“A voluntary carbon credit can be blended into a green transaction as a first-loss layer,” Citi's Collins said. — Bloomberg
New York: For years, small investment banks have been pulling out of the business of underwriting US municipal bonds, leaving the job of raising money for US state and local governments dominated by Wall Street’s giants.
Now, there’s concerns that the big banks may start dropping away, too.
Citigroup Inc’s announcement last Thursday that it is shutting down its municipal-bond division highlighted the pressures on a corner of finance contending with diminished fees, a debt-sales slowdown and pushback from local Republican politicians intent on drawing banks into America’s culture wars.
Chief executive officer Jane Fraser indicated that underwriting state and local debt was, effectively, too big a drag on the bottom line, unable to compete with more lucrative lines of work. UBS Group AG made a similar decision in October.
Citigroup’s departure is unlikely to have any immediate repercussions, since others will almost certainly fill the void, at least temporarily.
But it underscores the steady shift of capital away from the business. That raised concerns that a further retreat could make it more costly for local governments to finance infrastructure or increase the risk of a liquidity squeeze as big banks that backstop the market pull out.
Broker dealers have already retreated sharply from that role as buyer of last resort, reducing their holdings of state and local-government bonds sharply since the 2008 credit crisis.
“Over the next five to seven years, we are going to need more firms, not fewer, just to process all the bonds,” said Matt Fabian, a partner at Municipal Market Analytics, predicting that debt sales will rise as interest rates slide and governments step up borrowing for public works.
“Citi leaving now is not just that firm walking away from this business upside – it also means the incremental cost to borrowers in the future will be higher.”
A spokesperson for Citigroup referred Bloomberg to the memo released last Thursday.
Citigroup has been a major force in the municipal-bond market and as recently as 2021 was the second-biggest underwriter, accounting for roughly 10% off all the new securities that were sold.
It worked on landmark projects including the rebuilding of the World Trade Center site and the installation of 65,000 streetlights around the city of Detroit and was the envy of rivals.
But its longtime chief, Ward Marsh, left in 2019. Layoffs, retirements, and other departures shrank the public-finance department to about 120 people, down from around 400 employees at one point, according to two former employees who declined to be identified.
As the US Federal Reserve’s rate hikes depressed debt sales, it continued to lose market share, sliding to the seventh-biggest this year.
Still, the decision to shut down the business completely was a surprise, given its still prominent role. In 2022, it underwrote nearly US$27bil of long-term municipal bonds.
Washington State treasurer Mike Pellicciotti said in a statement that the bank’s departure was unfortunate.
“We’ve particularly appreciated Citi’s dependable participation in our competitive sales, where they have frequently provided the best bid,” he said.
The bank has also long been revered for its trading arm and its willingness to take risks during market dislocations. — Bloomberg
