A 29-year old bond trader made about US$120m for Credit Suisse’s European high-yield credit trading desk last year, as a series of sharp moves in company debt prices created notable winners and losers across the finance industry.
Hamza Lemssouguer made successful bets on debt prices linked to sub-investment grade companies Thomas Cook, Rallye and Altice among others, according to sources familiar with the matter, contributing materially to the roughly US$140m in trading profits Credit Suisse’s European high-yield credit desk recorded last year.
Lemssouguer was promoted to head of European high-yield credit trading at Credit Suisse in August after the desk recorded its best-half yearly performance on record, according to an internal memo.
Goldman Sachs's European high-yield desk also performed particularly well in the first half of the year with trading profits of around US$70m, according to sources, although it gave up some of those gains in a trickier second half of the year.
A spokesperson for Credit Suisse declined to comment on the trading figures and individual companies. The bank's success in high-yield stemmed from "strong client partnerships and high trading volumes" in bonds and credit-default swaps, the spokesperson said.
A spokesperson for Goldman declined to comment on the trading figures.
The successes at CS and Goldman contrast starkly with the difficulties at other banks. Bhavit Sawjani left JP Morgan late last year after the European high-yield credit desk he headed lost around US$40m, according to sources. Citigroup’s head of European high-yield credit trading Paras Shah recently left the firm after a tough year, sources said.
Sawjani is now a partner at investment firm GoldenTree Asset Management. GoldenTree and Sawjani declined to comment. Spokespeople for Citigroup and JP Morgan declined to comment. Shah did not respond to a request for comment.
The struggles for JP Morgan and Citigroup represent something of a blip in a very strong year for bond trading at both firms. Revenues in Citigroup’s fixed income unit rose 10% annually in 2019 to US$12.9bn, while JP Morgan reported a 13% annual increase to US$14.4bn after a record-breaking fourth quarter.
But traders note European high-yield credit was a treacherous market to navigate in 2019. Despite remaining low by historical standards, defaults inched higher, often accompanied by dramatic moves in corporate bonds and credit derivatives.
Last year saw the highest number of trigger events since 2009 for credit-default swaps, derivatives used to protect against debt defaults, Citigroup credit strategists said in their 2020 outlook titled "The view from the precipice". In Europe, eight European companies with rated debt defaulted on €5.4bn of euro and sterling bonds over the course of the year, JP Morgan strategists said in a recent report.
“Defaults are increasingly a concern,” the Citigroup strategists said.
For traders, the speed and scale of the moves in credit markets were particularly challenging.
Take Rallye, the holding company for French retailer Casino. The upfront cost of buying five-year CDS protection on Rallye leapt from 48 to 73 points overnight in May after the company entered creditor protection, according to data provider IHS Markit. That means the upfront fee a buyer of default protection would have paid to insure €1m of Rallye debt rose from €480,000 to €730,000.
Sawjani’s desk at JP Morgan lost about US$25m on bonds and CDS positions related to Rallye, while HSBC lost about US$5m, IFR reported last year.
Elsewhere, the upfront cost of default protection on €1m of Thomas Cook debt jumped from €340,000 to €650,000 in the space of a few trading days in May after the travel company issued its third profit warning in less than a year. Thomas Cook filed for bankruptcy a few months later.
Andrew Jarman, a former credit trader in Citigroup’s London office, left the bank last May after he racked up paper losses in the region of US$10m related to CDS protection sold on Thomas Cook, IFR reported.
BIG LOSSES, BIG GAINS
Credit Suisse’s Lemssouguer and Goldman Sachs's high-yield desk both made money on Rallye, according to sources. Among the investor community, Scott Goodwin, co-founder of hedge fund Diameter Capital Partners, recommended buying CDS protection on Rallye at the Sohn Investment Conference in 2018.
Large moves in the credit markets may be the shape of things to come in 2020 and beyond. The Citigroup strategists calculate that the “credit cliff” in the US and Europe is at its steepest level in historical terms.
That points to a highly bifurcated market, with the debt of most high-grade companies trading near full price and a cluster of firms such as UK food company Boparan and retailer Matalan trading well below face value.
“It’s easy to fall off the cliff in credit,” the Citigroup strategists wrote. “Investors will have to ‘live on the edge’ to make any money.”
Additional reporting by Eleanor Duncan