Credit Research Poll 1998: Pioneers in their field
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Banks are building up their European credit research in the run up to Emu. Teams are being bolstered and specialists hired. But who is getting it right? The first ever poll of European credit research gives investors the chance to decide. SBC Warburg, Merrill Lynch and JP Morgan all did well, writes Brian Caplen. The poll was conducted by Rebecca Dobson.
SBC Warburg Dillon Read came first overall in Euromoney's trail-blazing European credit-research poll but Merrill Lynch swept the board in individual categories, coming top in 11 out of 13 tables. Other banks that performed well were JP Morgan, which came second, and Deutsche Bank, which came fourth.
The fact that SBC Warburg Dillon Read won the overall poll and Merrill Lynch triumphed in individual sections is explained by the houses' different approaches. SBC takes a global approach to credit research, not identifying with any particular sector and sending its main research product, Credit Advisor containing analysis of North America, Europe and Asia, to a geographical spread of investors.
By contrast, Merrill Lynch, a pioneer of credit research in Europe, began its operations with a geographical split but is gradually moving towards sectoral analysis as practised in the US where credit research is more developed. So far the European market is not large enough to support credit analysts dedicated to one sector and they tend to cover several. Meanwhile, emerging markets remain a sector in their own right.
"We began to migrate slowly from a regional to a sectoral approach as the high-yield market started developing," says Richard Deutsch, Merrill's co-head of European credit research. "We thought it would need a sector strategy to cut it."
SBC Warburg Dillon Read's head of European credit research, Andrew Evans, says that while internally analysts focus their efforts sectorally the research is not presented in this way. "We present ourselves as a global team with regional European, North American and Asian teams putting research into the whole thing. We are consistent with our coverage and global with our coverage. Investors in France who receive Credit Advisor get research on all three regions."
The major forces driving the growth of credit research in Europe are the onset of European Monetary Union and the prospect of a large, single currency high-yield market. The rise in emerging-market issuance is adding another dimension. Responding to these trends, most banks have reorganized their research departments to make them more effective. New staff have been brought in and competition between teams is becoming intense. Against this backdrop, the idea for a Euromoney survey was born and succeeded in generating intense interest among investors and banks alike.
SBC used to do its credit research under the auspices of the economics team but after a reorganization credit researchers are now part of the overall credit business. Credit researchers do not sit together as a group but are dotted about the trading floor to be nearest to the traders dealing in the areas they research. Evans and fellow corporate analyst Denise O'Callaghan sit near the sterling traders since this market is most advanced in its use by corporates whereas Jackie Ronaldson, who covers financial institutions, is located near the traders of asset swaps and FRNs.
"We try to ensure that the credit research we do is focused on the business rather than having a free-standing rating-agency type of group. We are focused on the market," says Evans.
Like a number of banks, SBC looks at credit research across a range of products. "The product is less important than the credit risk," says Evans. "As a bank we have integrated our credit research of loans and bonds."
Merrill Lynch began expanding its basic three-person team split between emerging and developed markets about a year ago. An early hire was Helen Rodriguez covering southern European corporates followed by Marc Pinto to research western European banks. The team is building specialization, with Martin Hornbuckle covering media and telecoms, one of the few sectors large enough to justify a single analyst.
"Merrill correctly anticipated that the market would develop quite dramatically and that there would be strong growth in bond issuance," says Deutsch. "We wanted to be out front and have tried to differentiate ourselves as a cutting-edge investor service."
JP Morgan has brought together its credit researchers from the commercial bank together with those on the securities side to form the kind of team it wants. "In a post-Emu world we believe all products should be integrated into a single business - emerging-market securities, loans, credit derivatives, high grade and high yield," says Edward Marrinan, head of European credit research for JP Morgan. Marrinan says the aim is to take an equities approach to credit research with analysts specializing. "So if we see a name we like and we can't find a bond we will find a synthetic product or a loan."