Merrill Lynch is reorganizing its fixed-income research division to combine high-yield and investment-grade coverage in several sectors. The move is a response to a market which has seen an unusually high number of "fallen angels," or credits recently downgraded to junk status over in recent months, and the expectation that those credits or others may recover and move in the opposite direction. "Having investment grade separated from high yield is less tenable in the current environment than it was five years ago," says Thomas Sowanick, co-head of fixed-income research.
This move comes at a time when rumors are circulating regarding other structural changes within Merrill's fixed-income division. Douglas DeMartin, a managing director in the New York fixed-income trading department, confirms that additional personnel changes are going on within fixed-income, but declines further comment.
The research changes include three investment-grade analysts picking up some high-yield coverage: John Forrey, who covers insurance, Leo Kelser, who covers utilities, and Jay Weintraub, who covers financial institutions. On the other hand, high-yield retail analyst Clare Schiedermayer will pick up some high-grade credits, displacing Stuart Rossmiller, who will move to telecom. No one will be released as a result of the changes. The convergence in credit quality has created either a vacuum in coverage, or, in some cases, an overlap, Sownick says, adding that other firms have made, or soon will make, similar changes. He says he is unaware of any wider firm reorganization.
A head of high-yield research at another top firm says the issue of whether, and to what extent, the various credit grade sectors of research should be integrated is not a new one, though to his knowledge only Salomon Smith Barney among top firms integrates coverage across the ratings ladder. He says the integration could provide cost savings and an opportunity to go after "crossover" business--credits that move from high-grade to high-yield or vice versa. In spite of these advantages, he says his firm has no plans to combine coverage, because the work involved would be immense for several reasons, among them the need to forge new relationships on the buy-side. "I don't even talk to the investment grade guy at Fidelity (Investments)," he says.