(Bloomberg) -- From San Antonio to Chicago, US municipalities are inviting in new rosters of banks to manage borrowings after two big players’ exits opened up a roughly $50 billion opportunity for firms that are still in the business.
Market heavyweight Citigroup Inc. and UBS Group AG began pulling away from munis over the last year, marking the biggest retreat in the sector since the financial crisis. While shrinking profit margins in the muni industry contributed to their decisions, other bulge-bracket firms and up-and-coming regional underwriters remain committed.
These muni players are eager to fill any gaps, and there’s a big incentive: The shift is happening just as US state and local borrowers flood the market with record amounts of debt.
“Issuers are taking meetings, we are seeking opportunities,” said Bill Reisner, co-head of fixed income at Janney Montgomery Scott LLC.
Citigroup, at its peak in 2016, managed $49.7 billion in municipal long-term sales, almost 12% of the market, according to data compiled by Bloomberg. UBS, which temporarily had exited muni underwriting in the wake of the financial crisis, had rebuilt its business to as much as $6.56 billion in 2021.
Together, the two managed more than $50 billion in deals when muni sales hit an all-time high three years ago. Offerings are on pace to top that level this year.
‘Relationship Business’
One key tactic firms of all sizes are using in their bids to grab market share is scooping up former Citi and UBS bankers. Janney, for example, recently hired former Citigroup municipal banking co-head Paul Creedon to expand into infrastructure deals. The firm seeks to enter pools that Janney may not have been part of previously but Creedon had been while at Citigroup.
“At the end of the day, this is a relationship business,” Reisner said.
Chicago recently hired Huntington Capital Markets as a lead manager for its $647 million bond sale. While Huntington has been in Chicago’s pool of underwriters since 2021, the lead role comes just months after Samantha Costanzo joined as senior managing director and head of public finance. Costanzo had led Citi’s public finance business in the Midwest.
“Issuers have recognized the exit of some banks has meant that many of the bankers they’re used to working with have spread out across the industry,” Costanzo said in an email.
Several borrowers are re-opening their pools just for new firms, issuing requests for proposals off-cycle or tweaking timing to accommodate bankers settling into their new roles, Costanzo said.
Recently, San Antonio Water System accepted proposals for its pool almost two years earlier than scheduled, partly because three large banks in its underwriting pool left Texas or the muni market broadly.
Republican politicians barred Citigroup and Barclays Plc from managing most municipal debt deals in Texas, one of the biggest US markets, over disagreements about fossil fuel and gun policies. Then, Citi and UBS left the US market broadly. So, the water system issued a request for proposals asking current firms to confirm their commitment, and to consider new players.
“We feel there are still plenty of good underwriters out there that can fill that void,” said Phyllis Garcia, senior director and treasurer of the San Antonio Water System. “We had to look a little differently than we have in the past.”
This summer it added nine new names including Charlotte, North Carolina-based Truist Financial Corp. to its roster. Truist is among the regional banks that’s hired former Citigroup bankers to expand.
While the reopening of such pools has been sort of episodic, “it’s a clear opportunity,” said Scott Frail, head of public finance origination and syndicate for Truist Securities.
The Connecticut Housing Finance Authority recently chose JPMorgan Chase & Co. to be among its senior managers and appointed it to lead an upcoming sale in September. Citigroup had served as a senior manager since 2021 until its exit.
UBS and Citigroup were both part of its pool, and the experience the banks brought isn’t easily replaced, said Hazim Taib, chief financial officer of the agency.
“Even if some firm wants to replicate what Citi did, it’s hard to flip a switch,” he said.
Still, the power shift is starting and smaller firms, depending on their relationships as part of underwriting syndicates with the most central players, are also moving among the ranks, said Justin Marlowe, a professor at the University of Chicago Harris School of Public Policy, who has studied the recent dynamics among underwriters.
“And of course, over time, information and influence drive market share and profitability,” he said.
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