UBS muni bond exit may spike public borrowing costs

CHICAGO (Reuters) - UBS Securities' plan to exit the municipal bond business could result in higher borrowing costs for cities and states as competition for underwriting business thins, market participants said on Tuesday.

Grappling with a subprime mortgage crisis that has hit its bottom line, UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) on Tuesday said it would sell or close down its municipal operation as it cuts 5,500 jobs to trim costs. The company also said it was in the preliminary stages of a possible sale of the muni operations.

UBS ranked third behind Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) as book running manager for municipal bonds in the first quarter of 2008, according to Thomson Financial. It served as senior manager on 89 issues with a par amount totaling more than $7.5 billion.

A UBS spokeswoman declined to give the number of jobs in its muni operations or the number that will be cut.

The municipal securities group "is a successful business with leading capital markets and sales teams and broad relationships, but is a business we believe will be highly valuable to another owner," UBS said in a statement.

"Select municipal trading desks" will be moved into the company's wealth management area to provide clients with muni inventory from the secondary market, UBS said.

No details on possible buyers for the muni operation were available, the UBS spokeswoman said.

Muni issuers, such as cities, states, schools and hospitals, may also end up paying more to sell their debt in the wake of fewer investment banks.

"The No. 4, 5 and 6 in the business are probably not too upset because margins will increase. And if UBS is not around to underwrite a deal, they will be able to charge more on a deal," said Tim McGregor, director of municipal fixed income at Northern Trust in Chicago.