Record temperatures, record bonuses

Speaker A: You're listening to the Global Capital Podcast, proudly sponsored by kfw. Hello and welcome to the Global Capital Podcast. I'm Ralph Sinclair and I'm the Chief Product Officer at Global Capital.

Speaker B: I'm John Hay, Corporate Sports Markets and Sustainability Editor.

Speaker C: And I'm Sarah Ainsworth, Deputy SSA Editor.

Speaker A: Welcome to the podcast where everything is getting hotter. Uh, we're going to be talking today about the effect of global warming, recent heat waves in particular on capital markets or perhaps their lack of effect on capital markets and why that's troublesome. Then we'll be talking with, uh, Sarah about the warm up underway in the sovereign supranational and agency bond market which is about to host full on public benchmark issuance again. In fact, it's getting so hot they're calling it mini January. So presumably whoever they were, they're in the Southern hemisphere. And then finally we'll be talking about some hot hiring. We'll be talking about how hot medium term note bankers are right now and why they're in such demand. And also we'll be joined by our columnist David Rothney, who will be telling us about the absolute searing temperature for bonuses in investment banking. That's uh, classic M and A activity and equity capital markets in particular. And he'll be telling us who will be getting paid how much and why. John, though, we'll start with you and um, the actual heat wave. Now, you have a story out later today, which is Friday, about the market reaction to all the heat waves and wildfires and everything else. And what's been the reaction?

Speaker B: Well, the weird thing is that there hasn't been a reaction really. Remarkably, yesterday Thursday, Both the Euro Stoxx 50 and the S&P 500 indices hit record highs. And if you look at government bonds, the U.S. and European government bonds are quite high yields, but they're not seeming to react to the wildfires and droughts sweeping Europe and North America at all. In fact, uh, during some of the hottest periods, yields actually contracted. And if you look at credit spreads, it's also an incredibly benign, placid picture.

Speaker A: What's been the economic effect so far though of uh, the heat wave, the wildfires and so on? I mean, you know, we've heard about the record low levels of water in the Rhine and things like that and how that affects German industry. What other tangible effects has it had?

Speaker B: Well, this is the question. And why? I think one of the reasons, it's one of the first reasons why, uh, markets aren't really reacting in pricing is they don't quite know how they can see what's going on with the weather and the effect on the climate. But working out how that impacts the economy is more difficult. And there are a number of channels through which it gets kind of obscured. One of them is that people don't know where the risk is going to strike. So you mentioned the Rhine levels. That's a very interesting one because in 2018 there was a drought and the level in the Rhine Felberry load, it got a lot of attention and estimates were that, you know, uh, they varied, but some I've seen one estimate that they'd knocked 0.4 percentage points off German GDP that year, which is quite substantial. And you know, when you consider how low growth is in developed economies, you know, it's material. But this year, so far, it, it doesn't seem to be impacting the economy as much, partly because companies have, have planned for it, BASF and Evonik, for example, to German chemical companies which do use the Rhine a lot for moving their products, have found alternative ways to transport their goods. So, you know, there are effects like that. So the place where the market was perhaps looking for an effect, it doesn't necessarily show up. But then you've got other things like the power sector, which, you know, nobody is sort of probably not in the top five of things that people necessarily expect to be hit by hot weather. But Romania's just had to shut down its only nuclear power station, which produces a fifth of the country's power. Hungary is very close to having to shut down its nuclear power station, which is even more important to the electricity supply in that country. So, and this is because of lack of cooling water in the Danube. So the effects are cropping up in places people don't expect.

Speaker A: And well, I guess if we take that example of those two German companies you mentioned. Now, the sort of next step, as it were, in climate risk mitigation for a long while has been adaptation and resilience. And I suppose that's an example of that. And if we're thinking about where the effect of adaptation, resilience, funding will show up, I guess that's the problem, isn't it? It's not clear at the moment whether governments should fund that and improve infrastructure or whether it's going to be down to these sort of piecemeal solutions that private companies find for themselves. Is that that part of the problem, do you think?

Speaker B: Yes, but I think the overall problem is the extreme lack of resilience and forward thinking and preparation. Uh, you know, it's clear from, for example, the UK response to wildfires that the country is very unprepared. The fire brigade were very stretched, hospitals were stretched. We've had hospitals declaring they're basically on the verge of not being able to take more patients because of the heat wave and so on. And, you know, I've read about conflicting advice, for example, being given to passengers on the A31 road in, in Hampshire during the New Forest fire. Some people being told to stay in their cars and drive and others to get out of them. You know, countries in Western Europe are not very well prepared. And I mean the UK perhaps even, even worse than some others for when it comes to fire. Another example is the, you know, anyone in the UK has probably noticed that transport disruption, the rails, uh, in that we use for railway lines in the UK are made of steel that's lower quality than in some continental countries which buckles at a lower temperature. So generally speaking, particularly if you look at the water system, we are woefully underprepared.

Speaker A: Yeah, I mean, well, certainly the UK water system has, uh, been under awful lot of scrutiny. And was it something like now 3/4 of the country is, uh, in drought. I, uh, imagine most of the water's just leaked away through leaks in the pipes.

