European Credit Management rebuilds after profits halve

European Credit Management, the fixed-income boutique founded a decade ago by two debt bankers at Merrill Lynch, is rebuilding following a couple of years of underperformance and mandate losses.

Last week, the firm recruited Andre Mazzella, formerly a portfolio manager on the credit team at hedge fund CQS, to become lead portfolio manager for high-yield bonds. Several further hires are planned.

The additions follow a period of recovery at ECM’s funds, which suffered from poor returns and volatility during the credit crisis. The firm was acquired by US bank Wachovia in January 2007, towards the end of the credit boom. Wachovia, which suffered its own woes in the crunch, was subsumed into Wells Fargo in January 2009.

ECM’s accounts for the 12 months to December 31, 2009, recently filed at Companies House, show operating profits halved that year to £11.4m, compared with the year before.

The fall was mostly due to a 28% drop in management fees, but there was also a 90% fall in performance fees, to £80m. ECM’s assets under management have fallen from a peak of just over €20bn in late 2007, to €12.1bn as of June 30 this year, according to its website.

One investor in the firm’s ECL fund, one of its seven main products, reported returns of -3.7% during the three years to June 30, against an 8.3% rise in the Barclays Sterling Over 15 Year Gilts index.

But during the 12-month period to the same date, the investment performed better, returning 40% to the benchmark’s 8%. That is indicative of a wider recovery in performance in recent months, according to the firm.

According to the investor, ECM has reduced leverage in many portfolios and this may lead to lower, but steadier, returns in future.

Rating agency Fitch Ratings, which scores investment funds and managers, said in February it would maintain its M2+ rating on ECM, its second-highest. Fitch’s analysts said ECM had been “adversely affected by the global financial crisis, but proved resilient”.

They added it now has “a lower business risk profile following the completion of a fund deleveraging programme and the establishment of a positive relationship with its new indirect owner, Wells Fargo”.

ECM was founded in 1999 by Steven Blakey and Stephen Zinser to take advantage of an expected surge in European credit markets following the advent of the euro. Blakey was head of international credit at Merrill Lynch, while Zinser was responsible for overseeing new issues of credit and asset-backed securities at the bank.