Credit research poll 2003: Bye-bye sell side, hello buy side


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Things are so tough in investment banking that major institutions are prepared to let award-winning credit analysts decamp to the buy side. Among them are some high-fliers in Euromoney's latest annual credit research poll. Kathryn Tully reports.

Credit research poll 2003
Winners of the credit research pollMethodology and explanation of tables
Did you predict the Ahold scandal?Life after Deutsche: the rise of the independent

A look at the top positions in each category in Euromoney's most comprehensive ever credit research poll shows that Deutsche Bank has performed particularly strongly in 2003, winning six out of 18 categories, coming second in five and third in another four. This is an impressive achievement and an improvement on Deutsche's results in last year's poll in most categories. The bank was particularly successful in high yield, winning four out of five categories.

So it's surprising to learn that two of Deutsche's most senior analysts responsible for these victories - identified in a poll drawing responses from 950 credit market investors responsible for over e3 trillion of assets under management - have been made redundant since the ballot was sent out at the end of January.

Simon Adamson, co-head of European credit research, left Deutsche in February after six years' service and has subsequently joined independent research firm CreditSights [see Life after Deutsche: the rise of the independent, this issue]. Helen Rodriquez, director of European high-yield research left the bank in January. At press time, there were rumours that she too was going to join CreditSights. But CreditSights denies this and she is not thought to have joined another bank.

Times are hard in investment banking, even in debt markets which are faring much better than equity and M&A. It seems that high marks from customers are no guarantee of job security for analysts. Cutbacks throughout European credit research teams, which have become a drag on some banks' P&L, have been a feature of the market for months now.

Fixed income might have been the best-performing department for many banks over the past year - and so credit research teams were largely insulated from the first waves of redundancies to hit the industry. But banks discovered in 2002 that the credit research teams that they had spent time and money expanding rapidly in boom times were now proving to be a cost that neither the trading nor origination sides of the debt business could afford to carry.

Bear Stearns is a telling example. Just over a year ago Bear Stearns had 17 credit analysts in Europe, but the widely respected head of the team, Phil Crate, departed after Christmas and is still looking for a new role. The only analysts left are Jens Jantzen (the most senior), Matthew Little, Barry Murphy and Tiago Parente. "Bear Stearns set up in the credit research business at exactly the wrong time. They built up a very large group, but they were not generating the trading flows to sustain the team," says one analyst.

Even the banks with strong credit trading desks supporting a quality research team, such as Deutsche, have concluded that credit analysis has become too expensive. "Over the last 10 years, credit analyst teams have become more aligned with trading desks and attached themselves to that P&L, which has put their pay packages up enormously," says Alan Everett, managing director at Sequoia Consulting and a credit analyst recruitment specialist. "Some banks had been going nuts increasing the sizes of their teams, and banks with just half a dozen analysts can now find themselves facing a multi- million dollar wage bill."

According to Everett, mid-range credit analysts might be earning approximately $175,000 and sector heads $500,000. As banks cut costs, heads of credit research who, according to Everett, can command salaries of $750,000-plus, can suddenly find themselves vulnerable, particularly if they no longer write research themselves.

But such high-profile departures as the ones seen at Deutsche are quite shocking. Adamson and Rodriguez have played a large part in pulling the bank up in the category for best overall investment grade from fourth last year to second this year, and best high-yield from second to first this year. This is in addition to coming top in other external rankings. As one analyst puts it: "Three to four years ago your job would have been secure on the basis of winning a poll." Deutsche would not confirm whether the bank would replace the co-heads of European credit research but it is not planning to replace Rodriquez as head of European high yield. The survivors in her team will now report to the head of credit research in the US. It looks likely the high-grade team will go the same way.

Other senior analysts to have left Deutsche in the past few months include Anya King, the highly regarded former co-head of European credit research along with Adamson; and Nesche Yazgan, who covered investment grade telecoms equipment, automotives and transportation. Both have joined CreditSights.

With the departure of so many key analysts, together with the absence of local heads to guide the business in Europe, it will be interesting to see how Deutsche performs in next year's poll.

Deutsche is not the only bank whose investor poll-winning analysts have moved on during the past couple of months. Felix Kaiser, whose team has come top for investment-grade telecoms for Goldman Sachs again this year, is to leave the credit research team to become part of Goldman's corporate risk solutions group. David Meade, who has helped Morgan Stanley top the poll for investment-grade automotives and general industries for the past two years, left after 10 years at the bank to join one of its key clients as a senior credit analyst at Fidelity Investments at the beginning of March.

Meade will continue to cover the same sectors that he did at Morgan Stanley - autos and manufacturing. "I've been increasingly interested in the investor side of the business for a while as demand for in-house research capabilities continues to grow," he says.

Meade is just the latest notable sell-side analyst to defect to the buy side, where, unlike on the sell side, several investment firms are expanding their credit research teams. "A lot of buy-side firms came unstuck last year because they didn't have enough home-grown analysis. They need the credibility to prove that they are not just crystal ball gazing," says Everett.