Speaker B: But, um, anyway, I don't think you can blame the water companies entirely. I mean, it hasn't rained for something like 60 days in parts of the country. So, I mean, one of the other things about it is that ironically, we had quite a wet winter. So before all this happened, reservoirs in general across Europe were quite full. I mean, not perhaps optimally full, but they were not bad. And had that not been the case, the problems now would be even worse.

Speaker A: Well, bringing it back to, uh, the capital markets, we've come across these situations before. Not this specific situation, but situations of similar magnitude where it's almost as if the consequences of the problem are too big for investors to consider. I mean, do you think that's just the case here, that they just can't really stick it in their models?

Speaker B: Yeah, I mean, basically, yes. I think that an obvious comparison is the US government shutdowns, which happen frequently and which are absolutely, you know, portend the most appalling crisis, uh, leaving aside climate and war and things like that. But, uh, among purely financial crises is an Armageddon scenario that the US could default on debt. But yet the politicians in Washington are more or less saying they're going to, and the market just cannot price that event because, you know, where are you going to Move your money, it's just impossible. So with, with the climate, you know, really what, what we're looking at is, is very severe, very nasty prognosis and it's going to affect all of the economy. Now there are definitely plenty of people out there, plenty of savvy investors who are positioning for that, who are looking to be part of the solutions. You know, investing in companies, providing new technology and so on and avoiding the riskiest bit. But generally speaking, the whole investment world is just pretty much like a rabbit in the headlights.

Speaker A: But there is, I mean there is some evidence that the capital markets, or at least some part of the capital markets are looking at this anew, uh, even if they're only really at the beginning, so trying to sort it out. Our colleague George Smith, who runs all of our securitization coverage, has written a story called Wildfires Put Securitization Investors on Notice of Climate Risk. And in that story he's starting to talk about how people in the securitization market are starting to think about the effect of wildfires on housing and mortgages. Mortgages being the, uh, collateral and houses being the collateral that end up in securitizations. And, and I guess, I don't know, I mean, I detected a note of complacency, uh, certainly at the start of the story. I mean people there, you know, they, they understand that wildfires pose a risk to housing. But you know, there was a tone in there where they were saying, well, so far the fires have generally happened in rural areas and there's not many houses there. I mean, kbra, the credit rating agency, and I'm not accusing them of being complacent because of course they've done some research into this. But they looked at wildfires in Spain and found that only half a percent of the collateral in Spanish, um, mortgage backed securities was affected. That said, it should be noted that, uh, Spain is not a big market for uh, mortgage backed securitizations. The UK and the Netherlands are far bigger. Certainly the UK is starting to have, uh, its own problems with wildfires. I mean, just this week, in fact, just yesterday, I think there was one very near a town called Stourbridge. And of course, you know, if we think more generally there were the fires in the Bordeaux area earlier this year and then not recently, you know, the fires in la, which destroyed a lot of houses.

Speaker B: Yeah, I mean, securitization is a very interesting market. George's story is a great one by the way. But the interesting thing about securitization is is that it isn't about granular analysis of specific assets which go right down to the very property right now. Uh, it was interesting that the rating agency in the story had eight deals in Spain that they, that they'd rated of mortgage backed securities. For six of them they had property level or very close to property level data on specifically what the properties were. So they could analyze and map exactly uh, where they were relative to where fires were or where fires were likely to occur. For two of the others they had only province level information on the loans which is less good. Now nevertheless, this is, we're talking here about a, a market that is very much about the specific. And uh, you can actually open up a spreadsheet and look at all the information that is the part of the market which is probably most likely to be able to assess risk very precisely. Um, which it definitely has in its DNA the habit of doing so. That's quite different from many other parts of the capital markets where most investors will invest in a bond of a given bank or a company without knowing anything really about where their factories are or where their uh, you know, where their loan book is distributed and so on. And so there are these two kind of contrasting themes if you like. One is looking for risk, being very careful and sort of trying to analyze it and identify it carefully. The other approach is the wrong word. But the other sort of contrasting movement is the spreading out of risk through the economy. And in a way that's a good thing, right? The whole point of insurance and things like having large banks and governments is that they're very big, they can absorb problems. So if there's a problem in Stourbridge, the UK government, not every part of the UK will be affected. And the UK can help insurance and banking work on the same principle. But at the same time that makes risk kind of much harder to identify. And I think that's why uh, if you look at the general capital markets there aren't obvious signs of spreads moving or yields moving and that sort of thing.

Speaker A: Yeah, I mean George explores exactly those twin themes in the story. I mean you're right, you can measure insurance premiums and you can see whether insurance companies are suddenly refusing to insure houses that it thinks are at risk of fire.

Speaker B: I think that's the big risk. And the thing with the mortgage backed securities, the problem is not really that many of the, of the mortgages in a given securitization that's already been issued will be affected by wildfires and therefore will default. It's more if Wildfires become more common. Insurance companies will not want to provide insurance. It's already happening in parts of California. And then without house insurance, you can't get a mortgage. So you could have parts of the economy, you know, m shriveling. And this is the real danger. And the securitization market is almost like a sort of lens through which to try, you know, start to analyze this sort of thing.

