Leveraged finance sector view: 2006 to level off
Alongside overindulgence in food and alcohol, the time has come for reminiscing on the hot spots of the previous 12 months. And one of the hottest of them all has been leveraged finance.
Driven by increased private equity activity, low interest rates, and new investors such as hedge funds, loans leveraged on companies' assets outstripped all previous records in 2005. In the first three quarters of this year, leveraged loans reached €90.5bn in Europe according to Standard & Poor's, far exceeding the 2001 previous telecoms- driven high of €78.5bn. Year to date in the US, leveraged loan value has reached $530bn according to research firm Dealogic, up from $518bn in 2004.
It's not entirely surprising therefore that the leveraged finance sector has also been a focus of hiring. Financial services recruiters in Europe and the US have the sector to thank for a fees bonanza.
"Leveraged finance has been a very active market this year," says Lee Thacker, a consultant at the London office of search firm Highland Partners: "There were probably about 150 hires in the sector across London."
Mary Helen Dunn, a senior partner in international rival Russell Reynolds' New York-based financial services team, offers a similarly upbeat assessment of activity across the Atlantic. "Institutions that weren't already in the leveraged finance business have been looking to build, and existing players have been looking to grow," she says. "There's been expansion and up-tiering."
Merrill Lynch, Calyon and SG Corporate and Investment Bank were among those adding staff in London, while Barclays Capital recently added two former Goldman Sachs leveraged financiers on Wall Street. But continental Europe saw the biggest boost: GE Commercial Finance, NIB Capital and RZB set up German leveraged finance teams from scratch last year, while Natexis and SG pushed into Italy and Bank of Ireland hired for a new team in France.
Senior additions made the headlines, but there was also plenty of hiring at lower levels. Matthew Venning, a consultant specialising in debt and leveraged finance hires at London recruitment firm Walker Hamill says banks have been stocking up on analysts: "Some have brought in as many as three or four."
Andreas Weik, head of financial services recruitment at Frankfurt-based search firm Hofmann Heads said the preferred profile in Germany has been (and still is) experienced juniors: "You name it, Citibank, Commerzbank, Dresdner Bank, Deutsche Bank, and RBS are all looking for people with roughly five years' experience in this market."
Clouds on the horizon?
The bad news is that 2005 could be as good as it gets for leveraged finance recruitment. Weik is confident of continued German hiring in 2006, and Barclays Capital is expected to continue building in the US, but recruiters elsewhere forecast a quieter year.
"Most of the leveraged finance hiring has already been done," says Barbara Valaperti, a consultant at Heidrick & Struggles in Milan. "The Italian market is fairly mature and in 2006 it will be more a question of upgrading than building from scratch."
Globally, the leveraged finance market faces a danger that next year will bring an increase in loan defaults as businesses find themselves squeezed by rising interest rates. A recent survey of 200 private equity businesses by Financial News found 95% of them though the amount being lent relative to companies' earnings has reached dangerously high and unsustainable levels.
But Stefano Podesta, an analyst at Fitch Ratings, says the dangers are unlikely to be immediate. "We expect that leveraged transactions structured over the last 12 months will have ultimately a higher rate of restructuring," he says. "But this typically happens after a two-year lag as amortization rises. Rather than 2006-2007, we're expecting the fallout in 2007-2008."