Bank of America Merrill Lynch fended off a summer onslaught from Citi to hold on to the top spot among municipal bond underwriters through three quarters of the year.
Citi was the number-one underwriter of state and local government debt in the third quarter, according to Thomson Reuters, placing $11.13 billion in municipal debt for an 11.9% share of the market.
B of A Merrill was right behind, with $10.92 billion for an 11.7% market share.
That was enough to retain the top slot year-to-date. Bank of America this year has underwritten $40.49 billion through September 2010, a 13.6% market share.
Citi remains in second place, with $40 billion in underwritings for a 13.5% share.
B of A Merrill is the top underwriter of competitive deals, while Citi is the number-one underwriter for negotiated deals.
Citi has been the top underwriter for more than a decade.
JPMorgan is in third place for both the quarter and year to date, with $10.1 billion and $33.6 billion in underwritings, respectively.
Morgan Stanley is in fourth, with $8.4 billion and $27.8 billion in underwritings for the quarter and year.
“There is strong competition for these issues,” said Robert Servas, managing director and head of public finance underwriting at JPMorgan. “Because of the expected volatility due to higher volume, issuers will need firms with strong balance sheets and proven underwriting capability to navigate the market successfully.”
These rankings reflect a change in methodology by Thomson Reuters, under which credit for underwritings is awarded to joint book-runners based on their allocations on deals, as opposed to equal credit awarded to all book runners.
Municipalities floated $89.6 billion in debt in the third quarter, a 3.1% decline from the third quarter of 2009.
The slowdown in issuance came entirely in August, a very slow month even though that’s precisely when borrowing costs reached their troughs.
The yield on the triple-A rated 10-year municipal, based on a Municipal Market Data scale stretching back to 1981, hit its all-time low of 2.17% on Aug. 25.
Borrowing costs began to creep up in early September, even though supply remained light.
Market participants cited a $900 million Minnesota deal priced Sept. 8 as a turning point, when dealers had to start offering concessions to clear deals.
The nature of municipal underwriting has evolved since the February 2009 enactment of the American Recovery and Reinvestment Act, which established a major category of taxable municipal bonds called Build America Bonds.
By opening up the municipal securities market to entities that do not pay income taxes in the U.S., ARRA led BABs to appeal to foreign investors, rendering municipal underwriting a global business.
A $1 billion Utah deal last month, a portion of which was taxable, offered disclaimers to investors in more than 25 countries, including such far-flung locales as Thailand, Luxembourg, and Dubai.
BABs have exerted influence on the underwriting tables in numerous ways.
For one thing, the average size of an underwriting is bigger.
While a tax-exempt deal tends to be sold as a group of small batches of bonds with different maturities, BABs are more commonly a single big issue with a long-term maturity.
The average size of a municipal bond underwritten by Bank of America this year is $108.3 million, compared with $87 million in 2008.
JPMorgan’s has grown to $114.7 million from $107.9 million.
Some firms in the top 10 notably underwrite more small deals. Robert Baird, for instance, is in 10th place with $5.8 billion in underwritings this year, but has by far the most deals underwritten, with 635 — averaging $9 million per deal.
Morgan Keegan & Co. has underwritten 529 deals with $10.4 billion in par value, or $20 million in average size.
“That would be the historical culture of Morgan Keegan, is to service the communities where we live and work,” said Jonathan Nordstrom, head of the municipal department at the firm. “Certainly it has been a good year for us as we continue to bring more deals.”
The underwriting tables this year largely reflect the leaders in underwriting BABs. Citi is the top underwriter of bonds authorized under ARRA, while Bank of America-Merrill is second and Barclays Capital is third.
BABs issuance is widely expected to spike in the fourth quarter because of the impending expiration of the program, or potential extension at a lower subsidy rate.
JPMorgan expects $40 billion in taxable municipal issuance in the fourth quarter.
The top underwriters sold most of the biggest municipal deals during the quarter. Bank of America, Citi, and JPMorgan all worked on Puerto Rico Sales Tax Financing Corp.’s $1.62 billion tax-exempt deal and Bay Area Toll Authority’s $1.5 billion BABs deal in June.
JPMorgan was joint book-runner on the $1 billion Utah deal with Goldman, Sachs & Co. which was the seventh-most active underwriter during the quarter, with $4.02 billion in deals.
Goldman ranks sixth for the year so far, with $17.86 billion in underwritings.
Public Financial Management remained the top financial adviser to municipalities in the third quarter.
The firm, which was the number-one adviser last year, has advised on $38.92 billion in deals this year — a 17% market share.
First Southwest is in second place for the year, advising on $19 billion in deals for an 8.3% market share.
Public Resources Advisory Group has advised on $18.63 billion in deals for an 8.1% market share.
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