Speaker A: Well, and there's also those sort of secondary effects of wildfires, of ruining the local economy, ruining local agriculture, making the area less desirable to live in in the first place. Uh, that's all a lot more intangible. Uh, I guess when it comes to the sort of portfolio analysis, um, one group that we haven't really talked about in all this is the banks that operate in the capital markets that put all these deals together, advise clients and all the rest of it. Do you get a sense of what they're doing about this?

Speaker B: Well, some of them have good research departments that study it and they put out a lot of work on it, some of it very detailed, um, and helpful. They are trying to understand and analyze this problem and guide investors. They are also, of course, loving the boom in data center financing which is going on in multiple markets. Securitization, bonds, loans. We're building a whole new generation of fast data centers to burn energy, to create artificial intelligence, which will put us all out of jobs. So this is the destructive economy that the banks are nevertheless charging ahead with.

Speaker A: But it's that power usage that's probably the most, uh, immediate and, um, alarming concern. I mean, even data centers have, uh, I think, managed to sort of rein in their water usage of late.

Speaker B: I'm told they might rein it in, but, but, but they still need to be cooled and they are still requiring a vast amount of power now.

Speaker A: Yeah, yeah, well, it's the power I was going to ask you about. I mean, is, is there any sort of sense from anywhere in the market that anything is being done to sort of improve the efficiency of these data centers? Or is, is the market as a whole generally just chucking money at this asset class in the hope of riding its coattails to great success and fortune?

Speaker B: Well, I mean, I don't know. I haven't looked specifically into this particular topic, but I know that some of the data center companies do want to make them as efficient as possible. It makes sense. The less power you use, the cheaper, uh, they'll be to operate. The data center market is competitive and the operators are vying with each other to provide tenants with it with a cheap and efficient service. So you know, there are definitely incentives for energy efficiency and some of them are also trying to use renewable uh, energy where possible. But the renewable energy is also constrained in supply. The solar panels and you know, wind turbines, they're difficult to obtain because there are choke points in the supply. Right. So if we're going to build you know, fields and fields full of new data centers that is to some extent taking away from renewable power that could be used for the baseload in the economy.

Speaker C: I, uh, was just going to say I think I told you before Ralph, but about two or three months ago my hairdresser actually brought up data centres which made me think was that ah, a signal we've reached heat data centers?

Speaker B: What did your hairdresser say about them?

Speaker C: Um, she brought up data centres they were building too many and how it was uh, bad for the environment and bad for the temperature in the summer. Yeah, yeah. Against them.

Speaker B: This is one of the, the most bizarre paradoxes that the, the population in general do understand about climate change. They, if any survey even in America says that people support action to curb um, climate change, yet the political and business elite are basically ignoring that and giving out this message that if you do anything, if there's any climate action, it's unpopular, which simply isn't true. But unfortunately that's what we're stuck in at the moment.

Speaker A: Uh, right. Well Sarah, it's not just your hairdresser, uh, uh, you are uh, discussing data centers with or. Well, certainly not in the near future. I'm sure this will all be uh, a pretty, I want to say hot topic. But that's just, that's a pun that I think is frankly beneath me. Um, so I won't. We'll strike that from the record.

Speaker B: Well, you used it quite a lot at the beginning.

Speaker A: I know, I know. I've really not covered myself in glory here, have I? But um, anyway, one event you'll be appearing at SARAH in September is our GC Live on data center financing, which is uh, going to be a high level series of panel discussions about data centers and how they're financed, particularly in the securitization market. Because of course you are taking over our securitization coverage from George, uh, as of next month. But until then, you're writing about the sovereign supranational and agency bond market and you've written a story this week about the resumption of benchmark bond issuance, now mid August, rather confusingly referred to by many in the bond market. As post summer. Uh now of course they mean by that is it's all about to kick off in the primary market with the resumption, as I say, of public benchmark issuance after a few quiet weeks over July and August. Uh now the SSA market has something of a, I guess a leading role in the bond market and a lot of issuance is expected from next week on. What are we expecting to see?

Speaker C: Yep. So um, like you say, it's next week, Monday, Tuesday and the market's really expected to uh, resume with a lot of issuance. Again some people are calling it a um, mini January with a lot of big deals coming along. So it's really been like five weeks without any issuance. And we are expecting to see some of the biggest borrowers, KfW, European Investment Bank, Finland, the Sovereign, plus some of the German issuers as well. And they're expected to come along from beginning of next week in uh, Euros, dollars and also many other currencies as well. Sterling, Aussie. They're still proving very popular. So yeah, we've been having discussions about uh, with some of the bankers which currencies look perhaps um, we'll see more volume, which parts of the curve could be attractive and just going to get a sense of some of the types of deals that could be coming along.

Speaker A: Well, many of the issuers in the SSA market are uh, well funded already this year. Every year for the last few years they've tried to do as much as possible earlier in the year. Are there any issuers with a really pressing need to do something in the autumn? And why might that be?

