Wall Street Muni Bond Fees Decline to Lowest Since 2004Michelle Kaske
States and localities are paying Wall Street banks the lowest fees in at least a decade to structure municipal-bond deals as dwindling issuance fosters competition between underwriters.
Average underwriting fees on debt sales in the $3.7 trillion municipal market this year are about $5.33 per $1,000 of bonds, the cheapest since at least 2004, data compiled by Bloomberg show. That’s down from a peak of about $6.90 in 2009, the first year of the taxable Build America Bonds program.
With the market for state and local debt set to shrink an unprecedented fourth year, there are fewer offerings to execute and market to investors, leading banks to reduce fees to win business, said Alan Anders, deputy director for finance in New York City’s Office of Management & Budget.
“The competition for deals is going up and that gives issuers the opportunity to negotiate lower fees,” Anders said. “It’s good to be able to finance your capital program in a way that saves the taxpayers money.”
Declining costs are a boon for communities still repairing their finances five years after the recession or facing spiraling bills on pensions or other services. The fees represent only part of their expense on bond deals. They also have costs for legal and financial advisers, and in some cases devote proceeds to terminate interest-rate swaps. Localities nationwide have paid more than $4 billion to Wall Street to exit the derivatives, Bloomberg data show.
Yet in 2014, shrinking supply has been the overriding theme.
Issuers from California to New York have sold about $185 billion of fixed-rate bonds in 2014, the least since 2011 at this point in the year, Bloomberg data show. The diminished borrowing is contributing to lower interest rates. Yields on benchmark 10-year munis fell to 2.15 percent yesterday, the lowest since May 2013.
“The real winners in this situation are the issuers,” said Michael Decker, co-head of munis in Washington at the Securities Industry and Financial Markets Association, which represents investment banks. “It really is a unique time in terms of being able to borrow in the municipal market long-term, tax-exempt at very, very low cost, including cost of issuance as well as interest expense.”
California, the most-indebted U.S. state, has seen its bond costs drop. The state sold $1 billion of general obligations in March and paid $3.75 per $1,000 of 20-year bonds, $2.50 less than it paid five years ago on similar-maturity securities, according to the office of Treasurer Bill Lockyer.
That would mean $1.75 million of savings on a $1 billion sale, according to Lockyer’s office.
“In many cases, every dollar we don’t give to underwriters is a dollar we can use to help pay for public-works projects,” Tom Dresslar, spokesman for Lockyer, wrote in an e-mail.
New York City’s underwriting costs on deals other than refinancing have averaged less than $5.05 per $1,000 bonds in the past year, Anders said. That’s below the national average of $5.33 as calculated by Bloomberg data. The city has been able to save on sales to individuals, known as retail buyers, which tend to cost more than offerings to larger, institutional investors, Anders said.
“We don’t offer higher sales commissions during the retail-order period to sell the bonds to individual investors even though that takes a lot of work,” Anders said.
While banks are making less money structuring muni deals, they want to maintain relationships with issuers and keep underwriting, Sifma’s Decker said. They also want enough local debt on hand to sell to clients, he said.
“Bond underwriting is just one component of the services that they offer, and they often think more in terms of their broader relationships and the revenue that they derive from a menu of services,” Decker said.
Underwriting fees climbed during the financial crisis as market turmoil led banks to charge more to find buyers. The Build America Bonds program, which fueled $188 billion of sales across 2009 and 2010, also raised costs as banks marketed the new taxable product.
After peaking in 2009, issuance costs fell to $6.43 per $1,000 in 2010, $6.10 in 2011, $5.85 in 2012 and $5.44 last year, Bloomberg data show.
“You have the same number of bankers chasing fewer transactions,” Decker said. “That tends to press the price of underwriting services lower.”
In June, New York-based Lebenthal & Co. said it would close its muni underwriting business and focus on selling the securities to high-net-worth individuals. Alexandra Lebenthal, president of the firm, was unable to comment on the trend toward lower underwriting fees, Claudio Pannunzio, a spokesman, wrote in an e-mail.
Bank of America Merrill Lynch was the top underwriter in 2013, structuring $42.2 billion of munis, Bloomberg data show. JPMorgan Chase & Co. worked on $38.2 billion and Citigroup Inc. underwrote $35.5 billion, followed by Morgan Stanley with $16.3 billion.
Zia Ahmed, a spokesman at Bank of America; Jessica Francisco at JPMorgan; Scott Helfman at Citigroup and Lauren Bellmare at Morgan Stanley, all based in New York, declined to comment in e-mails.
“At some point you’ll hit a floor where it’s just not possible for a firm to economically service a client and underwrite a transaction for less than a certain fee, but the trend of low underwriting spreads is going to be around,” Decker said.