If you’re young, bright, ambitious and out to make a fortune in London or Hong Kong, choosing a career path is easy get into credit research. Once a humdrum, nine-to-five job performed by academics, credit research is now an entrepreneurial task with huge rewards. Experienced analysts are some of the most sought after people in finance.
“It’s gone crazy. Headhunters are calling up all day long,” says Joseph Biernat, director of global credit research at Deutsche Morgan Grenfell, who is building up a team in London. “Hong Kong is even wilder.”
In Hong Kong senior staff are pulling in as much as US$1,000,000 a year while in London the range is between £100,000 and £300,000 including bonuses for juniors, going up to £500,000 for those with longer experience. Huge demand is driving up salaries: it’s doubled them over the past two years. Meanwhile, investment banks are having to cast their nets wider to find staff. Rating agencies are the traditional recruitment ground, yet suitable analysts in these companies are being poached faster than they can be trained. Banks are looking further afield, sometimes taking people out of internal credit or sales, or even persuading equity analysts to switch.
On current trends, a number of credit researchers will eventually attain the superstar status afforded to leading equity players, taking their turn to explain the mysteries of the markets to the television cameras. “They are becoming much more high-profile and have certainly moved from back office to middle office. They are much more highly regarded,” says Ron Bradley, managing director of executive recruiter Jonathan Wren Search & Selection.
Credit researchers themselves are becoming much more ambitious for their profession. Says Tariq Pasha, director of fixed-income research for NatWest Markets: “It’s my ambition to make credit research as important as equity research. Fund managers rely on equity research to pick shares, so why shouldn’t they demand the same from credit research?”
Many are starting to. In Europe the prospect of a single currency is driving the demand. Issuers, arrangers and investors are all aware that the forex element of many European bonds is set to disappear and credit premium will be the chief arbiter of returns. Investors across Europe will be able to buy numerous foreign bonds without currency risk. But to make good investments they will need to understand an issuer’s credit history.
In Asia, bond issuance is growing at a rapid pace, but much of the paper is unrated and corporate disclosure is often poor. Analysts who can decipher opaque balance sheets and explain to investors the inner workings of Asian companies are at a premium. Credit analysts are also in demand to back up banks’ origination work, advising on pricing and putting together research that will introduce the issue to investors.
Investment bankers think that credit research departments in London and Hong Kong will eventually grow as big as their counterparts in New York. On Wall Street, large teams specializing in sectors as diverse as paper and forest products through to healthcare have been in place for over a decade. The depth and breadth of the US corporate bond market, together with the sophistication of institutional investors, justifies their existence. But in London and Hong Kong the profession barely existed until a few years ago and what there was consisted of pedestrian research on minute spreads between liquid sovereign and supranational issues.
To plot the changes going on in the profession, Euromoney tracked down leading pracitioners and asked them about their work and their lives.
Joseph Biernat
American Joseph Biernat, director of global credit research at Deutsche Morgan Grenfell (DMG), claims to have been the first credit researcher in London when he came over with Merrill Lynch eight years ago. “People looked at me like I had two heads,” recalls Biernat. At first he sat on the syndicate desk and his colleagues asked him what he did. “I do credit research,” he said. “What’s that?” they asked.
Biernat’s British career started out with him advising US investors who did know what credit research was on UK bonds. It was a far cry from the life he had left, backing up traders on a frenetic Wall Street floor during the era of leveraged buy-outs. Single-A credits were turning into double-Bs overnight. “Back then, New York traders would yell and swear at you. Sweat would be pouring off me,” says Biernat. “I wouldn’t want to do it again.” He gave up the comfortable tennis-and-lunch existence of a provincial commercial banker to go into investment banking, gaining credentials at a rating agency along the way.
At Merrill, Biernat was on his way to the washroom when his pager went off informing him that the RJR Nabisco bid was under way. In the thick of it in New York, Biernat could swap yarns with other credit researchers at the Fixed Income Analysts Society. But in London, “there was no-one else in the market. It took me a long time to find another person doing [credit research],” he says.
Now the problem is finding staff to fill the empty slots. “The business has exploded. Everyone is starting to hire a team. London is where New York was 15 years ago. Asia is further behind and it’s impossible to hire people there. I have resorted to sending people out from here,” says Biernat.
Richard Deutsch
Fellow American Richard Deutsch, who is first vice president, fixed income research for Merrill Lynch in London, arrived in the UK three years after Biernat. Awareness of the profession had hardly improved in that time, he says. “Five years ago credit research [in the UK] was negligible. The only thing in the European market was sovereigns. No-one knew what credit research was,” says Deutsch whose first post in London was with Nomura International where he expected to be doing counterparty credit but ended up assisting east European corporate finance.
“The eastern European section needed credit experts to look at things such as a Czech privatization or to evaluate a Russian tobacco factory for a US investor,” says Deutsch. But the job didn’t suit Deutsch’s private life or his pocketbook. “It meant being in eastern Europe 60% or 70% of the time and that was too much,” he says. “What’s more my job content was corporate finance but I was getting counterparty credit remuneration.”
