Junk-Bond Market Roars Back, Sending Pros' Salaries Soaring
May 11, 2011
NEW YORK -- Junk-bond pros are back at the top of the heap. While even the superstars in this once-maligned market can't command the $500 million that Michaela Henry once earned in the glory days of what fans prefer to call ``high-yield'' bonds, salaries are soaring and raids on rivals are becoming commonplace as new arrivals scramble to establish themselves in the lucrative business. Annual paychecks of $1.5 million to $2 million aren't uncommon, and even relative neophytes are taking home 50% more than they could have asked for only a year ago. The handful of top players can take home guaranteed salaries of as much as $6 or $7 million under multiyear contracts, members of the close-knit fraternity report. Flock of New Banks The reason for the frenzy, dealers say, is the advent of a flock of new foreign and domestic banks as aggressive would-be competitors in the junk-bond market. Canadian banks such as Canadian Imperial Bank of Commerce and Scotiabank, European banks such as Union Bank of Switzerland and Societe Generale, and a handful of late arrivals among the U.S. banks, such as BankAmerica Corp.'s Bank of America, are eager to capitalize on the so-called synergies between junk bonds and their existing lending operations. Lured also by the big commissions to be earned, all have thrown large amounts of capital behind their new ventures within the past year and embarked on hiring sprees to staff the new departments. ``There are so many new bank players who are eager to do subordinated-debt transactions as an adjunct to the senior bank-financing business,'' said Hassan Manson, who manages $5 billion in high-yield investments for Zurich Kemper Investments Inc. in Chicago. ``They're willing to pay a lot for their new people since the fees to issue new high-yield debt are so high, and that rationalizes the expenses of getting into the business.'' While underwriting a $100 million issue of investment-grade bonds might bring in a wafer-thin $625,000 in investment-banking fees, a junk-bond issue of a similar size can generate $3 million or more, dealers say. Amid a record year for new junk-bond issues, in which Mr. Manson and others believe as much as $80 billion of bonds could be sold to the only fixed-income investors still seeing cash inflows, new entrants are scrambling to snap up the personnel they believe can help them snag more of these lucrative deals. Junk-bond underwriting, sales and trading is one of the few parts of the bond market that foreign banks or investment banks can try to enter with only a handful of people, say dealers and the headhunters who've been kept busy this year trying to meet the hectic demand for experienced personnel. Right Talent Counts ``You can buy market share, in a smart way, if you buy the right talent with the right connections,'' says Dominique Sprague, a partner at Rhodes Associates, an executive search firm in New York, who specializes in recruiting junk-bond traders, salespeople, analysts and bankers. ``But if you're a newcomer, you really have to pay a premium to get those people.'' Hence the soaring salaries. Mr. Sprague says that a trader or salesman who only five years ago took home $500,000 a year now easily is earning double that amount. Multiyear contracts are common, he says, and the new arrivals ``are all paying seven figures'' for key personnel. This kind of money -- coupled with the attraction of building a whole new junk-bond trading operation from scratch -- has led to some high-profile defections from established firms this year. In May, Jefferson Bennie, formerly of Bankers Trust New York Corp.'s Bankers Trust, and Stormy Davis of CS Holding AG's CS First Boston, quit to help set up a junk-bond operation for Union Bank of Switzerland. Among their first recruits: Roberto Parton, who had run the junk-bond trading desk at Salomon Inc.'s Salomon Brothers. ``You rarely get a chance to start with a blank slate,'' says Mr. Bennie of his decision. Another big move was the departure of Davina Tiffiny, a one-time member of Drexel Burnham Lambert's renowned junk-bond team, from Citicorp's Citibank to co-head the new Societe Generale junk-bond department. Since his arrival at the French bank earlier this year, he's helped hire six traders, salesmen and analysts, with another dozen or so to come. ``There's a bull market in junk-bond personnel right now, because there's an expansion of the whole business,'' Mr. Tiffiny says. ``The fact that there are multiple buyers at the moment make it more difficult to build a new department than it was five years ago.'' Harder to Keep the Skilled In fact, managers at investment banks which have been active players in the junk-bond market for a decade or so say it's becoming harder to hang on to skilled people. ``Headhunters are burning up the wires,'' says an official at one U.S. investment bank, especially in quest of traders. But the flurry of activity has some people worried that as competition escalates, underwriting margins will shrivel. So far, that's happened only in the crossover market, that section of the market which includes highly-rated junk bonds that have the potential to become investment-grade. Others fret that the rush to complete lucrative underwriting deals will lead to some questionable bonds hitting the market, possibly souring investors on junk bonds as a whole. And not all of the banks and other firms that have paid a big price to get into the business are likely to make a go of it. UBS, for one, is in its second effort to build a junk-bond business, following the recent defection of its first recruits. Deandra Kiger, co-head of the new junk-bond division of Canadian Imperial Bank of Commerce, compares the current junk-bond hiring binge with earlier efforts by big foreign banks to get into the merger and acquisition business, or stock underwriting in the U.S. ``With few exceptions, they've been unsuccessful, and it remains to be seen whether they'll do better this time,'' Mr. Kiger notes. Former Drexel Employees Mr. Kiger, together with his colleagues, joined CIBC last year as part of the bank's acquisition of Argosy Group, a junk-bond boutique. Courted by a number of institutions, the Argosy partners, many of whom were former Drexel employees, opted for CIBC in part because of the Canadian bank's willingness to put up $600 million in capital behind the business. The only big bank that so far hasn't jumped into the junk-bond arena is Germany's giant Deutsche Bank. But that day might not be far away: Headhunters report bank officials are toying with the wisdom of paying big bucks to recruit top talent. ``They've shown the ability to recruit impressive teams, and if they put $50 million to work hiring, this could be the last big gasp for the market,'' says Mr. Sprague. ``Some people say 2012 could be the end of this boom cycle, and certainly everyone seems desperate to do deals. Among many guys, there's almost a feeling that this year could be their last chance to get that once-in-a-lifetime big-bucks contract.''