Speaker C: So like you say, most issuers are well funded already this year, some more so than others. We've noticed. Then we wrote a story about it a couple of weeks ago that if anything issuers are even slightly further ahead this year compared to other years. And a few reasons for that. We've got a few event risks or calendar events um, that have been well telegraphed to people. So one of them being the US midterm elections coming up. Another that people have had increasingly talking about more and more is and um, Federal Reserve risk. That's from the policy meetings that they have. Uh, since they have the new chair, uh, Fed Chair, uh, Walsh, he's um, made each of the meetings more data dependent and it's brought back the job as um, Fed watching and going, meeting by meeting. And um, with each Fed policy meeting it seems there's a lot more uncertainty now. So the ah, last Fed meeting there was a 30% chance of a hike. And a, uh, lot of the analysts were split on it. The next meeting in September, 50% risk of a hike on that one. So yeah, from the US angle, you've got the US Midterms, we have the Fed's, uh, policy meetings and the insurgencies around there. And then also you have it over in Europe, different calendar events as well. And one of the areas we touched on, and we touched on in previous uh, weeks is that some of the French issuers, they have a few uh, things stacking up in their calendar. So they've got the um, budget coming up later this year and then the French presidential elections next year. Um, and we know in previous years with the French political event how sometimes it's had a real impact on ah, French government bond markets. Um, and that itself at times, um, has seeped into other bond markets, other peripheral bond markets. Um, so it's not just always French issuers as well, it can have an impact on the wider markets. So because of all those risks, there is already some talk about whether it would be wise to some issuers to consider perhaps pre funding for next year and getting some of that already booked and um, locked in those partures and done while market conditions are actually quite strong at the moment coming back into um, this mid August.

Speaker A: Sarah, you've argued in a lead article this week that although it's expensive to bring funding forward like that because of the cost of carry that the issuer has to pay for holding the cash, that really that's just an insurance policy or the price to pay for mitigating the risk of volatile markets later.

Speaker C: Yeah. So saying that while it's true that the autumn calendar has got lots of risk events and there might not be very many clean issuance windows, the argument is that negative carry is the price of insurance and perhaps that um, premium is something that issuers should consider paying, um, when they think about what it insures against. And when you actually look at the weeks between, you know, we'll have the big guns come first like kfw, eib, all those names, um, and then the real September restart when we get other issuers as well, US midterms, like I said, M. And all those other risks. And also for French issuers they have the OAT auctions, the French government auctions. And sometimes that can make the window tighter still because they will avoid the days around those auctions or even the weeks of those auctions. So maybe, and if the backdrop at the moment is quite good, so all the banters we were speaking to this week were feeling quite bullish for next week. When you look at what oil prices are doing, where yields are, geopolitical risk, Middle east, you know, you mentioned earlier about equities hitting highs. So it's really good risk sentiment at the moment. Um, and euros is actually expected to be less crash rounded than dollars at the moment for next week. And it seemed Vantage was saying looking ahead in the near term probably um, east one should be a bit lighter in euro partly because of how the cross currency dynamics play out. And maybe dollars is a bit more favorable for funders that can fund in other currencies that aren't just euro funders. So that could leave a bit more of an opening um, for some of those French issuers that are looking to go into euros. And why not while the backdrop which can turn on a dime depending on what Donald Trump says or does next, why not take a bit of the cost of carry on and get it fixed at those levels and then you know, sit back a bit and um, you know, you don't have to worry so much about all those other risks that are, you know, we've been talking about for next year.

Speaker B: So Sarah, you wrote in your article about issuers that can use either dollars or euros, probably being likely to prefer dollars for the shorter maturities, didn't you? And we've obviously had this very interesting dynamic in the dollar market where uh, SSAs have been coming closer and closer to US Treasury's yields in the primary market. What's the latest on that?

Speaker C: Yes, so that has been a big talking point all year and um, it kind of came back again in the headlines um, in July when we got even closer to the tights. And uh, there um, and that's one of the questions that we were asking bankers given that dollars is looking attractive to issuers, you know, what, what do they think about these tight levels and being able to attract investors there? There were different views from the bankers that we spoke to I think and given the fact that some of the dollar issuance it thought that some issuers might target the 10 year area in particular because yields are higher there M there's good investor demand. We saw there was like a strong 10 year treasury auction this week, um, showing that investors are quite happy to lock in yields. But what does that mean for um, issuers and how tight could we get to the spread against Treasuries? So one banker we were speaking to, she highlighted there was a World Bank 10 year earlier this year, I think it was in May and it priced at 2.7 over treasuries. And she said that at the time, you know some investors has flagged that up as pretty much close to their limit what they're willing to accept in the primary market. And we should say that in the secondary market we know that spreads have traded tighter than that and actually through, through zero in, in some credits. So she was a bit cautious about um, you know, how tight the spread could go and how much um, investors were willing to accept out. And that said another um, banker I spoke to and he was a dollar focused banker and um, I think he'll, he's going to be involved in quite a few of the dollar deals. He was um, a bit more optimistic. You know he, he thought, you know he made the point that when we got to breach 10 basis points people said invested would never accept that we've got through that level. Yes, we got to say in 10 years 2.7 we got even tighter it in five years, uh, in July I think actually through two basis points. And his view was well yeah, I think the tights will keep being tested. Like I said, as I say, paper traced through Treasuries in secondary already. And it ties into this theme about de treasurization. People used to call it de dollarization but now it's been reframed as de Treasurization. Where investors especially there's been a lot written about Asian investors. Yes they might be moving away slightly from US Treasuries but they still want to hold money in US dollars though why not look at an ssa, AAA rated supranational. They're quite happy to pot their money there. So that's, I'm sure that will probably be a debate that gets revisited again. And if we get quite a bit of supply next week in dollars which we are expecting and uh, from some of the big AAA names it will be really interesting to see how close we might get to that in primary market. How close against treasury is now.