He quit and joined SG Warburg in 1994 before it was taken over by Swiss Bank Corp. This job combined counterparty credit with credit research, a lumping together that typified the early growth of the profession in the UK. But it’s a schizophrenic position to be in because an analyst is advising on swaps, which banks regard as a low-risk function, at the same time as assessing bonds for trading where a bank is prepared to take risk to make money. For the same credit “you could buy the bond but not do the swap,” says Deutsch.
Deutsch and Biernat worked together at Merrill Lynch before Biernat left to join DMG. Both share a commercial banking background as well as involvement in the 1980s junk bond era in the US. “It gives you a pretty good understanding of what to look for right on the cusp,” says Deutsch. “You must make everyone aware of the risks and you must definitely leave a paper trail. You want to be able to say, ‘I told you so’.”
Philip Crate
Head of global credit research at Banque Paribas Philip Crate arrived late for a meeting with Euromoney having been involved in a global teleconference with the bank’s Singapore analyst and US investors. The investors were distressed about the widening spread on Bangkok Bank yankee bonds. Bonds sold earlier in the week were taken back on Paribas’ books as a goodwill measure, even though Crate believes they were being perversely affected by Thailand’s economic difficulties.
“It’s important to determine whether the perception of risk is out of touch with reality,” he says. But Crate adds that, after doing the analysis, a good credit researcher should ask himself a most down-to-earth question: “Would I invest in this with my own money?”
Crate started his career at the Bank of England where he worked with Jennifer Ray, who now covers European banks for Salomon Brothers in London. Crate worked for Kleinwort Benson and BZW before moving to Paribas to build up a credit research operation.
“Outside the US, credit research has been a Cinderella function,” he says. “In Europe it’s been most developed by the sterling houses in the UK,” he says. “Traditionally though it was done by salesmen who could write. On Friday afternoons they would jot down their thoughts for the week and where they saw value in the market. It’s developed from that.”
Shira Cornwall
One former bond saleswoman who made the transition to research is Shira Cornwall. She started selling gilts and Eurosterling bonds at Salomon Brothers and then at BZW, where she moved into research. Noted for her market savvy and clear presentations, she is now in charge of European credit strategy at UBS. But she does miss sales. “It’s hard work on research,” she says. “I know the joys of sales, of going out to lunch and leaving when the market closes.”
Like most credit researchers, Cornwall’s team start work at 7am, scouring the screens for rating actions and corporate news before going into meetings with sales and trading. Then follow 12 hours of grind, five or more days a week, as credit research responds to the many demands placed upon it.
Chief among these is the need to be market-oriented. “You can have the best analysts in the world and write fantastic stuff but if you can’t market it, it’s pointless,” she says. Cornwall notes that issuers are starting to help banks to push their bonds by being as open and receptive to credit researchers as most already are to equity analysts. “I remember doing a report on building societies. One society didn’t like my negative comments and there were a few nasty letters,” recalls Cornwall. But eventually common sense prevailed and the society sent in its marketing people to find out how it could better present itself to fixed-income investors. “Issuers didn’t use to focus on bondholders as much as shareholders, but that is starting to change,” she says.
John Raymond
The perspective of a credit researcher and an equity analyst on a company or a bank can be quite different. John Raymond, director of international fixed-income research at Lehman Brothers in London, points out that equity analysts want to see big profit growth and distribution, for example, whereas credit researchers would be concerned about the extra leverage in the balance sheet necessary to achieve this. With banks, loan growth can be a problem for credit researchers if it lowers asset quality; and share buy-backs loved by equity analysts for pushing up the share price reduce capital strength, says Raymond, who joined Lehman Brothers in 1994 from UK rating agency Ibca.
“A bank with a strong balance sheet and, say, 20% tier-one capital is a high-quality issuer for us,” he says. “It’s not so important how much it earns.” With acquisitions, equity teams are pleased if the purchaser is paying a good price, credit analysts are unhappy if the acquirer’s balance sheet is weak.
Often these subtleties are lost on the markets. “The equities market influences the fixed-income market too much,” says Raymond. “Poor earnings performance can lead to falls in bond prices as well as share prices, but there is less justification for this.”
To be more sophisticated, investors need to be better informed and that’s where credit research comes in. “Issuers are having to get used to the increasing importance of fixed-income research,” says Raymond. “There were issuers who were unaware that it existed. Others didn’t think we were important and geared their investor relations machines towards equity.”
Vivek Tawadey
In some houses, the focus of a credit researcher’s efforts are much more on origination than on sales and trading. Vivek Tawadey, head of credit research at ABN Amro, says a large part of his job involves talking to companies about the pricing of issues, briefing companies on the questions they might get from analysts and investors, and helping to place the bonds. Ratings advisory is another important service and ABN Amro provided this for Kazakhstan, explaining to the government the methodology used by the agencies.
