Welcome to 25 for 25 the credit sites 25th anniversary edition of our no more risk better podcast five episodes 25 questions insights from our expert analysts and industry veterans. We revisit the origins of credit sites share hard one lessons from across cycles and unpack the art and science of credit analysis. We'll highlight how we collaborate and explore the future of credit research what's changing and what still matters if you want to know more so you can risk better you're in the right place. Let's dive in celebrating 25 years of credit.
Hello everyone and welcome back to the credit sites no more risk better podcast and this is when he sees our global head of strategy at credit sites. And today we have a very special first episode in our 25 for 25 series celebrating credit sites 25th anniversary. And with me today I have three of our esteemed European analysts, all of whom joined within about three years of each other in the early days of credit sites so we are going to get the inside scoop from Simon Adamson, our head of European financials, Andy Beltin, head of your pain, basics and infrastructure and Andrew Mulder, our head of European utilities. And I do have to say that you guys must have joined while you're still studying in university for have been around credit sites for as long as you have we also have Zach Griffiths, our head of US investment grade and macro strategy and we're going to talk about the early days of credit sites and some of the lessons learned so thank you guys for joining me today.
Simon, I would love to start with you. You are truly the heart and soul of our London team and London office. What was the vision behind founding credit sites you were already involved in the world of credit research as credit sites was getting founded. Can you give us an overview of what was it like in the early days and before coming around.
You make it sound so long ago. What was it like in the early days I think I'm struggling to remember some of it but I think back in 2000 you remember. Sorry. Everything used to come by facts if you remember.
Yeah, facts was a new invention. Well, back in those early days I think the vision was just very simple. It was to provide independent credit research to what was basically an untapped market and if you think back to 2000. This was actually a pretty new idea.
I mean no one knew if it would have any legs. Obviously we're still going so it had some. I think part of that vision was to gather together a group of senior experienced credit analysts and just provide good quality research. No actually grind.
No trading operations. No assets under management and a much bigger team than you would find any of the individual banks that will provide in credit research. And of course back then there was a lot more sell side research. Most of the investment banks have teams that were publishing credit research and now a big question and the big hurdle I guess when we founded credit sites was that we were able to do it.
And we found that credit sites was would anyone actually pay for the service because the sell side research was perceived as being free. Now of course it wasn't actually free. Someone was paying for it somewhere but it wasn't unbundled and clients weren't explicitly being being charged for it. So we had to get past that hurdle to begin with.
And I think maybe the one thing that helped credit sites in the early days more than anything was if you remember Elliot Spitzer who was the New York State Attorney General was sort of sparking a debate on biased in equity research and setting up independent research. And that really helped us on the credit side as well. So I think the idea of independent credit research took hold far more quickly than I think even we had hoped at that time. And that's what really spurred the development of the firm.
So it's fairly simple vision but it was going into sort of unknown territory really at that time. Thanks Simon. That's interesting to think back and kind of distinguish between what we do at credit sites and the sell side research. I think some of those challenges or considerations have been brought up recently are going through the MIFI to exercise back at Wells Fargo on the sell side.
And so I think there's some interesting developments recently that are almost similar to what we saw back then. I know you kind of outlined one of the big moments or perhaps drivers of credit sites coming to be but can you share maybe a defining moment in terms of maybe whether it was what made it clear that the model was going to work or anything else that kind of sticks out to you in the early development days outside of kind of what you just outlined for us. I guess for me personally and probably for for Andy and Andrew as well was the opening of the London office at the end of 2002 beginning of 2003 because that's where we all got, you know, got involved. And obviously credit sites expanded was founded in the US expanded out into London beginning 2003 to start covering European credits that's where it all started for the three of those in terms of credit sites.
In terms of defining moments for the firm, I guess there've been quite a few but the one that sticks in my mind I guess is the global financial crisis obviously that started 2007 which was still fairly early on in history of the firm. And I think what we came to realize was that within bounds, you know, global financial crises are actually quite good for credit sites because you get a lot more readership, you get a lot more people that are suddenly concerned about credit, you need to be able to show people that you've got some senior analysts that have lived through previous crises, although I don't think anyone had seen anything quite like what happened 2007 onwards but you know, for example, just in banking, you know, we've been through the Nordic banking crises of the early 90s we've seen LTCM. So, you know, we had analysts that have a lot of experience in that as long as as long as not too many of our clients are actually getting caught up in whatever crisis is going on, those sort of things actually again, we know we've got a lot of readership, we've got a lot of more publicity, much more visibility because of what was happening 2007, 2008. So I think that was probably for me the defining moment in the development of credit sites.
