Goodbye high yield, hello vulture funds

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High-yield bond professionals look set to suffer from the credit crisis. Now may be the time to move into a vulture fund instead.

In the days before the credit crunch, when rating agencies' verdicts were still trusted and AAA meant absolutely no chance of default, high-yield bonds were differentiated with ratings of BB or lower, indicating that issuers couldn't be entirely trusted to make repayments. But with all debt now eyed suspiciously by wary investors, and even triple A bonds being hard to shift, the high-yield market has all but seized.

The problems were visible last month, when New Zealand's Yellow Pages directories group slashed a planned high-yield bond issue of NZ$300m by more than 50%.

Troy Angus, a portfolio manager/analyst at Paradice Investment Management says the move reflects investors' indifference to the credit markets: "There haven't been any significant transactions completed in the high-yield space for about the past month across the world, let alone Australia or New Zealand. There's not too many in Australia in a position to offload high-yield debt."

Will this hurt job prospects for high-yield professionals? Deutsche Bank and Lehman Brothers are rumoured to have put a freeze on all headcount additions (allegations unconfirmed by the banks), but Andrew Valentine, a Melbourne-based consultant at financial services recruiter Jon Michel, says it's too early to tell: "The banks appear to be taking a wait and see approachm, but we haven't seen a significant drop in hiring in Australia."

So far, there have also been no repercussions for pay in the bond market space. "For a manager, they can earn AU$150k to AU$190k as a base salary," said Valentine. "With the performance upside, you are talking anywhere between 70% and 150%." However, if bond issuance remains low it's hard to see how pay will remain unaffected in future.

High-yield professionals who want to consider their options may be advised to shift their attention to more dynamic areas of the market - namely vulture funds. "Because credit spreads have increased significantly, some banks and other investors are looking to put together vulture funds that will buy up distressed debt rather than finance new deals," says Angus.

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