Debt/Credit Sector View: Prop Traders Lead the Way

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All signs point toward this year's run-up in debt markets producing a bright forecast for investment banking jobs lasting well into 2006. The reason: explosive growth in debt markets, fueled by alternative products such as CDOs (collateralized debt obligations) and mortgage-backed securities and the proprietary trading of them.

Banks, hedge funds and private equity firms alike have increased their exposure to these pools of debt such as asset-backed securities (ABS) and derivatives, creating opportunities and competition for banking professionals who can trade, analyze, and manage the risks associated with these complex, structured products.

Most of money being raked in on Wall Street these days is coming from prop trading, where a firm trades its own book as opposed to a client's. While the cash debt business has sputtered, the ABS market, layered debt that includes home and auto loans as well as credit card receivables, has enjoyed record growth. Total ABS issuance, led by CDOs, was $555.6 billion during the first half of 2005, rising 35% over the same period last year, according to the Bond Market Association. With continued economic growth, home loan and credit card receivable volumes figure to stay at high levels.

As a result, Gary Goldstein, chief executive of the Whitney Group, an executive-recruiting firm in New York, says banks are allocating capital to securitized products and are on the prowl for candidates who can do more than simply manage relationships. Firms are seeking professionals who can who can trade and handle principal investing. Goldstein says he has been increasingly busy trying to fill positions at banks in areas such as CDOs, credit derivatives and mortgage-backed securities.

Dough Hanslip of search firm Korn-Ferry International says that there has been a definitive increase in hiring at investment banks, particularly on the sellside in businesses catering to alternative investment arenas. "Credit analysts are very attractive right now because credit arbitrage funds are on fire," he says. Demand for analyst level positions is up 5%-10% from last year, he says.

Base Static, Bonuses Rise

Although hiring is brisk, base salaries have remained constant. The market for credit analysts ranges from $80,000-$100,000 plus bonuses, while those for structured analyst positions, such as CDO analysts, are higher, fetching between $120,000-$150,000 plus bonuses. After bonuses, mid-level jobs range between $500,000 and $600,000, while VPs pull in $800,000-$1 million plus. It is the year-end bonuses, however, that remain the barometer for true salary growth.

According to Russ Gerson, head of the financial-markets recruiting group at A.T. Kearney in New York, bonuses are likely to be higher than in 2004. Why? Bank revenues have grown by about 30%-50% this year, largely due to higher trading and investment banking revenues. As a result, he says, conservative estimates would put bonus pools up 20%-30% over last year. Firms such as UBS, Lehman Brothers and Goldman Sachs, whose energy practice has expanded to meet growing M&A deal flow, have added investment bankers.

Across the board, firms are expanding, Gerson says. Recently, JP Morgan Chase, Bank of America and Citigroup each reported third-quarter earnings growth due to a spike in trading revenues. Gerson says industries such as energy and health care are most likely to see job expansion. Even technology, he says, "is seeing significant (hiring) activity for the first time since 2000."

Demand for sellside analysts will also be pushed by prop trading, as investment banking departments increasingly resemble those at hedge funds. To capitalize on the rapid growth of structured fixed income, banks have been shuttling VPs and senior managers to asset-securitization roles and prop trading desks.

Invariably, hedge funds and private equity firms will drive salary growth at banks, as people with experience in structured finance, such as securitization, origination and collateral risk, will be highly sought after. "There will be cases where compensation of traders in propriety areas will dwarf investment banking compensation," says Gerson. Recruiters agree that there is likely to be strong pressure to compensate bankers who manage trading and proprietary books because they will increasingly be courted by hedge funds.

"Investment banking is going through a robust period right now, with lots of deal flow." Gerson says, pointing to M&A growth but seeing activity all around. "Barring a major unexpected event, I expect that activity and compensation will continue to be on an upward trend through 2006."

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