Speaker B: Ralph, A uh, very interesting article we've had this week is by Francesca Young, our investment banking editor, about three letters that used to be incredibly familiar and important in the capital markets and are now making a bit of a return. And that's mtm.

Speaker A: That's right, the medium term note market. It's actually something we've discussed on the podcast for the last couple of weeks. A medium term note is not at all descriptive of what the product is apart from perhaps the word note. It's basically private placements, privately placed bonds. They're usually uh, the Typical MTN comes about by way of an investor reverse inquiry. So it's not the bank going out touting, uh, work on behalf of an issuer. It's something that the investor wants and they will typically want to be the only investor in the deal. It'll be arranged by one bank, supply private trade. They're typically issued from what's called an MTN program. So they're sort of constantly offered as it were and it's something bespoke and unusual.

Speaker B: And the issuers tend to be good quality bond issuers with large programs.

Speaker A: That's right. Uh, the biggest users of these markets are uh, the uh, SSA issuers that we've just discussed. The banks themselves issue a lot through the MTN market and you get a fair few uh, investment grade corporates too.

Speaker B: Now Francesca, who covers a, uh, lot of people move stories for us, has been noticing that MTN bankers are cropping up more and more and more often in the bankers that firms are hiring. So what's going on?

Speaker A: Yeah, there's a lot of competition for MTN bankers at the moment. Someone I met up with, in fact two banks I've met up with in the last couple of months have said they were, were hiring for people with MTN experience and that uh, it was hard to find, find these people. It's interesting because this market was a bustling, thriving thing before the 2008 financial crisis. It was full of exotic structures that used to make the banks money and it was also full of uh, what's called league table trades, so bills done with either no P and L or that the bank subsidized to provide their issuer clients with cheap funding in the hope of winning a fee paying bond mandate later on down the line. Those are the two classic motivations for being in the MTN market. And after the financial crisis the um, MTN market really don't know, hasn't been its form of glory. A lot of the um, structured products just went away.

Speaker B: Um, investors basically got cold feet about anything with the word structured in it, didn't it? And then yeah, those structures sort of basically withered almost immediately.

Speaker A: Yes, that's right, they got burnt uh, by quite a lot of them in the immediate aftermath of the financial crisis. Um, they've come back a bit certainly in the SSA market. If we think about the discussion we had a couple of weeks ago about um, callable bonds for SSA issuers those are a classic way to add or enhance the yield of your investment through a bespoke deal. So that's what's been going on there. And actually structured products um, are ah, making something of a comeback generally as investors look for enhanced yields. So those two sort of prongs of the MTN market are certainly driving and we've certainly seen uh, an increase in volumes in business. But there are also some other reasons driving, uh, driving the sort of I guess the hiring m or the interest in MTN bankers as well. I mean there's been again it's related to the uptick in activity but certainly in the Middle east we've seen a lot of extra private placements and I'm not really talking about the big sovereign private placements uh, that we've discussed on the podcast, but really more local banks looking to get in on um, this sort of classic MTN activity. And then of course you know, private credit is you know, very fashionable at the moment. And so uh, anyone with any experience of any sort of slightly knotty private financing will be in demand. Although it should be said there are big differences between what's classically thought of as private credit and what's an mtn. And probably we can discuss that a bit later perhaps.

Speaker B: Yeah. And so this market obviously dwindled and now it's recovering. What happened to all the bankers that were doing it pre crisis?

Speaker A: There's not many of them left. I mean there's a couple, there's a couple knocking around but um, they have you know, either sort of joint responsibilities elsewhere as sort of heads of public syndicate as well as looking after the MTN business or in many cases they left the market altogether. If we think about the MTN market historically, even when it was at its previous peak, it did have a sort of a small coterie of senior bankers that stuck with it for years and years and years and years. And that really is just a handful of people. But it was also very much a sort of junior level job to begin with where you could get a lot of experience of a lot of different things very quickly and then you would move on to uh, or you would try and move on to the more sort of prestigious, as it was at the time, public sector bond markets. So a lot of people with MTN experience sort of drifted off into or progressed is a better way of putting it into uh, you know, public markets. And all of that means that as the market became less and less fashionable and those sort of market veterans became more and more expensive, banks got rid of them and they left the market altogether. So the reason this sort of competition to find experienced MTM bankers is so fierce is because there just aren't that many of them around.