I think that the kind of counter cyclicality of credit sites has been really nice for me personally joining from a bank, which is highly cyclical and Simon, it seems like banks are always ground zero for these crises are very frequently around zero for these crises. So I'm amazed that you are still kind of able and willing to stick with the banking focus. Do you want to shift in public consumer or something else? Well, I guess it's what makes it interesting.
I do remember back in 2006, talking to John Raymond who covered the banks with me at that time and we were saying, really just can't think of anything to write about the whole sector is so it's so boring, there's nothing happening. Everything is so tight. What are we going to do next? Do we even need to cover banks?
And then, you know, 2007 onwards, it's been a been a really fair story. I mean, up until even, well, obviously, a couple of years ago, we could be sweet in the US regional bank. So, I mean, the good thing is you're always seeing something new. Just when you think you've seen every reason why a bank may get into trouble and every aspect of what a bank might do is something new comes along, some new risks and new products.
So I think that keeps it fresh and that keeps it interesting and it can get a bit hairy at times and it can take over your life from time to time. But it's been quite an interesting sector. Yes, absolutely. Never underestimate the potential for financial engineering to really add some hidden risk to the system for sure.
So, Andy Beltan, I want to go to you next. I know that a defining moment in credit sites early development, at least for Simon and Andrew Mulder was interviewing you. Andy, how has your approach to credit research and analysis evolved over the past 25 years or so? That's a good question, actually.
And I think I probably answered in two ways. The first is actually to say what hasn't changed. And one of the things that's been constant in credit analysis, at least for non-banks or non-financials, has been important to cash flow analysis and modeling. I first heard the phrase, cash is king when I turned up at a now-defunged UK merchant bank in the late 1980s.
But I think it's a phrase that is as resonant nowadays as it was back then, whether or not you're looking at a typical, for example, a chemical behemoth like BASF or a small paper producer like Fedra Goni, which is struggling with a four times leverage profile. And I think one prime example of importance of cash flow is actually looking at the European high-year construction space, which is a sector that I've got firsthand experience of. Now, this is a space that's basically seen a plethora of failed and bankrupt companies like Abongoa, Astaldi, CmC, Ravenna, all of which have disappeared through essentially cash flow pressure. This is a sector where e-bit-down numbers can basically be plucked out of the air.
And I think it's a very solid illustration of the fact that the devil is in the detail. And the detail here is in the working capital statement and it's in the free cash flow lines. Now, in contrast to that, I think one of the greatest changes that I've seen in credit research is I've been at credit sites has been the changes in the way we approach relative value. So, when I first turned up in 2005, the European bond market was great deal smaller and less liquid than it is now.
And actually we express relative value through CDS recommendations. Now, the global financial crisis put pay to that market in a completely devastated I.G. CDS with the result that it actually accelerated our move towards using Abong recommendations to express relative value. And of course, that's a process that is still ongoing and that is even accelerating as we look at the present day.
So I think I would say that's possibly the biggest change is more on the relative value side rather than the fundamental research side. Yeah, I think that's a great point. And the technical aspect of relative value comes up a lot with clients when we have strategy conversations. How are people positioned?
Is there liquidity? Is this on the run or off the run? You know, we're on the curve. Is it a hybrid?
And remolder, I know that you have some good experience with the corporate hybrid space, which has really shown some pretty significant growth, especially in your sector of utilities. How has your approach to credit research evolved over the past 25 years or even more recently? Well, I think what you just said about hybrid is one prime example. There are different instruments now and more complex instruments.
It seems like bankers are always coming up with something new to get around some kind of issue that companies perceive they have. And hybrids are a great example of that. I can echo Andy's comments before I joined Credit Site, all the relative value was looking at CDS mostly. And I originally came from an equity background.
And I actually found it quite... When I first started looking at credit, it was like, oh my God, with equity, you've got the share price. With credit, you've got 20 or 30 or 40 bonds depending on what company you're looking at. So it was a slightly different universe from me originally.