Alongside Meade, Fidelity announced two other new hires at the end of March: Olivier Szwarcberg, previously co-head of European credit research at Bear Stearns, where he covered financials, and Dierk Brandenberg, who was head of European credit for the securities lending and institutional money market funds business at Deutsche. Fixed income now accounts for 40% of Fidelity's assets under management. "The quality of our credit research is a distinct competitive advantage for us," says Jenny Toolin McAuliffe, director of research at Fidelity. "In these market conditions, our focus is to provide solid defensive coverage of every name we own."

Schroders Investment Management, Standard Life and Norwich Union have also been expanding their teams in the past few months. And although the buy side has traditionally paid much less than the sell side, some of the salaries on offer to senior analysts making the move from banks to fund managers at the moment amount to £350,000 or more. Clearly, to hire analysts with 14 years' industry experience like Meade, the buy-side will have to pay up.

According to Everett, senior sell-side analysts find the buy side attractive despite the likelihood of a pay cut, partly because there is more job security than on the sell side, and partly because the quality of life is better. "People leave because they have been fed up with all the sell-side shenanigans and the life style is more civilized - you can leave work at 6.30pm. A lot of credit analysts are also not hugely egocentric, they are very level-headed people who enjoyed the ride while it lasted and are happy to take their recent riches and head back to a less pressurised environment on the buy side."

Credit analysts at the banks have long grumbled about the amount of time they spend on written research to support new issues their banks are lead managing. Not only does this carry the taint of bias, it's a distraction from covering other issuers' debt where there may be much more secondary market action. And credit analysts typically have to cover far more companies than do equity analysts. Now, working conditions for sell-side analysts are getting still more difficult, even for those not threatened with redundancy. For a start, the number of corporate scandals coming to the fore in the past 12 months has made the job a lot more demanding. Meade says: "Research has obviously been a much tougher job this year with so many names under pressure."

"The market in Europe is obviously very nervy," says Gary Jenkins, head of European credit research at Barclays Capital. "There was a time when you would type out a message on the company, and if it was a particularly nasty result, this might move the market three or four basis points. The volatility in the market today means the job is totally different. You cannot afford to miss anything, because nowadays the move could be 300 or 400 basis points."

Analysts face the dilemma that they want to avoid having a buy recommendation on the next corporate to blow-up, but might risk missing out on key performers that could benefit the investment community if they play it too safe. "Analysts do feel they're on the line," says Matt King, vice-president and head of European credit strategy at JPMorgan. "They're more worried about being overweight in a credit that blows up than they are about missing a rally". But with everyone now so cautious, he says this year will be difficult because people are so focused on avoiding a blow-up, they risk missing a rally on a lower-quality name.

The other knock-on effect of deteriorating credit quality is that most banks have had to devote staff specifically to covering cross over credits. Meanwhile, investors are demanding more in-depth information on companies and more one-to-one contact than ever before. Analysts have to take hours wading through many more pro forma and exceptional items in company reports. But investors want the analysis straightaway. On top of that there are more and more credits to cover as analysts take on responsibility for more sectors in response to job losses in credit research teams. The sheer volume of credits in the market is also a pressure - Barclays Capital's 2003 European corporate bond market overview covered over 600 credits, 85% of the European iBOXX corporate index.

Tarred with the same brush

And the whole analyst community has been tainted following New York state attorney-general Eliot Spitzer's crusade against corrupt equity analysts. "This was once regarded as a job that had a high level of integrity," says one credit analyst. "Now for a while we've become no better than estate agents. I think that's unfair, because there were only a very small number of equity analysts who abused the system and now everyone's tarred with the same brush."

This has produced a lot of uncertainty. Catherine Gronquist, director of international credit research at Morgan Stanley, says: "The regulatory situation is evolving post-Spitzer, so it's really a work in progress." Most apparent has been the strengthening of Chinese walls around the credit research community in Europe. In-house compliance staff are all over credit analysts like a rash.

So between banks cutting costs and coming to work being less enjoyable than at any time in the market's history, a generation of credit analysts is leaving the industry.

But the grass is not necessarily greener on the buy side. Everett says that of the eight credit analysts he has placed in the past 18 months, three who had gone to the buy side from the sell side have headed back again. "The reason cited is that it's boring. Another common problem which has been mentioned several times is that if you get the analysis correct, the fund manager takes the credit but if you get it wrong, you get the blame." He adds that buy side analysts are also often expected to cover far more issuers then they can feasibly cover thoroughly and that their opinions are not considered as much as they should be when it comes to investment strategy.

At the moment, Everett thinks the number of buy-side players getting into hedge fund investing means that their need for decent credit analysis is still growing. But how long the buy side will continue on its recruiting spree is uncertain.

The good news is that a few banks are still looking for new talent and Everett has just placed two new buy-side analysts with sell-side firms. But the boom times of credit research teams of more than 20 analysts attracting investment banking salaries are over. Some banks are watching their most venerated analysts walk out of the door.

The spirits of the departed may yet come back to haunt banks with big proprietary trading desks and banks whose eager bond salesmen might catch the blame for putting investors into dud credits. "You need better analysts in tough times," says Jenkins.