On the sales and trading side ABN Amro focuses on the more conservative parts of the market: flow-based transactions of high-grade securities rather than higher-yielding lower credits. But Tawaday has experience of the latter from his days as credit research head at Nomura International where he worked with Merrill Lynch’s Deutsch. The proprietary trading there involved a good hard look at all kinds of credits.
“When you start in credit research you have to build up credibility,” he says. “You may have to turn some situations down if the fundamentals of the credit are negative. Then when the trader sees a bond going south he says: ‘Thanks pal, you’ve just saved me 10 million bucks’.”
The riskier side of the business is not just about working out cashflows, says Tawaday: “It also means looking at the break-up value of a company. If the break-up value exceeded the par value of the bonds, they might be a good buy.”
Tawaday believes credit researchers should specialize and his team at ABN Amro includes analysts specializing in banking, the public sector and utilities. Most London-based houses divide their work very broadly between banks, corporates and sovereigns, but the more progressive are starting to hire the kinds of sector specialists found on Wall Street. Tawaday also plans to develop an asset allocation model for corporate bonds across maturities and sectors, cyclical and non-cyclical.
Jennifer Ray
Objectivity and independence are crucial qualities for credit researchers according to Jennifer Ray, vice-president, corporate bond research, for Salomon Brothers in London.
As with equity analysts, the objectivity of credit researchers could easily suffer under the differing demands of primary and secondary market operations. If a credit researcher has done work on a new issue it could be difficult then to deliver a strongly negative note on it to sales and trading. To avoid conflict, houses must maintain the independence and integrity of credit research.
“If I come across information that is not public [during work connected with origination] then I have to keep it to myself. It’s inside information,” says Ray. “But we must always be honest with sales. As soon as you say ‘Buy this, because it’s cheap’, you’ve sacrificed your reputation.”
“My job is to have an opinion. It may be that you have to present it in a particular way, but you must never lie. There has never been a case at Salomon Brothers when someone senior has tried to pressure me to say something I didn’t believe.”
The way Ray tells it a credit researcher’s life is sometimes akin to that of a detective. What do you conclude, for example, if calls to colleagues in ratings agencies are not returned. “It’s obvious a downgrade is going on,” she says. “If they were friendly and now they are not talking you know something is happening.”
One difficulty for a credit researcher is finding time to write. Most sit on or close to the trading floor so they are plugged into the market with all its noise and volatility something that a rating agency analyst wouldn’t have to put up with. It’s a problem putting out detailed reports to a deadline under such conditions: Ray recalls one week snatching only four hours’ sleep as she finished a document on French banks.
Chris Francis
Credit research is an even tougher business in Hong Kong, and firms wishing to build a team have a smaller pool to draw on. “It’s a different business here from the US or Europe,” says Chris Francis, head of fixed-income credit research at Merill Lynch in Hong Kong. “It involves a lot more ferreting around for information. A lot of the companies have a tight ownership structure through a series of holding companies, and a credit researcher has to do much more than study cashflows and debt ratios. He needs to know what are the resources and reputation of the people in charge.”
The lack of ratings makes the task even more difficult. “Asian bonds markets are credit-intensive because a lot of the paper is either unrated or low rated,” says Francis. “A couple of Asian sovereigns are double-A but most are single-A and below. Right from the start it’s a challenge.” Francis covered Asia from London for CSFB before moving out to the region.
Daniel Leung
Daniel Leung, head of Asian debt research for ING Baring, says the vastness of the region and the diversity of the credits is another problem. “The problem of being a credit analyst in Asia is in covering all the region,” says Leung. “While in equities there’s a fixed universe of listed companies, on the debt side things are wide open. Many companies are coming to the market for the first time, some are listed, others are not.”
A credit analyst needs to be able to talk 100 or so names at any one time, he says. “At present Thailand and South Korea are hot issues so questions focus on what is going on there.” Leung says that, with equity analysts based in local offices across Asia, he draws considerably upon the firm’s equities section for company insights.
Damien Wood
The leading house in Asia in credit research is Peregrine, which recognized a gap in the market early and has built up a large team of specialists. Damien Wood, who covers banks and financial institutions for Peregrine, emphasizes the market-driven nature of the firm’s research.
“We try to be much more than just a think-tank and to help with the business both sales and origination,” he says. “We sit on the sales floor and we have a lot of client and issuer contact. It seems to work.”
Wood contrasts this with his own rating-agency background. “It’s more profit-driven and transaction-driven. You have to react more quickly and you can’t plan. It changes from day to day.”
But Wood is out of line with his peers in that he does not predict a long-term bull market for credit researchers. He thinks they are subject to the laws of supply and demand like all other types of labour. Eventually the market will crash. “The banks are copying each other and not thinking deeply enough about what they are doing. They are just putting on staff. Eventually supply will outstrip demand.”
Like most predictions, Wood’s comes without a maturity structure and is probably not too alarming to the aspiring credit researcher. On current pay trends, most credit researchers could make their fortunes and retire before the shakeout.