But I think really the making that's changed for me is looking at some different instruments in a different context rather than just looking at the CDS originally. And now the bonds. And again, as Andy says, we're moving more on to the individual bonds level recommendations because I think that's kind of what clients are asking for. I mean, it can be quite complex, particularly if you've got some of the utilities I have and I'm sure Simon's the same in the banking sector and some of his names.
You do have 50 or 60 bonds that you can pick from. It can be quite difficult to find relative value between those bonds. And I think one of the things Simon said about founding credit sites with experienced analysts is an important point because when you're looking at individual bonds, you need to have contacts in the market that you can talk to and say, well, is there anything strange about this bond that makes this relative value slightly different from the others? You know, is it perhaps it's not liquid at all?
Perhaps it's a smaller size, so it's more accessible to the retail market and things like that. And that makes a difference. And so I think it's important to have the contacts in the market, which I think was one of the founding things with the credit sites when I started the credit sites. The main people within the business were experienced analysts within credit sites were experienced analysts with years of experience behind the most investment banks.
And that was important because when you kind of go to a company and say, oh, I worked for credit sites in the early days, they kind of say, who are they? But if you're going to say, I'm Andrew Molderer, I'm Simon Adamson or Andy Belton, they would know who you were and they would speak to you. And that kind of really helped, I think, the growth of credit sites from where we started to where we've got to. Andrew, how long did you do equity research before you came to credit sites or how long are you an equities person before you came to the world?
I was at Goldman's for four years actually doing equity research during the long term capital management. I was at Goldman's then where and that was so that's quite a hairy time. Yeah, so I did four years there and then I moved over to the credit side for four years as well. Then I joined credit sites after that.
I mean, it's kind of interesting you ask about equity research because one of the questions you asked Simon was about defining moments in credit sites history. And I think one of the moments for me very early on was the fact that credit sites was actually looking to do equity research and credit research. But they found that really that the revenue wasn't there from the equity side mainly because there were a lot more competitors and the banks were a lot more active in terms of the equity research they were putting out and everything like that. And so that sort of really I think moved credit sites even more firmly over to looking at the credit side rather than other areas.
And I think that's really where we've grown from there sort of growing the business on the credit side, more high yield coverage, more special situations coverage and so on. So I think that was really quite a defining moment for credit sites deciding exactly what they want you to do and where they want you to do it. That's awesome. I didn't realize that credit sites had considered equity research.
And I remember in my years at both Wells Fargo and Bank of America, I was shocked at perhaps how few companies, individual equity analysts covered and their titles would be seemingly four layers down sub sector of their coverage. And I was like, wow, that is incredibly specific. How many companies could there be that you could possibly cover? So I feel like that's really interesting perspective to think about how that was, you know, at least initially considered to be part of kind of providing this independent research and ultimately deciding the banks clearly have it pretty well.
Surrounded, whereas that really wasn't the same case for fixed income. So one of our most successful equity zones, I think, trying to get into equity research. Well, you got to have some of those to make it 25 years in the business. They're not all going to be home runs.
So Simon, I actually want to come back to you thinking about the credit markets over the past 25 years. What, in your view, have been the most significant changes over that timeframe since credit sites has been operating? Well, I guess in a way, Andrew and Andy have covered a few of those things already. I think, you know, when you think back to 2000, going back to this issue of relative value, it was actually deliberate decision by us in the early days, not to really get involved in relative value, even though most of us had come from the sell side, run investment banks, partly because, you know, we were a bit cut off from that.
We weren't sitting in a trading room, but also we just needed to build up a body of research, you know, fundamental research in order to have something to sell. And therefore, I think we didn't want analysts getting too distracted by, you know, by trade ideas or by relative value or even by that much client interaction. So it was a different sort of perspective in those first few years, but it didn't matter too much in the end because I mean, the market relatively speaking, especially in Europe, was sort of in its infancy. I think, I mean, if you think the firm was founded in 2000, I think from what I remember, the Euro only came into being in 1999, I think it was first of January, 1999.
I don't think we actually got notes from coins in euros until 2002, you know, in those early days, there wasn't really a very developed Euro credit market. It was still pretty much starting off. So that was a very different sort of market for fewer participants, a much smaller market, probably less liquid, although I think sometimes there isn't that much liquidity even today, but it was certainly a different sort of market. I think from my sector, from the bank's point of view, things have changed massively mainly because of the global financial crisis and what happened to regulation after that.
