Regional muni bond specialist proves that small is beautiful

Robert W. Baird & Co. Inc. has regained its claim to underwriting the most U.S. muni bond issues, amping up its small-deal specialty last year and grabbing a few larger ones, too.

By the end of 2012, the Milwaukee-based investment bank estimated, it had been the lead underwriter on 875 municipal bond issues, topping the 606 it handled in 2011. The increases come, in part, from opening three offices in Texas and boosting the total number of public finance bankers by 10% to a total of 80.

“Those are pretty impressive numbers because it's such a large number of issues for one firm to underwrite in one year,” said Jeff Westergaard, who leads Morningstar Inc.'s municipal bond research group.

Baird and other regional investment banks are attracting new business in everything from underwriting to deal-making as major Wall Street banks pull back because of slumping overall profits and increased federal regulatory restraints that target the larger players. Baird has grown by focusing on specific geographic regions and sectors, such as charter schools.

“We're trying to find niches where we think clients are being underserved,” said Keith Kolb, who leads Baird's public-finance division.

“A MUCH BIGGER STORY’

The trend of regional bank mergers could create stronger competitors to Baird's dominance of the small-deal realm. Still, it's besting Chicago-based regionals such as William Blair & Co. LLC, Loop Capital Markets LLC and Mesirow Financial Holdings Inc., even though it often jointly underwrites offerings with those companies.

“What R.W. Baird is benefiting from is a much bigger story,” said Jim Reynolds, chairman and chief executive of Loop Capital Markets, which was tied with another firm as the top minority-owned senior underwriter in the U.S. through mid-December 2012. “We're seeing New York global investment banks shrinking and they are yielding a lot to the middle market. They're leaving us a runway that I haven't seen since I've been doing this for the last 15 years.”

Regional investment banks have grabbed market share as bankers leave major players for regional ones, Mr. Westergaard said.

Baird built a team in Texas last year around the hiring of Ajay Thomas from Raymond James & Associates Inc.

“Texas is one of the largest markets in the country — they did not go through the recession in the same way that many other parts of the country did,” Mr. Kolb said.

Baird's strategy is to scour the country for even tiny muni deals; it averaged about $10 million per offering last year. While Mr. Kolb said Baird's forte as a senior underwriter is on offerings up to $300 million, the firm is rarely the lead on deals that big. Still, it's increasingly taking on those in the $50 million to $100 million range, according to data the company provided.

BAIRD BRANCHES OUT

This year, the focus for growth will be on the New York and Boston markets as well as Florida and California, Mr. Kolb said. The company also is seeking a banker to carve out a niche in higher education.

To be sure, the big New York banks still dominate the largest offerings. Based on the total value of offerings, Bank of America Merrill Lynch was the nation's top lead underwriter, handling $52.7 billion through Dec. 18, compared with $8.5 billion for Baird, according to Thomson Reuters.

Nonetheless, there's money to be made on the small deals because less competition for the underwriting role usually means fatter profit margins.

Lynne Marek is a reporter at sister publication Crain's Chicago Business.