April 2006
Credit research poll 2006: Analysts see the upside of a downturn
Banks’ credit research departments are readying themselves for a turn in the credit cycle towards a higher level of defaults and volatility. Florian Neuhof reports on the state of play.
AT A TIME when default rates are low and spreads are tight, credit research is not enjoying quite the prominence it reached during the days of high volatility and default risk. Furthermore, regulatory changes have prompted many banks to cut back or even scrap the published research they provide. But an increase in event risk, the arrival of new products, the search for higher yields and the expectation of higher default rates mean that credit research is far from passé. Banks have recognized this and are refocusing their research to accommodate the changes in the market.
Credit research’s heyday was the period of extreme volatility during the last cycle of credit decline that started in 2000, when it was also thriving on the back of the nascent European credit market that emerged with the introduction of the euro. Gary Jenkins, managing director of credit strategy at Deutsche Bank, which ranks second overall in high yield and sixth overall in investment grade research, says: “The importance of research has changed; this is a process with ebbs and flows. In 1995 it was not the centre of the market, while in 2000 it probably was. Now it has fallen away a bit again.” The determining factor is the default rate and tight spreads. “In 2002, when the default rate was at 11%, there was a real need for research. At the moment, the default rate is at around 1.8%, so there is not so much need,” Jenkins says.
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