UBS exit highlights Wall Street distress amid deal slump

The dramatic move last month by UBS Financial Services to lay off nearly its entire public finance team and exit the negotiated underwriting business is an extreme example of the cuts seen at big firms since January as the municipal market slogs through its second year of anemic issuance.

But the Wall Street layoffs offer an opportunity for regional firms to pick up veteran talent, market sources said.

The recent string of turnover across firms can be categorized as the "Great Reset," said James Pruskowski, chief investment officer at 16Rock Asset Management.

"It's being defined by large layoffs, compensation compression, consolidation, and involuntary or voluntary retirements," he said. "The banking business, alongside lower new-issue supply, is behaving more as an expense than a revenue center, and profitability from trading is down across the board on all Wall Street."

The cuts come as the industry weathers its second year of declining volume that has increased competition for fewer deals and tightened underwriting spreads. Cheapening bond valuations have challenged balance sheets. The March banking crisis and political dynamics in Texas, one of the market's largest issuers, have also pressured some of the top senior managers.

16Rock Asset Management

"This is bad news for our market," said a sell-side source.

"It creates this desperation where people will bid lower and lower just to get a deal and keep their job — or so they think — and that trend is a dangerous one," the source said. "The big question is: who's next? I don't think UBS is the end."

Volume as of Oct. 31 totaled $316 billion, down 8% year-over-year In 2022, issuance totaled $391 billion, down 21% from 2021, which saw $483.2 billion of debt issued. In 2020, issuance totaled $484.6 billion, despite the onset of the COVID-19 pandemic, and 2019 saw $426 billion of debt issued.

In January, Morgan Stanley cut several top-level public finance veterans and Goldman Sachs implemented sweeping across-the-board cuts. In February, Citigroup cut three positions from its municipal ranks, followed by the bank's move to cut its high-profile head of municipal strategy Vikram Rai in June. Rai in September joined Wells Fargo.

Wall Street cuts offer an upside: they provide smaller and middle-sized regional firms the opportunity to attract veteran professionals with skills and a client book, multiple sources said.

"There are certain places where the business is profitable, where the volume is sufficient and they're staffed generally correctly," said the sell-side source, naming middle market firms like Stifel, Piper Sandler and Raymond James.

"People lost money on deals this year, so that's one reason why the bigger firms are re-looking at the profiles of the business," said a second source. "A lot of the Pipers are looking to pick people up in this environment. They're looking to expand where the big guys are getting out. The people who are really aggressive are the Pipers and the Hilltops, those middle-market firms are looking to pick people up."

UBS' decision to exit the business echoed the firm's same move in 2008 amid the financial crisis, when it also said it would exit the negotiating underwriting business but remain active in the competitive and secondary trading markets. In 2017, the firm re-entered the negotiated business, hiring dozens of bankers following its hire of well-known public finance veteran Peter Hill. Hill left in October 2022.

In January, after six years of rebuilding its business, the bank trimmed 20% of its public finance ranks in what proved to be a foreshadowing of its September exit.

The size of the UBS layoffs is not known but appears to include around 50 bankers from more than 10 offices across the country, including its primary desk in New York and branches in Chicago, Florida and California.

Steve Genyk, head of public finance who replaced Hill, and Angelia Schmidt, head of negotiated underwriting, remain at the firm. Doug Vissicchio will continue to lead the bank's municipal trading business, which includes competitive underwriting.

UBS ranked 20th among senior underwriters through the first three quarters of the year. The firm ranked 16th last year among senior managers nationally, leading 73 deals valued at $6.09 billion for a 1.7% market share compared to 15th in 2021 leading 83 deals valued at $6.84 billion for an 1.5% of market share, according to Refinitiv. The bank ranked 17th in both 2020 and 2019 and 19th in 2018.

The public finance exit came after UBS acquired troubled Swiss rival Credit Suisse in March for $3.3 billion.

"It was a combination of volume being down and the Credit Suisse acquisition made them relook at every single business line," said the second sell-side source. "And people in Europe don't get our business and don't understand the value of it."

Like other firms, UBS was also hurt by politically driven legislation targeting underwriters in Texas that bans underwriters for "boycotting" the fossil fuel industry or "discriminating" against gun companies. UBS and Citigroup, for example, were dropped as co-managers from a $3.5 billion Texas Natural Gas Securitization Finance Corporation customer rate relief taxable bond issue in October 2022.

"Texas definitely didn't help," said a source close to UBS.

The decline in volume has sparked layoffs beyond banks, affecting other industry firms.

Massachusetts-based firm BondLink laid off an unspecified number of employees in late-April and early-May as bond volume dropped. The firm had nearly doubled its size from 12 to 15 months prior to that time. Several of the employees laid off were newer hires to the firm.

Colin MacNaught, BondLink CEO, said Thursday the firm has since brought on a few new hires since May.

The drop in issuance, MacNaught said in May, affects every firm in the muni market, something he attributed to "higher rates, episodic rate volatility (hitting both issuers and investors), and the prevalence of higher cash levels for governments (higher tax collections, federal stimulus)."

On the banking side, some sources said they are watching for more cuts at Citi, which for the first three quarters of this year has dropped out of the top five senior managers to sixth from third for the same period last year, according to Refinitiv. The firm last year fell to fourth place from its second place finish in 2021 among senior managers.

Citi also recently launched a major restructuring that will give CEO Jane Fraser increased authority over Citi's five main business units, while also cutting management layers.

Pruskowski noted that Citi has lost a lot of skilled labor in recent months and "as a liquidity provider, they've been falling down the ranks." But, he added, the firm is "still doing a great job staying active."

A Citi spokesperson declined to comment.

Despite the challenges — and assuming the country skirts a major recession — issuance is eventually expected to pick up as the Federal Reserve taps the brakes on interest rate increases, inflation cools and cities and states rev up badly needed infrastructure work, market participants said.

"Everybody has had a bad year," said a market participant. "But we're in a cyclical industry. Our infrastructure is old and every year it gets older," the source said. "Do you think there is one municipal entity out there that doesn't need help? They all need help."