Investment banks have quickly realised that, to compete in the new credit markets of Europe, they have to provide constant research on the credits which form it.
For investors looking to make relative value trades, such research can be vital - fund managers with a growing number of issues to choose from have little time to carry out their own in-depth research.
But analysts with credit skills remain the exception rather than the rule. The rush to recruit has led to a battle for top people between investment banks and the rating agencies, and the compensation of the experienced credit analyst has skyrocketed.
Philip Moore reports on the role of the credit analyst in Europe's new debt capital market.
In the 1980s, spotting the difference between an equity analyst and his credit counterpart was easy enough. The best equity analysts achieved virtual cult status; their photographs and soundbites appeared in the press almost every day; and with their salaries reported in several cases to be at superstar level, one half expected some of them to release pop records.
By contrast, the stereotype of the credit analyst was of an almost Dickensian clerk, propped anonymously on a high stool and scratching endless figures with a quill pen deep in the bowels of an unglamorous commercial bank.
Clearly, the emergence within Europe of a far more active corporate bond market is fast eroding this schism between equity and credit analysts.
Ron Bradley, a director of the recruitment company Jonathan Wren, who began to carve out a niche for himself in the fixed income credit research area six years ago, says that the very best London-based credit analysts can now command all-in pay packages of between $750,000 and $1m.
But he adds that the same analyst's counterpart in New York can probably expect to earn double this figure - confirming that Europe remains some way behind the US in terms of salaries, as well as in terms of the depth and liquidity of the corporate bond sector.
Bradley sees the gap between equity and fixed income analysts being reduced further still. "The league tables of debt side analysts which are starting to be published now will result in them becoming much more like equity analysts," he says. "At the moment we don't have things like the Extel survey in the fixed income market, but that will come."
Bradley also points out that the recent development of the European corporate bond market, characterised by an increase both in issues from investment grade companies and from higher yielding issuers, is starting to create divisions within the world of the credit analyst.
The reasons for this are obvious enough. Bradley says that for most credit analysts it is "extraordinarily difficult to command a base salary of more than £100,000" and that what he calls "the cream" in terms of remuneration takes the form of bonuses linked to performance.
Clearly, spectacular performance (on the upside as well as on the downside) is much more likely to be generated in the volatile high yield sector than in the more consistent investment grade bond market.
"So you do see divisions within banks from time to time," says Bradley, "especially when somebody who is doing very well on the investment grade side wants to make the switch into the more lucrative higher yielding market and for whatever reason is unable to do so. Many investment grade analysts are frustrated high yield analysts."
While at a broad level the gap between equity and credit analysts may increasingly be closing with regard to the perceived value of fixed income research, other substantial differences between the two remain.
First and foremost, while many of the basic skills involved in the two jobs may appear similar, the ultimate objectives of an equity and a credit analyst are very different. Because it is the equity analysts' job to identify potential growth, the theory goes, they will always take a higher level of risk with their recommendations than their counterparts on the credit desk, and command higher salaries as a result.
The requirement to pinpoint relative growth prospects also means that in many instances equity and debt analysts will take a diametrically opposed view of the same company. One banker points to UK financial institution Halifax as an example.
"Equity investors don't like Halifax because they keep saying it's got too much capital which it does not know what to do with," he says. "But debt investors love Halifax because it's a domestic business that makes solid and predictable revenues at virtually no risk. It's chalk and cheese."
Some bankers extend this difference to an apparently ludicrous extreme, saying that in some instances, from a purely technical point of view, the optimum development from a credit researcher's perspective could be for a company to cease trading altogether, removing any vestige of risk from future strategy and leaving the residual cash to do nothing other than service debt.
This is, of course, hypothetical in the extreme, and in any event some credit research specialists point out that in practice there is a link between the equity analyst's preoccupation with growth and the fixed income analyst's concern with protection on the downside.
Kate Thurman, head of credit research at Dresdner Kleinwort Benson in London, makes the point that in today's environment, in which the delivery of shareholder value has become a buzzword throughout Europe, management with no clear growth plans may come under pressure from equity investors.
If that pressure results in management taking radical action in the form of looking for potentially risky acquisitions, for example, this will very rapidly come to the attention of credit analysts and bondholders.
Another critical difference between equity and credit analysts, say some bankers, is that the client-poaching factor does not yet seem to have worked its way into the recruitment of credit analysts. It is well known that a major reason for the spiralling pay packages offered to equity analysts arises less from their views on the earnings per share potential of, say, Glaxo, and much more from the length and quality of their client list.
But bankers say that lower margins in the fixed income market coupled with the relative underdevelopment of the corporate bond sector in Europe have dictated that this is not yet a phenomenon among credit researchers.