But what it meant was that, and going back to a little bit more under saying as well about what companies he covers is that you have a much more complex liability and capital stack now. So we're looking at a lot of different sorts of instruments or some of them very complex in terms of the regulatory background. And what it means essentially is that we've moved in banks anyway from the concept of bailout to bail in. And that means that investors have to do a lot more credit work, which is good for us, I guess.
But I mean, in the old days, you probably bought senior debt from banks thinking it was virtually equivalent to government debt because whatever happened, the banks would get bailed out. Obviously now you have to do much more credit work on those sort of instruments as well as the more subordinated ones. That's been a really big change over the past 25 years in looking at the banks sector anyway. And as Andrew said, that's probably been married in other parts of the credit market as well.
Yeah, I think that's a great point, Simon, especially as we see these surges in new issues supply, especially for some of the more complex or subordinated structures where there are just deals left launching left, right and center. And clients only have so much time to look at each individual deal, go through all of the different terms and conditions. And that's where credit sites and the broader analyst team does a tremendous job of stepping up and actually getting in the weeds on some of these things amid the absolute deluge of new issues supply. And as it's important to know what you're buying, understand what you're buying, understand how things can go sideways because unlike the equity market, it doesn't just all go up, apparently.
Well, I remember in the early days Glen Reynolds was one of the founders of the credit site saying to us that, you know, as a credit analyst, you can be the smartest guy in the room or the most useful guy in the room. Most of the time you're going to be the most useful guy, but just occasionally you can get a smartish guy as well. So you have those two aspects to it. I was just basically taken a lot of what I was about to say.
I was waiting to get my opportunity to give the Glen comment because that is a classic but it's also a truism. It's absolutely at the core what credit size does is not just be the smartest person in the room, but actually be the most useful. Yes, and I think that the evolution of credit sites to be much more client engaged, you know, more one on one conversations, all of those things. I think that it really increases the utility and clients who lead on us for meetings and more bespoke analysis.
I think are the ones who really benefit from credit sites and also it makes it much more fun for us as research analysts. So I think that's what I'm going to do. I'm going to put things into the world and think who's reading this? Does anybody care?
Also, we get very existential. We get ideas for what we can do from clients as well. It's two or two ways. I remember years and years ago before the Icelandic bank crisis, which was actually kind of a big thing at the time, that we hadn't even looked at the Icelandic banks until a couple of people said to us, well, are you seeing what's going on in Iceland?
Are those interesting decisions might be worth having a look? So I flew out to Reykjavit and met the banks and it was a great couple of years for us because it was a very interesting story. But we probably wouldn't have got into that much later if we hadn't had those conversations with clients where they brought that sort of thing up. Absolutely that reverse inquiry can be so powerful and so beneficial to us and then by default, the broader credit sites client universe.
Alright, let's wrap it up with a little bit of a pseudo speed round. Andy Beltman, I'm going to ask you first, as you look back through your years at credit sites, what do you think was the biggest challenge that you overcame? I think actually, Simon's already touched upon it. And it's that classic juxtaposition between market volatility and sort of commercial reality.
Market volatility is brilliant for our business. It increases the readership on the website. It increases the reverse inquiry demand from clients. But at the same time, I remember in 2007, 2008, we were all incredibly busy running around producing historically high levels of research.
And I think, obviously, insightful research. At the same time, though, a lot of our clients were seeing really intense financial pressures. And you're kind of thinking from a one standpoint, the research standpoint, this is a great thing. From the other standpoint, you're literally going through your roster of clients thinking that hedge fund has gone bust.
That one's gone bust. That one's gone bust. That one's gone bust. And it's that kind of juxtaposition between volatility being great for research, but also having a negative commercial impact is a real sort of memory for me in 2007 and 2008.
And actually, I'd say that that was also something that was relevant in sort of April 2020 when we were faced with a very different challenge. Similar kind of things, in one sense, that volatility was massive. The market was looking towards people like credit sites for our insights on what this unprecedented pandemic and the lockdowns that were resulting from that would have on the market. But at the same time, which on the challenge to balance the challenges are running a business.
