Bond Dealers Face Brain Drain in London as Analysts Go to Funds

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They are the ideas men, pitching strategies to colleagues on London trading desks at banks from Citigroup Inc. to Morgan Stanley. Now they’re leaving in droves to join investment firms.

At least 15 credit analysts have left lenders including Credit Suisse Group AG and Deutsche Bank AG in the past 17 months, according to people familiar with the departures, who asked not to be identified because the information is private. Fund managers Apollo Global Management, BlueMountain Capital Management and CQS are among their new employers.

Banks’ fixed-income businesses are being squeezed by rules requiring them to hold more capital and take less risk. As they pull back, analysts are departing for the buy side, underscoring the shift in power toward money managers that are increasingly dictating the future of credit markets.

“There’s a lot of frustration on the sell side,” said Brett Chappell, Copenhagen-based head of fixed income trading at Nordea Investment Management, which oversees 174 billion euros ($198 billion). “Experienced and intelligent people who develop great trade ideas are not even sure if their traders can take on a new position in size, or if their bank would be willing to utilize its balance sheet.”

Fortress, CQS

Juan Manuel Munoz, a Deutsche Bank strategist who focused on distressed debt, departed in April and is moving to Fortress Investment Group, according to two people familiar with the matter. Christian Leukers, a credit analyst for banks on Deutsche Bank’s trading desk, also left last month. He will start at CQS in June, according to Michael Rummel, a spokesman for the hedge fund in London.

“We continue to build out and strengthen our capabilities across credit research and credit trading,” said Simon Finch, chief investment officer for credit at CQS in London. “We see opportunities as banks continue to pare the use of their balance sheets.”

Deutsche Bank spokesman Charlie Olivier declined to comment on the moves. Munoz couldn’t be reached for comment, while Fortress spokesman Gordon Runte didn’t respond to e-mails seeking comment.

Gildas Surry, a credit analyst covering European banks on BNP Paribas SA’s London trading desk, left last month and will join Axiom Alternative Investments as a senior analyst in June, according to a statement from the investment manager.

Dealers Diminish

Regulations introduced since the financial crisis to protect against bank losses are eroding the incentives to make markets.

The average number of dealers providing prices for European corporate bonds dropped to 3.8 per trade last month, down from

8.8 in 2009, according to data compiled by Morgan Stanley. Liquidity in credit markets dropped by about 90 percent since 2006, according to estimates by Royal Bank of Scotland Group Plc.

This backdrop makes desk analysts’ jobs more difficult because traders are less likely to be able to act on their recommendations. A constant focus on cost efficiency is hurting lenders appetite for taking big positions that could affect the trading desks’ bottom line.

As lenders withdraw from their traditional roles as market makers and warehousers of bonds, hedge funds and asset managers are boosting their debt holdings. That in turn is increasing demand for analysts.

Risky Assets

“The role of the analyst is vital for the buy-side because if there is no trading then these bonds become a buy-to-hold investment,” said Andy Hill, London-based director of market practice and regulatory policy at the International Capital Market Association. “You really need to do your homework before you buy them.”

Strategists focused on distressed securities and high-yield bonds made up the largest proportion of those that have found new employment at investment companies.

Joerund Aarsnes Holterud, a former junk-bond analyst on Morgan Stanley’s credit trading desk, joined Apollo earlier this year, and Simon Matthews, who held a similar role at Citigroup, joined BlueMountain last year. Maxime Hennequet, left Credit Suisse last year where he analyzed soured credits and joined CarVal Investors.

Holterud, Matthews and Hennequet declined to comment on their new roles. Seda Ambartsumian, a spokeswoman for Apollo at Maitland, also declined to comment, as did Morgan Stanley spokesman Tom Walton and Citigroup spokesman Simon Boughey.

Alex Field, a high-yield analyst at Credit Suisse, has joined Oak Hill Advisors, according to two people familiar with the matter. James David, a New York-based spokesman for Oak Hill at Kekst & Co., declined to comment on the appointment.

Banks “have pulled back from making markets in bonds and that has created a situation where asset managers hold more and more of the inventory,” said Jon Mawby, a London-based fund manager at GLG Partners, which manages $30.5 billion. “These firms therefore need more resources to cope with the expanded universe of bonds they hold.”

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