Debt capital markets investment bankers assembling at Euromoney’s two-day forum for global issuers and investors in London at the end of last month would have been unhappy had they listened in on one panel discussion. The talk turned to the difficulty of attracting talent into the conventional high-grade debt business of issuing bonds for investment-grade corporate and agency borrowers and distributing them to conventional investors.
What was once, at the start of this decade, the cutting edge of the investment banking business, when firms were key intermediaries for issuers in the capital markets, has been over-shadowed in recent years not just by M&A and equity capital markets, the traditional marquee investment banking businesses, but by principal investing, prop trading and, even within the debt universe, by leveraged finance and structured credit.
The story was told of a senior DCM banker addressing his firm’s most recent graduate intake and asking, at the end of his talk, for a show of hands from those interested to pursue a career in investment-grade debt capital markets. From 50 people in the audience, there rose just one faltering arm.
Is that graduate the slowest of his class or is he, perhaps, one to keep a close eye on?
At first glance, one might be forgiven for thinking the volunteer will not survive long in the cut-throat world of investment banking. His classmates have better identified the prevailing mood inside their chosen industry. Many leading firms aren’t that fussed about the investment-grade debt business any more. Those leading the change in the business model from agency to principal, notably Goldman Sachs, see little reason for doing high-volume, low-margin new issues for high-grade borrowers. They make no secret of being happy to pass up as much of that as they can en route to doing funkier, higher-margin deals for difficult credits in complex forms. Merrill Lynch, for years the leading firm, has let that franchise slip.
Has this attitude of benign neglect become so prevalent that it offers a breach in the barrier to entry through which new investment banking competitors can burst? Bank of America, which has the most impressive momentum of any arranger in the conventional debt capital markets in the US and has invested heavily in sales, trading and research at a time when others are giving the business less priority, clearly sees it as a good business in its own right. It is also a way to increase the bank’s relevance to corporate clients and other issuers and to investors. There is an obvious precedent. This is how Citi, now in the top three global M&A and equity capital markets firms, first made its name.
Is the tide set to turn? Recently, Euromoney asked a senior debt markets executive at a firm renowned for its expertise in derivatives and complex, structured credit products what was new at his shop. The answer came as a surprise. He has been aggressively hiring traders and other veterans of the cash bonds business. He sees a great opportunity to grab market share, as the competition abandons this business in an attempt to follow his own firm’s lead in credit derivatives. Firms have been suggesting to investors complex ways of hedging their positions, ignoring the fact that most just want to be able to sell into liquid cash markets. His firm now sees potential for a big increase in profitability in the conventional cash bond business.
Don’t show that lonely volunteer the door yet. He just might be on to something.
