Everybody has their price, or so the saying goes.
Three years ago, when Eric Kolchinsky resigned from Moody’s, the rating agency, to take a job at Lehman Brothers, he thought the investment bank had found his price. As an analyst in one of the most profitable areas of the investment banking business – structured finance – Mr Kolchinsky held a golden ticket in terms of earning potential, and he was cashing it in.
“Rating agency analysts in structured finance have a unique kind of expertise that is incredibly valuable for the investment banks,” says Richard Stein, head of the capital markets practice at recruitment firm Korn Ferry. “It’s not unusual to see banks offer analysts compensation packages that are three or four times what they’re earning at the rating agency.”
Given the pace of the structured finance boom in recent years, this is not surprising. Global structured finance issuance reached a massive $2,000bn in 2006, and as investment banks have developed complex ways to package bonds, corporate loans, mortgages and other forms of debt into securities to sell to investors, they have also reaped huge revenues.
As a result, says Ian Bell, head of European structured finance ratings at Standard and Poor’s: “Competition has probably been hottest in structured finance for the past decade at least. That’s because structured finance requires technical skills – and people who have expertise with the technology are found at law firms and rating agencies.”
However, intense competition for professionals with the technical know-how to develop these products has created a thorny problem for the rating agencies.
Although rating agency salaries have increased, they still cannot compete with investment banking salaries. But at the same time, rating structured finance issuance is their largest and fastest-growing business, accounting for the bulk of their
At Moody’s, rating structured finance deals earned more than $880m last year, representing a massive 44 per cent of total revenues. Separate public accounts for the other two major rating agencies are not available, but annual reports from Fimalac, parent company of Fitch Ratings, and from McGraw-Hill, which owns Standard & Poor’s, suggest that structured finance is of similar importance to their revenues.
This means that the rating agencies have to pull out all the stops to keep staff excited and motivated on the job, as well as stressing the convivial elements of rating agency life that – they hope – compensate analysts for the lesser financial reward.
All three of the big rating agencies – Fitch, Standard & Poor’s and Moody’s – say they offer employees flexible working arrangements such as the four-day work week, for example. Meanwhile, some managers admit to more circuitous staff retention techniques, such as locating analysts in cities outside London or New York, to make them “harder to reach” for the investment banks that might lure them away.
In Mr Kolchinsky’s case, the option of working at a rating agency eventually proved more attractive than life as an investment banker – after a year at Lehman Brothers, he returned to the structured finance group at Moody’s. “Obviously when I moved to the investment bank, compensation was the issue,” he says. “But in terms of the work-life balance, working at a rating agency is definitely better.”
Mr Bell says that such an environment is typical of the ratings industry, whereas in the investment banking world, aggression is more often rewarded over co-operation: “At the investment banks, if you can eat your neighbour’s lunch, then all the more power to you.”
Some analysts say that this may contribute to the higher proportion of women in senior positions at the rating agencies than in the investment banking world. Claire Robinson, senior managing director for asset finance and public finance at Moody’s, relates sitting on one rating committee where the female managers outnumbered the men, adding “perhaps it’s the emphasis on teamwork that means women can be very successful here”.
The rating agencies also stress that their analysts enjoy the freedom to maintain their intellectual integrity. Mr Bell argues this can be challenging in the investment banking world, where compensation is linked to revenues. At the rating agencies, says Mr Bell, “it’s a very intellectually honest environment because you aren’t in a position of having to compromise your integrity to get a deal done, and you are not measured in terms of how much money you made today”.
Ms Robinson says this stems in part from the different role that analysts have to play at investment banks. “One of the big things that differentiates rating agencies is that analysis is our product,” she says. “At the investment banks, research is a staff function, but at the rating agencies it’s a line function and the management are former analysts.”
As result, she says, many staff are attracted by the idea that a rating agency can offer job stability – something less certain in the investment banking world, where staff are more at the mercy of economic cycles.
However, it is accepted at all the rating agencies that there will be a degree of turnover in their staff – whether the analysts leave for investment banks, or asset management firms and insurance companies. So part of the challenge is maintaining a constant recruitment process in order to replace those that leave.
Gloria Aviotti, head of global structured finance at Fitch Ratings, says: “We have had to manage situations where people are poached from us, but at the same time, we’re continually working to find the talent that’s needed for the complexity of the work.”
Fortunately for the rating agencies, however, recruitment is often needed most at the junior pay grades, as turnover rates are lower among senior staff.
Mr Bell at S&P says: “I think that’s because, by that point in their careers, people have already been offered the big investment bank pay packages where the sky is the limit. And ultimately they have decided against them because there’s something that they value in the rating agency environment.”
To recruit junior level staff, Fitch began an analysts’ training programme. For the past three years, the rating agency has hired up to 25 graduates for a two-year training programme across all asset classes, then made permanent offers to the best trainees. “This has become a strong and stable base of our talent retention strategy because they learn so many aspects of the business,” says Ms Aviotti.
Ultimately, says Mr Bell, the rating agencies are sanguine about the dynamics of the job market for the structured finance analysts that are at the core of their business. “You know you’re always going to lose some people to the banks,” he says. “But it’s predictable and we can manage for it.”
Structured for gain
It does not have the high profile of equities trading or the glamour of brokering mergers and acquisitions, but a career in structured finance is among the best paid in investment banking.
For those who can get their heads round building debt portfolio products using derivatives, the starting salary for a “synthetic CDO structurer” on Wall Street is about $200,000 a year, while someone with just a few years of structuring experience could command $600,000.
According to a recent survey from the London-based recruitment consultancy Michael Page, structured finance salaries in London are also generous. Graduate employees earn £45,000 a year, more than in other banking disciplines such as equity sales, where salaries start at £38,000. But, at director level, structured finance professionals can earn as much as £600,000 a year, while senior equities sales earn closer to £400,000.
Rating agency salaries are considerably lower. Richard Stein, head of the capital markets practice at the recruitment firm Korn Ferry, says it is not unusual to see banks offer analysts compensation packages that are three or four times what they earn at the rating agencies.
As a result, says Mr Stein, the rating agencies have a deep-seated recruitment problem. “They recruit heavily at the graduate level for their training programmes, but the experience and expertise that they give their trainees means that their mid-level analysts regularly get picked off by the banks.”