And for example, you've got salespeople making loads and loads of cold calls from their kitchens. At the same time, you've got the research team trying to coordinate 25 different voices in a research led strategy article, for example. When you're dealing with 25 different locations, whether it be a kitchen or a lounge or a dedicated office. So I think both of those two examples, I would say, are really clear illustrations of the kind of challenges that I faced during my credit sites career, but also the way that credit sites has reacted to it.
We tend to be very nimble. I think we are incredibly innovative in the way that we operate when facing with these kind of challenges. Yes, absolutely. I mean, I think that we all have a little bit of PTSD looking back at April 2020 and the things that we were doing at the time, especially for anyone who might have had kids at home.
I remember my six month old being on the dog bed and me just throwing balls at him to try and entertain him while I'm trying to do a conference call and figure out what the Fed is going to do next. That was a true delight. Andrew Mulder, I'd love to hear what your biggest challenge was as you're looking back. I mean, I think the guys covered really some volatility in the markets was a big challenge and dealing with what that meant.
And for me, actually, maybe it's well, how do you utility analysts, most of the names I cover are, you know, when I started covering them, they were all double A. Okay, so they've gone down slightly. But occasionally you do actually get utilities that go bust. You know, I covered British energy.
I was also covering Abingoa when that went bust and I'm covering all said at the moment, which is not going bust, but it's very volatile because of what's going on. You know, and that's kind of been a challenge dealing with slightly different things and adapting to them. And as Simon said, you know, you start off and you have a meeting with a client about something and actually, okay, you've got an idea how it works, but you might not have that much detail and that client gives you a little bit more information and then you start to build up a better picture and you can throw your knowledge base from the conversations you haven't client. And that really helps you kind of challenge the challenges overcoming a new situation.
And as you get more familiar with that situation, you get that through speaking with clients and writing research and getting feedback on that research, you know, that really helps you as an artist. I think that's kind of one of the big challenges for me kind of looking at new situations involving my sector. And it's great. I really enjoy it makes the job exciting.
You know, as you say, winning, sometimes you're so busy, you're up all night and you're up at the weekend and you're working on holiday because the situation has come up. But I find that exciting and I enjoy doing that really. But I enjoy doing that when those situations come up. And therein is a very big part of Andrew Molders benefits to credit sites because he manages to make utilities sound exciting.
That's a real talent. First time I found the world's most important utilities analyst in the same sentence. Oh my gosh, I love it. I also frequently think that a team of research analysts would also make the most excellent group of private investigators because we know how to find out information and be a little bit slick about it a little bit sly about it for sure.
So maybe if the credit sites thing goes sideways over the next 25 years, we can all read and be as private investigators and focus on that part of the world in the future. I think in 25 years, probably going to be retired. I was going to say, I might need the help of a Zoomer frame at that point. We need the number of legs.
I'll be there. I love it. I think it could be super fun. And you know what, as we get older, people are more likely to ignore us, at least, you know, for a period of time.
So we can be really sneaky about things. No one's going to be paying attention to the old lady. Just kind of listening on things. I'm here for that.
All right, Simon, I know that you already mentioned one of your challenges in 2006 trying to figure out what the hack to write about the banking sector. But do you have any other large challenges that you can kind of think back to? I mean, challenges every year, I guess, but I guess apart from having to work with demanding credit strategies, which of course has been an ongoing challenge, I think probably actually, probably actually, you know, the failure of credit is really in 23 because that's been the most recent challenge, but also probably the biggest simply because it was so big. There's so much debt out there.
There are so many investors involved with it. So many media headlines and we got so many inquiries and questions and calls. It was a very intense period. So that was, you know, why not probably the biggest challenge, I think.
Absolutely. Well, Simon, as a credit strategist, I do have to just tell you that for the analysts, the beatings will continue until the morale improves. So you're just going to have to continue to take what we're dishing out. But no, that it is all for the good of the firm, the good of credit sites.
And we all know that you three have been great for the firm, great for credit sites. And this has been a really fun conversation. So thank you for joining us in our first episode of our special edition series of 25 for 25 celebrating credit sites 25th anniversary for anyone who is listening. You can always find us by reaching out to your credit sales rep or using that ask an analyst function.
And please like share, subscribe, spread the word of credit sites. We make boring things like utilities apparently interesting. We try anyway. We try.
We try.