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Opinion

Macaskill on markets: High-yield high-fliers

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

As the high-yield debt markets converge further with leveraged loans, the model of a modern head of leveraged finance at a big house is a banker with a focus on lending, such as Andy O’Brien at JPMorgan or David Flannery at Bank of America Merrill Lynch. An Irish surname isn’t obligatory, but a reputation for hard work and patient application to client needs is, and flashy behaviour is not encouraged.

However, some veterans of the buccaneering early days of high-yield debt sales are still active in the market. Drexel Burnham Lambert, the firm that built the market for high-yield bonds, imploded in 1990 after its founder, Michael Milken, was implicated in a series of scandals. The torch was taken up by DLJ in the 1990s and the firm was sold to CSFB in 2000 for $12.2 billion. Bennett Goodman, a Drexel veteran who was head of leveraged finance at DLJ, took the same role at CSFB and quickly gained a reputation for securing compensation levels for himself and his team that were aggressive even by the Wall Street standards of the day.

This seemed to infect other CSFB employees – not that the firm had ever been short of staff who combined talent and a healthy sense of their own value.

Jack DiMaio, the top high-yield bond trader at CSFB before the arrival of Goodman and his team, was an obvious potential hiring target for his old boss, Bob Diamond, who headed Barclays Capital after leaving CSFB.

When Diamond attempted to hire DiMaio and some 40 other fixed-income traders in April 2001, Allen Wheat, CSFB’s chief executive, made a counter-offer that guaranteed DiMaio $15 million a year for three years.

The size of the guarantees for DiMaio and his team contributed to the firing of Wheat by Credit Suisse group chairman Lukas Muhlemann soon afterwards in July 2001.

DiMaio reached a rapprochement with new CSFB head John Mack that involved a restructuring of his bonus deal, and stayed at the firm until 2005, when he left to set up a hedge fund called DiMaio Ahmad.

The new fund was an active buyer of high-yield debt with added leverage to boost returns, which was not a recipe for success in the approach to 2008.

DiMaio bounced back in July 2009, when he was hired by Morgan Stanley as head of interest rate, credit and currency trading. DiMaio’s new job came with a reporting line to global sales and trading head Mitch Petrick. Two domineering bankers with similar backgrounds in high-yield credit trading – Petrick had previously been head of leveraged finance and corporate credit at Morgan Stanley – were unlikely to form a friction-free partnership. When Petrick was fired in December 2009 the chief reason was the broad underperformance of the bank’s sales and trading franchise in a year when Goldman led the industry to record revenues in FICC. Rivals speculated that the presence of DiMaio might have made the decision to fire Petrick easier for the incoming senior management team at Morgan Stanley, however.

Petrick, like DiMaio, quickly bounced back from adversity and in March this year joined Carlyle to lead the private equity firm’s leveraged finance, mezzanine and distressed investing operations.

Once Petrick has ramped up the leveraged finance business for Carlyle he will be an important target client for Wall Street dealers, although he might require assiduous wooing by Morgan Stanley. One of DiMaio’s other former bosses, Bennett Goodman, is already one of the most important buy-side players in leveraged finance.

Goodman set up a credit fund called GSO in 2005 – around the time DiMaio was launching his own investment vehicle. Goodman displayed impeccable timing in selling GSO to Blackstone in March 2008 and the private equity firm’s financial strength allowed him to ride out the credit crisis later that year.

GSO had fee-earning assets under management of $23.6 billion by the end of June 2010 and has been able to pick up assets from other CLO managers such as Callidus Capital, as well as boosting its direct leveraged loan exposure.

Another former CSFB leveraged finance colleague of Goodman and DiMaio is also a big buy-side figure now, although he has shifted to an emphasis on vulture investing. Mark Patterson, who had been head of leveraged finance at CSFB when DLJ was bought, co-founded MatlinPatterson in 2002 and is now a substantial and often highly visible buyer of distressed assets. Along with partner David Matlin, a former head of distressed trading at CSFB, Patterson has taken positions in firms such as Nortel. That stake was used last year to mount a bid for Nortel that failed. However, it drove up the price of MatlinPatterson’s holding.

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