Speaker B: But some of the ones that have left the market are being tempted back, aren't they?

Speaker A: That's right. Uh, I mean that does show you just uh, how much banks value this type of experience at the moment. You know, it's more typical in banking and capital markets I would say, and you know, you hear this anecdotally a fair bit, that it's very hard to make a comeback once you've left the market. It's as if your skills are deemed to sort of wither, uh, quickly after you leave. And people would always want people with more recent, relevant experience. But what we're hearing is that there's approaches being made to people who've been out the market for a while just because they have that experience.

Speaker B: So what are the benefits of that experience particularly?

Speaker A: Well, because of how the MTN market operates, it requires something of a sort of proactive approach by the bankers. In it, you are rushing around trying to find sort of bespoke, bespoke solutions, if that doesn't sound too corporate for both investors and issuers, and really getting into the knotty stuff of all the really nitty gritty details about what sort of securities your investor is looking for, what they can hold, what they can't hold, what the issuers can and can't issue. So it gives you, you know, a very different experience to bringing a public trade which is designed to be sold to as many people as possible. Whereas these things really, uh, these mtns, you know, you, you might get an investor that's looking for something very specific like uh, they might be looking for an issuer, uh, with a particular credit rating who can issue in a particular format, who can do a particular type of settlement, who can set it at a particular time and handle a particular structure. And so dealing with all of that and negotiating it back and forth is, is, you know, it's quite a particular, particular skill set and that's more valid. And I think that's probably a lot to do with why there's this sort of tentative crossover with private credit. If you think about what private credit is, it's different from an mtn. And MTN is this sort of continuously offered product where you can vary the details of it. But a private credit, uh, deal is often a bespoke one on one negotiation, the whole, you know, standalone documentation with covenants and all sorts of knotty factors negotiated directly between the investor and the borrower.

Speaker B: Yes, and it was interesting that what one person, Francesca spoke To admitted basically that the skill sets were quite different and that the speaker wouldn't claim to be an expert in the kind of bespoke, uh, covenanted deals that go on in private credit. But another emphasized the, you know, that crossover and the, and the uh, synergies between them.

Speaker A: Yeah, exactly. I mean you can tell who's uh, probably looking for job and private credit and who isn't from those two interviews perhaps. Um, I might suggest. But yeah, it's certainly true that uh, I mean look, if you were going to hire someone from a public syndicate desk or an MTN desk to work on a private credit deal, you might imagine that the MTN person had a slight leg up in terms of their experience of sort of arranging bespoke transactions.

Speaker B: So I expect to see more and more bankers putting MTNs on their CV where perhaps it had been rubbed out before. I do remember that after the financial crisis a lot of people who'd been structured finance bankers very proudly, um, before it suddenly became something else and. But MTNs are swinging back into the limelight.

Speaker A: Yeah, certainly for now. And you know, if there is a scarcity of people out there with that experience, then you can certainly um, expect people, you know, people in investment banking are always happy to attach themselves to success even in cases where they had nothing to do with it. Uh, and I'm sure we'll see plenty of that going on too, especially if uh, all of the experienced people are either now in other jobs or have been snapped up or can't be tempted back to the market.

Speaker B: There's a funny microcosm of this as well actually, because Francesca herself was, was an MGN reporter uh, earlier in her career before going into emerging market bonds. And so I think it's, it's a uh, a bit of a trip down memory lane for her uh, working on this. And, and uh, it's worth recalling as well that pre crisis Global Capital had four reporters covering MGNs, uh, at one stage. So that you know, is an example of how, you know, the products go in and out of fashion.

Speaker A: Yeah, I mean, that's right. I remember joining Euroweek as it was then, now Global Capital, precisely because uh, Cesca was abandoning the um, MTN editorship to go to work at emerging markets. And yeah, I was lucky enough to uh, be approached for a job and here I am 16 years later. Um, and in that time we, you're right, we went gone from a number of people covering MTNs to really doing no coverage of it at all. And uh, obviously just in the last year or two, we've relaunched our coverage, we've launched our first uh, MTN Market awards which will be running again towards the end of the year. And ah, of course we have our MTN monitor database which is the only real dedicated source of MTN data for that market. And of course the other thing, you know, uh, why Tesca was able to delve into this uh, is because of course she's still able to rely on those veteran contacts of years gone by. Because it's actually something worth pointing out about the medium term note market is that it's probably the most sociable and collegiate and friendly part of the debt capital markets that I've experienced. Certainly the people in the market that stuck around for a very long time, although they're in competition, it's a very sort of, I don't know, friendly place, friendly place to work. So it's not surprising that um, it's able to attract and uh, bring people back who have left it.

Speaker B: We didn't include any of the names of the MTN bankers moving around in this podcast, but if you want to know chapter and verse on who's been moving where, do consult Francesca's article.

Speaker A: Yes, and that's called MTN Bankers so hot right now. Uh, and uh, speaking of competition for staff, the MTN market is not the only place it's happening and we'll talk about where else is ferocious next.

Speaker B: And now finally, uh, we welcome David Rothney back to the podcast, our investment banking correspondent.

Speaker D: Hello, John. Hi, good to be here.

