Leveraged finance specialists are earning compensation comparable with top bankers at the peak of the technology, media and telecoms boom as institutions clamour for talent.
At least seven banks in Europe, North America and Asia, including UBS, HSBC, Fortis, ING and Nomura, have reinvigorated their efforts in the booming leveraged finance market, helping to push compensation levels up by at least 25%, according to City of London headhunters.
Goldman Sachs last week hired nine people for its leveraged finance business, taking the number of recruits in the sector over the past month to more than two dozen.
The move followed the double defection of a nine-strong team from French investment bank Calyon to Canadian rival CIBC World Markets and a team of the same size from German bank HVB to BNP Paribas.
The appointments follow similar moves by competitors to recruit top bankers to provide debt financing to private equity firms in the bull market. Headhunters claim it is a trend that will continue into next year.
Demand for top talent has risen to such an extent that compensation levels for leveraged finance bankers in Europe are outstripping the US.
A headhunter who specialises in leveraged finance said: "Compensation levels have been escalating to the point where the rate is out of kilter. It is more expensive in Europe than it is in the US to hire and retain top talent."
Experienced leveraged finance bankers at top-tier banks are reputedly securing compensation from US$3m (€2.4m) to US$30m, compared with a minimum US$2m to US$3m their equity and debt markets peers are earning, according to a source.
Compensation levels are being driven up by a combination of the intense demand from companies trying to break into the market and established houses trying to retain top dealmakers. There is also a lack of talented, experienced leveraged finance bankers in Europe.
Investment banks scaled back their hiring after 9/11, which led to a shortage at the associate level. As a result, there is a dearth of quality associates several years on.
The headhunter said: "I've seen seven or eight associates who are earning US$500k a year. The last time I saw that was with TMT investment bankers just before the bubble burst."
Nearly €102bn (US$129bn) of leveraged loans have been raised to fund private equity-led European buyouts this year, up from €27bn in 2002, with the top-tier investment banks standing to make revenues of between US$300m and US$500m, according to estimates.
European leveraged finance houses Royal Bank of Scotland, Barclays Capital, Deutsche Bank, Credit Suisse and JPMorgan have been strengthening their teams. But a new wave of banks normally considered third-tier in the leveraged finance market are hiring specialists to challenge the established market participants.
A head of leveraged finance said: "Even the reticent banks, such as BNP Paribas, have had to swiftly realise they need to be there. CIBC, Dresdner Kleinwort and Société Générale, however, have understood for some time that they can build leverage on the balance sheet rather than by mergers and acquisitions."
UBS, considered one of the most conservative lenders in Europe, has increased its lending capacity to sub-investment grade companies to challenge its competitors in backing big leveraged buyouts. HSBC has also expanded its risk appetite by launching a dedicated leveraged finance division after recruiting from Morgan Stanley.
The development comes as concerns over the leveraged loan market among practitioners are growing. Last week, the UK's Financial Services Authority detailed in a 94-page discussion paper the risks posed by rapid expansion in leveraged lending.
The FSA said it was concerned about the scope for insider trading using information about private equity deals, the conflicts of interest inherent in the business, growing levels of leverage and the lack of clarity about who held that risk.
It said: "Lending limits are increasing, multiples are rising, transaction structures are being extended and covenants are weakening."
It added that the terms on offer from banks appeared to approach the limits of prudence.