"It's true that among equity analysts there is a lot of movement from firm to firm because of their perceived ability to pull clients," says one credit research head. "And it is also true that I have a relationship with a variety of issuers and they have an impression, right or wrong, that they can draw a degree of comfort from that.
"But I don't think anybody out there is going to be prepared to pay me $3m-$5m a year for my ability to pull in a debt mandate which may earn us fees of $500,000. The super deals are in M&A and equity offerings, because margins there are so much higher."
Be that as it may, competition among investment bankers to find top quality credit research analysts is clearly intensifying. One obvious hunting ground for credit analysts is the ratings agencies, and the last few years have seen a number of analysts move from organisations such as Standard & Poor's, Moody's or Fitch IBCA across to the investment banking community.
But while moving from a ratings agency to an investment bank may seem an obvious enough call for a talented and ambitious credit analyst, there is no guarantee that success in one environment will automatically ensure success in another.
Nor is it written in stone that an analyst at a ratings agency will necessarily want to make the move to an investment bank. "There is the whole issue of lifestyles to consider," explains one head of credit research at an investment bank eager to recruit more analysts.
"One individual who I've been trying to winkle out of a ratings agency has told me that he reckons he would have to work at least 10 hours a week more in an investment bank than at the agency. So the step-up in pay which he is expecting is substantially higher than we had bargained for. His other reservation is that a ratings agency can give him absolute job security which a bank may not be able to match."
One analyst who has made the move recently is Gerry Rawcliffe, once of Fitch IBCA in London, and now assistant director of financial institutions research at Dresdner Kleinwort Benson. He says that a key difference between his daily life within the two institutions is that, as a banker, he needs to be much more market-focused, both at a primary and secondary level.
"A lot of the work we do in research is in supporting new issue origination," he says, "which involves bringing a credit which may be unknown to the market and telling the credit story to investors."
In the secondary market, meanwhile, he adds that much of the focus needs to be on identifying and explaining relative value among credits, which by definition is not something the ratings agencies are concerned with.
Bradley agrees. "The trick for credit analysts is to be ahead of the ratings agencies and to be able to spot relative value," he says. "The better analysts are those who are able to spot anomalous pricing or ratings and if they do so that can be highly profitable both for the bank and for their clients."
Just how profitable was underlined in an exhaustive bulletin on credit analysis published by Gary Jenkins, head of European credit research at Barclays Capital.
This pointed to the example of a 10 year bond issued by Porsche in April 1997 which was priced at 14bp over the Bund. "By lunchtime on the day of issue," this noted, "demand for the name was so strong that the spread tightened to flat with Bunds. This was clearly an anomaly and did not reflect the actual credit strength of Porsche, a luxury car manufacturer with a cyclical earnings profile."
In other words, any credit analyst able to identify that massive retail demand for the Porsche bond arising from its immediate name recognition would send its spread nosediving would have delivered a very profitable trading idea to his clients.
A by-product of this is that there are a number of occasions when banks' research ought to have a more profound influence on spreads than that of the ratings agencies. At JP Morgan in London, head of European credit research Ed Marrinan says that there is no question that the research produced by the ratings agencies remains at a very high standard.
"But the very nature of the way they conduct their business creates opportunities for banks such as ourselves," he says. "From a regulatory standpoint the ratings agencies have a very formal procedure which they must adopt each time they publish a rating. By definition this is a lengthy process, so their views on companies may not be as timely as the banks' views."
Marrinan adds: "So if a sovereign borrower in Europe is downgraded by the ratings agency it need not mean that the spreads will move as a result. If credit analysts are doing their job properly, the market will have already discounted the ratings downgrade. In general the banks will therefore have more of an influence in driving spreads than the ratings agencies do."
Another clear advantage which banks have over ratings agencies, says George Johnstone, who analyses European sovereign credits at Barclays Capital in London, is the simple consideration that a bank's research is provided to its clients free of charge, although the bank will clearly recoup its outlay through commissions.
Johnstone accepts, however, that in the realm of sovereign credits, bank analysts may be able to offer less in terms of value added than the ratings agencies, given that the range of ratings between sovereign credits in Euroland is so narrow.
"But an important part of my job," he adds, "is analysing the creditworthiness of sovereigns and relating my views to those of the ratings agencies, which is especially important for sovereigns which have split ratings."
If there is one department in which the ratings agencies would appear to have a clear edge over their bank counterparts, it is in the objectivity which they can bring to their analysis. Because the corporate bond market in Europe remains relatively underdeveloped, much of the available credit research is deal-specific material published by a borrower's lead or co-lead manager, which has obvious implications for its objectivity.
Bradley says that investor sophistication is, however, such that the majority of large institutions are very alive to this potential conflict of interest. Most investors, he says, monitor very studiously the recommendations published by banks, suggesting that those which allow their judgement to be clouded by corporate finance considerations will very soon find their credibility terminally eroded.