eFinancialCareers

The heroes and villains – according to what they report.

The financial information sector includes companies that provide financial services firms with the information they need to conduct their business. Theoretically, they include everything from small independent equity research firms to financial services consultancies. Here, however, we’re focusing on two major areas – rating agencies and providers of real-time financial markets data.

Rating agencies assign credit ratings to organisations and governments after calculating the likelihood of them defaulting on their traded debt products (companies issuing debt products pay the agencies for this privilege). Ratings are issued in a coded form, making it easier to make comparisons between one organisation and another. So, for example, if a company is rated AAA, the rating agency judges it almost 100% likely to pay on time. If a company is rated C, the risk of not being paid on time is high. There are numerous other ratings in between – from AA and A to Baa and so on.

Different agencies use slightly varying codes for their ratings. But on the whole, bonds ranked Baa, BBB or above are considered “investment grade”, meaning investors are likely to get their money back. Anything ranked below this is known as “speculative grade”, where repayment is less certain. While rating agencies help banks and their clients by calculating the likelihood of a default, data providers, such as Reuters, Bloomberg and Thomson Financial, provide live (real-time) information on the changing prices of financial products.

They also offer a wealth of other data, including news analysis and information on company accounts, plus related products, such as screens and terminals for traders to use to access their information.

Trends

According to their critics, the big three rating agencies are overly conservative and ill-equipped to deal with the complex products used in today’s financial markets. “It is quite scary: there has been enormous growth in derivatives, hedge funds, exotic bond options and other products. Many of these are not cash products so they’re off the balance-sheet and therefore very difficult to measure and assess, which leaves the ratings agencies in a dilemma. This is a big issue not just for ratings agencies and data providers but for central banks and corporate watchdogs,’’ says John Noonan, Sydney bureau chief of Thomson Financial.

But the big majors carry clout. In May 2005, Standard & Poor’s (S&P), one of the leading rating agencies, delivered a heavy blow to Ford and General Motors by downgrading their debt to “junk” (speculative) status. The move affected €355bn (US$449bn) of debt at the two companies and followed a 40% drop in first-quarter net profits at Ford, as well as a loss of US$1.1bn over the same period at GM.

In March 2006, Fitch Ratings dealt Ford another blow by downgrading its debt further into junk – from BB+ to BBB-. This followed US$1.6bn in losses at Ford’s North American division in 2005.

Data providers occupy another spectrum entirely – one beset by intense competition between leading players, which battle to provide data faster, more cheaply and on increasingly fancy screens. Over the past decade, Reuters, the traditional market leader, has lost out to Bloomberg, its aggressive number-two rival.

Key players

The ratings agencies sector is dominated by three key players: Standard & Poor’s (S&P), Moody’s Investor Services and Fitch. The last independent local ratings company, Australian Ratings, was absorbed by S&P in the 1990s.

“The main distinction to be made about data providers is whether they are issuing breaking news and general news feeds or real-time market information. Many do both, but in separate sections of the business,” says Thomson’s Noonan.

Roles

If you work for a rating agency, don’t expect to find yourself rating companies’ bond issues immediately. You’re likely to start as a research assistant, helping an analyst, and work your way up. “But it is a very good place to be poached from for investment banks,” says Michael Hermans, senior director of Fitch Ratings in Brisbane. Employment in the sector has doubled in the past five years and is still growing, he says. Analysts at rating agencies specialise in particular product types including corporate finance (company ratings), public finance (local government ratings), infrastructure (utility companies and public project finance), structured finance (rating derivative products) and financial institutions.

Not all rating agencies operate a proper graduate recruitment programme. S&P recruits on an ad-hoc basis. “We hire graduates in addition to recruiting staff from a variety of backgrounds within the financial community, including banks and financial institutions, corporates and professional services organizations,” says Marianne Matin, director of Human Resources at S&P.

Neither does Moody’s run a graduate training scheme, but it occasionally offers internships to students and recruits some graduates. Fitch does not have a formalized recruitment program in Australia but does take on interns from time to time, particularly for major projects.

Career rungs

There are distinct rungs on the career ladder at data providers, beginning with analyst/reporter, then senior analyst, bureau chief, senior editor, publisher, where the incumbent might be in charge of Asia, or the whole world. Information providers cover everything from data analysis to technology, journalism and business development. Some offer complete platforms – news and data feeds and electronic trading devices. Graduates need to have both financial and journalism (or communications) qualifications and experience. At Thompson Financial in Sydney, all employees are both analysts and reporters, says bureau chief John Noonan.

Pay

You’ll get a lower salary than someone in investment banking, but a higher salary than a journalist and you’ll have a reasonable work/life balance. Bonuses are in the 5%-20% range, except for sales people who can receive considerably more. You’ll also have regular opportunities for overseas postings and short-term international travel.

Skills

• “To work in a credit ratings agency, you must have a good technical ability to understand credit. In structured finance, you would need real quantitative capacity and a strong background in modelling. We look for banking and commercial experience and communication skills. Anyone wanting to work in sovereign or state government debt needs economics,” according to Fitch’s Hermans.

• At data providers, Noonan says, communication and finance knowledge are pre-eminent but “even more important is the ability to analyse quickly and decisively and take a little bit of risk in the analysis. Those who don’t last are those who lack the chutzpah to go out and put forth their analysis and opinions with confidence,” he says.

• Matin at S&Ps says: “We seek skilled and talented individuals, who are committed to Standard & Poor's values of integrity, respect, teamwork and the highest professional ethics. We actively encourage our staff to identify talent in their own personal networks and reward them accordingly.”