Pay deals for high-yield bond professionals are soaring just as the market itself is facing its worst rout since the August 1998 credit crisis.
Compensation levels have skyrocketed to the extent that a top telecoms analyst of only middling rank can command a staggering $1m (€1.15m), about twice what an equivalent professional covering the high-grade sector could expect to be paid.
Meanwhile, the market is in terrible shape, with many bond prices at all-time lows and some banks facing big trading losses.
High-yield bond prices effectively tracked the performance of the Dow Jones Industrial Average, which was highly volatile throughout last week.
Bonds issued by companies such as RSL were trading at 19 cents on the dollar on Friday.
Grapes Telecomm bonds were trading in the high 60s, despite the firm having received a ?100m equity injection less than two weeks ago. But demand for good European high-yield players is as strong as ever, according to a report out last week.
Philip Pirie, senior partner at recruitment firm The Consultancy Partnership Group, which compiled the report, said: 'Growth in compensation levels for new hires in the past 12 months have averaged by more than 50%.'
Sales, trading and capital markets professionals earn double the salaries on offer in the investment grade market. In an extreme case, an official at vice president level specialising in analysing the telecom sector is said to have been offered a $1m total package.
'I think you could double that number and still not be in the realms of fantasy,' said a senior high-yield banker.
The shortage of experienced players in Europe is driving up the price that banks are prepared to pay to get good people.
Banks are confident that the market will win them lucrative returns in the long run. 'The profitability of high-grade issuance is declining, due partly to competition, while at the same time high-yield is maintaining its fee structure,' the report said.
Banks can often charge 2% to 2.5% fees to underwrite a junk bond, compared with well under 0.5% in the investment-grade corporate market.
However, the risks inherent in the market were highlighted last week when Morgan Stanley Dean Witter admitted to having lost $90m in the third quarter and said that it was facing a similar downturn in the fourth. The losses stemmed from US high-yield bonds the bank underwrote for ICG and Viatel, which now have little value. Goldman Sachs is also believed to have lost money on RSL bonds for the same reason.
The market correction spilled over into the investment-grade market, with triple-B and single-A rated corporate bonds getting hit particularly hard. That sector includes a rash of bonds issued by telecoms companies such as Deutsche Telekom, KPN and Telefonica.
The market has been lacking lustre since blue-chip US companies, such as Xerox, began issuing profit warnings three weeks ago.
'No one should be surprised by this,' said a bond trader at one US investment bank. 'The equity market has been selling for six weeks now. The credit markets really got hit only this week. We're the lucky ones.'