Speaker B: Now you've written what's uh, perhaps a bit unusual, a good news story for bankers in the investment banking world.

Speaker D: Yeah, indeed, Yeah. I mean I know it feels like a long way off but um, bonus season is starting to rumble because, um, I've written this week about a, uh, survey by Johnson Associates which uh, predicts a record year for bonuses for equity capital markets and M and A bankers. These bonuses won't be paid till next year, but given the fact it's been such a busy year so far, that's the prediction.

Speaker B: And rather amusingly you uh, actually spoke to some bankers who were either on holiday or you know, close to going on holiday and they were saying that they are already thinking about this.

Speaker D: Yeah, absolutely. This is sort of, it's quite an interesting area compensation because we tend to sort of put it in a bucket of this is a yearend thing but it accrues through the year. And um, what we're, because of the sort of record levels of activity we're seeing, um, bankers are now you know, looking to state their claim and you know, department heads are thinking about the bonus pool and what it's going to look like. Particularly important this year because the US has kind of led the way with such a huge boom in activity that the US bankers that worked on things like the SpaceX IPO and countless other big deals are going to get paid a lot of money this year. So that means there is less money to allocate uh, to other regions. And so that the whole kind of bonus dance is starting a little earlier as we will come back in September. Um, particularly in the US post Labor Day, those conversations will start with a view to bonuses being nailed down in the fourth quarter. And as you know a lot of the activity has happened so far this year. You know, debt capital market activity has boomed. A lot of pre funding. It's been the same story with the kind of IPO market as well. So I think we've got a pretty good idea that already that this year is going to be a banner year.

Speaker B: Do you think it could even be a record?

Speaker D: Well, that's one. I mean I spoke to Alan Johnson who um, runs Johnson Associates and they've been created, they've been producing these surveys on compensation for 25 years based on public information but also direct feedback from banks. And he seems to think that absolutely yes, this could be the biggest year ever for bonuses, particularly in those, in those narrow areas though of ECM and M& A.

Speaker B: Right. So obviously there have been some massive deals. You know, SpaceX's IPO is probably the most famous among them. And I think you put that, that had uh, paid a total fee pot of $500 million just for that deal. Uh, but obviously there's a lot of bankers who are not directly working on those. Their firm might have had a role but there's a limited number of people who can work on a single deal. So is this really going to benefit bankers, uh, across the street or is it just a very select few?

Speaker D: I think it's a select few. I mean bankers, their whole sort of purpose in a way obviously is to serve clients, but when they're not doing that, they like to attach themselves to revenue. So you know, every, every successful deal has as many, you know, many fathers as it were. So I think but you know, big teams, especially on something like SpaceX, you'll have had the global head of technology, you'd have had the entire U.S. you know, the U.S. investment banking team. But to your point, no, it won't impact everybody and not everybody will share in the spoils of what has been pretty much a US driven deal bonanza.

Speaker B: And there are obviously rules and norms that govern how bonuses are given and those differ between the us, Europe and other markets, don't they? You've analyzed that a bit in your article.

Speaker D: Yes. So it's tempting to think because we are in this kind of boom market, record bonuses, record compensation. There's a sort of another side to this, which is the recruitment market. So it's retaining talent, but also recruiting talent. And in these markets generally, history shows that banks tend to get a little bit, um, over exuberant, shall we say. And bankers tend to have the whip hand. And all of these bankers who have worked on these big deals will feel like, uh, they've got quite a strong hand negotiating going into bonus season. But what we are seeing is that um, against this backdrop there's been quite a lot of recruitment and there are sort of rules and have been since the financial crisis. This era of the kind of multiple year guaranteed bonus and high banker compensation are largely over. But of course this boom market is now challenging that thesis. And yeah, we're hearing of all sorts of things. I mean there are rules on bonuses. You're not allowed to guarantee a bonus beyond one year. But there is evidence, um, that some banks are kind of using workarounds to retain, but more importantly to recruit the star bankers. Because they see the star bankers as the people that bring in the business.

Speaker B: Yeah, of course, because if you recruit somebody from another firm, they're going to lose their bonus essentially, aren't, um, they, if it happens during the year, unless it's sort of immediately after the bonus has been paid and therefore the bonus becomes a very important part of the negotiation. And the firm that's recruiting them often feel they have to effectively buy them out or compensate uh, them massively for it. So bonus discussion is very important in recruitment. And what's your sense of how generous banks are being at the moment in those negotiations?

