 600 in 1929 to 200 in 1935, according to the firm’s website. It has been in municipal finance for more than five decades.

Blair currently has nearly 1,400 employees in offices in 15 cities worldwide, and had more than $84 billion in total client assets as of March 31, 2017. At the time its expansion into Ohio early last year, the firm’s public finance staff was at 31.

EXPANSION
The firm had dedicated resources and support to expanding the firm’s municipal business. One local banking source said the growth did broaden the firm’s business and deal numbers but likely fell short of profit expectations amid shrinking spreads and entrenched competition.

The firm expanded its existing municipal coverage from the Midwest and Connecticut to cover California in 2013.

“The firm is strongly committed to growing its fixed income business and, in particular, our municipal bond, public finance, and infrastructure investment banking business,” Tom Lanctot, then partner and head of debt capital markets, said at the time. “So we’re looking at hiring bankers all around the country.”

The firm made a big push in 2014 into the Texas market, snaring a five-member banking team from Robert W. Baird & Co. led by Ajay Thomas, who took over the public finance banking group and guided the ongoing expansion. Still in expansion mode, the firm landed in Ohio early last year hiring a team of veteran public finance bankers from Fifth Third Securities.

Blair ranks 27th nationally among senior managers so far this year leading 47 deals valued at $702 million, according to Thomson Reuters. It also ranks 27th in the Midwest and 22nd in the Southwest. The firm ranked 23rd last year nationally leading 150 deals valued at $2.7 billion. It ranked 14th in the Midwest and 22nd in the Southwest.

In 2016, Blair said it completed 330 financings for issuers on behalf of local communities across the country totaling over $20 billion in municipal bonds. Senior- and co-managed transactions nearly doubled last year from 2015 as the firm’s Ohio business in Ohio took hold. The firm’s Ohio team closed 75 transactions in its first year for $825 million in par volume and ranked seventh in the state among all municipal underwriting firms, according to its website.

LOCAL
Several public finance professionals said the news stunned them, while others said there had been speculation that the firm was evaluating the value of its municipal business.

The firm faced struggles on several fronts. Sources said the firm had faced a lingering reputational backlash for its role as Chicago’s advisor on its much maligned $1.16 billion, 75-year 2008 lease of the city’s parking meter system. The implementation was fraught with mistakes raising the public’s ire and some raised questions over the valuation, although William Blair stood behind it based on the competitive bids submitted for the transaction.

“William Blair has always had a premier reputation, although the parking meter deal did hurt,” said one banking source.

While the firm’s local headquarters would traditionally give it an upper hand in winning local business, the firm’s lack of commercial bank support hurt as Chicago has in recent years cast a more favorable eye on firms that offer credit support.

For Chicago, several bankers said, the firm’s exit is a loss, as the city has seen other locally based investment banks and commercial banks with a municipal business move their headquarters and trading floors elsewhere due to mergers and acquisitions or departures from the business.

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Christine Albano

Christine Albano

Christine Albano is a reporter in the Investor’s & Investing beat, which she has covered for the past two decades. She has a wide range of buy side sources in the municipal market.