Bull Bear Report Jan 26 2011

Shaky Muni Bond Markets Might Shed Bankers

By kyle stock

The market for bankers who sell municipal bonds is expected to cool this year, as debt-laden governments crimp borrowing.

Matt Fabian, a managing director at Boston-based Municipal Market Advisors, expects new muni sales to decline by close to 20%. Such a slump would undoubtedly wipe out a number of jobs.

"It's a fairly fluid labor market," Fabian said. "There's a core of senior bankers and a big base of junior bankers. I don't think companies think twice about shrinking that base if the market turns."

Driving the slowdown is a nationwide push by governments of all levels to cut spending. Additionally, the federal Build America Bonds subsidy program, which fueled the muni markets recently, expired at the end of 2010. Not only will the cost of borrowing rise for governments, but many rushed to sell debt in 2010 that they otherwise would have issued this year.

It's hard to say how many jobs would be affected by a slowdown. Based on the volume of capital raised, roughly 14% of private-sector bankers work on muni deals, according to data compiled from the Securities Industry and Financial Markets Association.

What is certain is that investors are cooling on munis. Tax-free government bonds lost some allure last month when lawmakers extended tax cuts for the wealthy, according to Anand Iyer, managing director and head of multi-asset class research at MSCI, a financial index and investment services firm.

And investors are growing increasingly skittish about defaults. Only 256 issuers linked to $8 billion of muni debt are in default, according to Municipal Market Advisors. That's a tiny fraction of the roughly 50,000 issuers and $2.9 trillion of muni debt outstanding.

Still, a growing number of governments are hiring attorneys to restructure debt payments and avoid bankruptcy. The subject was at the forefront early this month when the Senate Budget Committee met with Federal Reserve Chairman Ben Bernanke, And notoriously bearish analyst Meredith Whitney has called for 50 to 100 major muni defaults in 2010 tied to "hundreds of billions of dollars." Annual muni defaults peaked in 2008 at $8.2 billion.

"You have the less-sophisticated investors who are allocating less (to munis) because they are worried about defaults," Fabian said. "And then you have the more sophisticated investors who are allocating less because their bosses are worried about defaults. There's broad expectations among people of a collapse among issuers."

A number of the companies that dominate the muni underwriting business declined to answer questions for this article, including Bank of America, Piper Jaffray, Royal Bank of Canada, Stifel Financial Corp., UBS and Wells Fargo.

A number of regional players, however, hope a slowdown will provide a chance to grab bulge-bracket talent and expand. Keith Kolb, head of the public finance group at Robert W. Baird & Co. Inc., expects to add 10 muni bankers this year to his staff of 100. "I think the pot may shrink next year, but the needs that are out there are not going away," he said. "Projects still need to get done."

Specifically, Baird, No. 11 on muni underwriting tables in 2010, is planning on hiring professionals from larger investment banks who specialize in areas outside of its current footprint. The company has opened five offices in the last two years and hopes to cut the ribbon on more.

Memphis, Tenn.-based Morgan Keegan, which worked on more muni deals than any other firm in 2010, has a similar strategy. The company is shopping for about 30 people in the West and Midwest and is specifically focused on bankers that have handled debt for transportation and healthcare entities, according to Rob Baird, president of the firm's investment banking unit.

"We're looking for senior bankers who have relationships in their geography or within their specialization," he said. "We typically take advantage of an environment where good bankers are available."

Write to Kyle Stock

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