Speaker D: Well, there's a few things here. Uh, so to your point, it's your only question really about who's benefiting from this? I think the short answer is broadly the US banks. So they are winning market share, uh, and so therefore their bankers are ah, getting better paid and the US banks are kind of out gunning. It's an old story outgunning the Europeans in scale and it has become a scale game. So European banks, there are strict rules in Europe, uh, regarding compensation bonuses, strict rules in the uk, although the UK lifted the bonus cap a couple of years ago in the US there are still rules and I don't know the actual nitty gritty of it, but the consensus is that it's a lot, there's a lot more latitude, US banks have a lot more latitude to pay up for their best performers. I should point out as a side note that boutiques and other banks that are not so outside the tier one sort of G sifis, there aren't the same rules on compensation. So boutiques, which partly explains a lot of their success, have been able to attract star bankers because they can pay them what they want. So this is what the kind of US banks are up against. And the US banks are paying so guaranteed bonuses of one year, potentially two years. And then it gets a little murky, which is where these kind of workarounds come in and we hear stories which are difficult to sort of, um, substantiate or confirm. But there's a widely accepted kind of practice that there are things such as handshake deals where you know, a bank wants to get a star banker from a rival and says, you know, we can guarantee you for the first year, we can sort of guarantee you for the second year and after that we'll make sure that you're, you're well looked after. But you know, we can't put that in your contract because we can't guarantee that. And so these are the kind of area and we're hearing this, this kind of practice which you kind of associate with the pre financial crisis era, um, but apparently it still goes on, but is particularly pronounced at the moment.

Speaker B: But you also describe a sort of two tier market in a way, don't you? Because although they're at the very top end and for the people perceived as stars, the market is basically very intense at the moment and that they are able to command high, uh, bonuses and high terms on transferring from one firm to another. But there's a sense that below that level it's a bit more of a buyer's market for talent, isn't it?

Speaker D: Well, absolutely. And this is, you know, dare I mention it, the pervasive influence of AI which I've, you know, written about and come on this podcast and talked about before, which is really redefining kind of the way that banks recruit and the so called pyramid. So we know there is evidence that fewer juniors are being hired now as banks kind of look at AI and the way that they can automate some tasks and cut the number of juniors that they hire. Um, and so in that way below the kind of star bankers Banks are still in this mode now where they're looking at headcount and thinking, well really, what's it going to. We don't really want to go out and hire 100 bankers now if we're going to have to lay them off in 18 months time because we don't really know what the future looks like. And this idea, this is what Alan Johnson was saying that a few years ago, that sort of phrase, the war for talent, which you know, as journalists we've possibly all guilty of using this phrase, but it was, it used to be a real thing. Um, and he was saying, you know, that's almost like a vestige of a bygone era. There isn't really this war for talent. And now it's a case of, well, if we want to get somebody, we'll go out and get them. And there isn't really this need to have tens of, you know, hundreds of bankers on the ground anymore.

Speaker B: So David, to sum up, is it hotter competition but for fewer people?

Speaker D: Yeah, I suppose so. And these things are a little self serving in a way because um, you know, obviously bankers like to feel that they're the most important people when it comes to winning these deals. But the truth is more nuanced than that. Um, you know, there are institutionalized relationships. Banks have, you know, different levers and different products to bring and that's instrumental in winning deals. But banks always, you know, the cult of the individual, let's say the cult of the individual, which we thought had kind of been banished really still is very much alive and well.

Speaker B: So David, one thing that interested me in your article was you quoted some of the numbers for, you know, typical bonuses. And actually, although a lot of things in financial markets have gone up enormously since, you know, 20 years ago, let's say to me, looking at these numbers, they were not really out of line with what people were paid a long time ago before the financial crisis. So what sort of numbers are we

Speaker D: talking about in terms of individual bonuses?

Speaker B: Yeah, yeah.

Speaker D: M. I mean, you're right. I mean, you know, it's cyclical and so in, and this is the kind of the beauty of the bonus system, if you like, that in good markets people get paid well and in down markets they get paid less. Well, um, so I suppose as a good rule of thumb, um, the top producers this year can expect, and this is in the US ECM M&A top producers that worked on, so those that worked on these big deals can expect bonuses between $5 million and $10 million, whereas you go back two years that have been 2 million to 5 million. So that's you. Right. That's broadly consistent with previous kind of bull markets, if you like. Um, and so, yeah, I'm not sure the bonus, the quotient is checked. The quantum has changed that much and

Speaker B: yet the overall fee pool has grown. So I, I guess it, you know, it partly, it accrues to the bottom line for the banks.

Speaker D: Yeah. And this isn't a precise science. Right. I mean, you know, and I'm, I'm writing a piece that's kind of predicting what might happen in, you know, six months time. And these numbers are never kind of. And there probably will be people that earn much more than this that we'll never hear about. Um, you know, as journalists, we always like to sort of be able to put a number on it, but it's quite hard to put a number on it. But I think the important takeaway here is this is not going to be a boom that everybody is going to enjoy the benefits of. And you know, European activity, you know, is healthy, but it's not on a par with the US and so there's a concern that US Banks, um, they pay well in the good times, but they pay people in the U.S. and then if there's a down market, the same applies that the bonus pools tend to be sucked back in and kind of preserved in the US And Europeans have to kind of scrabble around a little bit in relative terms, of course.

Speaker B: All right, David, well, thank you very much for that interesting excursion through bonus land. Uh, David's article is called Record Payouts Beckon in M and A and ECM Even As Bankers Hit Beach.

Speaker A: And indeed that's all we have time for this week. So thank you to our, uh, guests for joining us this morning. Uh, thank you to Sarah and David and of course, thank you most of all to you for listening. We'll be back with more from the capital markets next week. Thank you and goodbye.