Credit Crunch!

clive horwood

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It’s terribly easy to get bullish about the development of the credit markets in Europe. Those who work in the business can comfort themselves in the knowledge that the corporate credit markets and all that goes with them – from plain vanilla bonds to more complex credit structures and credit derivatives – have shown a dramatic growth over the past five years, albeit from a very low base.

But certain areas of European fixed income require urgent attention. Fund managers in the European credit markets are becoming increasingly exasperated by the quality of the service they receive from bank sales teams. Put simply, investors are annoyed by what they see as the crassness of the approach of many credit salespeople.

I know a credit fund manager who, within three hours of getting to work, receives 150 e-mails per day from sales teams with trade ideas. What is he supposed to do when a salesman who doesn’t know him from Adam sends him 20 messages in one morning containing trades with just the bid-offer spread and suggested buy-sell sizes, which don’t even give a context of where the trades may have been the day before? This means the investor just has a series of ticker names and numbers against them but no idea of the direction of the market. And often the trades are not executable at the prices quoted.

To add insult to injury, the e-mails are prepared by the bank’s credit traders and sent to the salespeople to forward on to the buy side. But many of the salespeople don’t even bother to remove the FW: from the e-mail subject line.

The perception among fund managers is that many of the professionals involved in credit sales do not care. A lot of the individuals staffing credit sales desks are former government bond salespeople. Fund managers find that the level of communication they have with the salespeople rarely motivates them to enact a trade.

In effect, sales desks are undertaking a scattergun approach, in particular in the plain vanilla corporate bond markets: they shove out a whole load of poorly considered trade ideas and hope that one or two get picked up on.

Of course, the level of service is not universally poor. If you work in certain areas of the market, you are likely to do quite well out of a bank’s sales team. For example, salespeople covering hedge funds tend to be much more in tune with client needs, and much more familiar with the market.

So why this inconsistency in quality of service? One of the main reasons is the different levels of compensation to different markets and audiences. The best-paid jobs in European credit sales tend to be in the structured product side, as well as salesmen covering hedge fund accounts. So that is where the talent congregates.

And you can understand why. Most sales teams now work on the concept of sales credits rather than on a pure commission basis. The credits are better for higher-margin products. Those trades are in the structured market rather than the plain vanilla market.

A salesman who sells a few million of a structured product will likely receive the same sales credit as a counterpart who has sold tens of millions of plain vanilla product. One salesman of my acquaintance was earning relative peanuts three or four years ago in the plain vanilla markets; now, he annually takes home a large seven-figure sum. How does he do it? He goes round some of the less sophisticated accounts in Europe flogging single-B tranches of CDO structures.

This is an individual with excellent credit skills, the sort that would meet the needs of many of the fund managers who complain about the dearth of talent in the corporate credit market. But he would be shooting himself in the foot – or at least shrinking the size of his wallet – if he were to rely on the wafer-thin sales credits available in the cash credit market where poor liquidity means he could not execute nearly the volume of trades he needs.

Contrast this situation with the example of the US market, where the salesman is king. In the US, it is typically the sales team as much as the research analysts who look at the market and come up with the trade ideas. They are the gurus, the stars of the market – immortalized by Tom Wolfe in the form of Sherman McCoy, the bank trader in Wolfe’s novel The Bonfire of the Vanities, who gloried in the title of “the bank’s top producer”.

In Europe, when it comes to credit sales, it’s more a question of ‘The Dustbin of the Banalities’. Fund managers aren’t happy. Investment banks take note.

Clive Horwood is former editor of Credit and a director of Financial Issues, a specialist fixed-income communications company. News, views and comments to: [email protected]

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