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From fencing to Fitch

Desperate for a job, Paul Taylor stumbled into banking by chance and credit ratings thereafter. The Fitch CEO stresses the importance of understanding what one rates.

'They said, "you're the only guy who came to see us." We managed to be seen as people trying to do an honest job, trying to be as transparent as we could be, listening, coming up with our own ideas.' - On meeting clients during the world financial crisis in 2008-2009

SOME fall into something they like doing. Others have their mind set right from the start.

And then there's Paul Taylor, the CEO of Fitch Group, who readily admits he was not quite organised in planning his life.

While he had no idea what he wanted to do in school, two unrelated pursuits - his academic study of marketing and the sport of fencing - got him started, serendipitously, at a big British bank. He then moved to a Japanese bank, and then into the credit ratings industry.

Today, he sits at the top of Fitch, the junior "Big Three" player by revenue after Standard & Poor's (S&P) and Moody's in the cushy credit ratings oligopoly.

Mr Taylor is slowly expanding the firm's market share while building on its treasure trove of financial information, which is packaged for sale to banks. Over the last five years, Fitch has, by its own metrics, increased its market share by 1 per cent a year, he says.

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The firm's specialty is in banking. It has a broad range of fundamental data on banks all over the world that banks themselves tap upon to assess counterparty risks. Fitch is also a notable player in structured finance.

In corporate ratings, however, Fitch covers less ground than the other two players. There is an inertia among banks, the gatekeepers who help companies issue bonds, to rely on just Moody's and S&P to rate them, Mr Taylor explains.

Yet just as he once led his university fencing team to strategise how to win competitions, Mr Taylor is figuring out the challenging task of how to lead Fitch to gain market share. "We fight to change that inertia through the quality of what you do. We make sure we have experienced, seasoned analysts ... we publish more research, our analysts cover less credits, you do a lot of blocking and tackling as much as you can."

Fencing competitions

All this work was unthinkable in Mr Taylor's younger days. (Though when asked if he knew he would end up as a credit ratings chief, he replies with a straight face: "Of course!")

Growing up in south-east England's Kent region, Mr Taylor became "quite fanatical" about the sport of fencing in high school. Pondering where to go for higher studies, he thought of fencing. He knew a champion fencer was at Lancaster University and an English national coach would visit to train him. Meanwhile, the university had a well-known marketing course, which seemed a sure path to riches.

"My girlfriend's father had a very nice car, he was the marketing director of a local company," Mr Taylor says wryly. (Today, the same man, now his father-in-law, still has a nicer car than him, he says.)

That was that. Young Paul ended up studying for a marketing and business degree from Lancaster University, fencing all the way. He became the captain of the university's fencing club.

Yet things weren't rosy when he graduated in 1983. He had no idea what he wanted to do, though he enjoyed his marketing and business course. There was a recession in the UK. Like his peers, Mr Taylor had applied to a variety of jobs to no avail. And he was still passionate about fencing.

So he went off to take part in yet another fencing tournament - and promptly missed a recruitment fair where big banks came to the university to hire fresh graduates. "One of my friends told me they came and hired loads of people, 200 to 300. I thought, aarrgh! So I sent a letter to each of the big banks, I said I was indisposed and missed your interviews, but was really keen on a career in banking."

Fortunately for him, one bank, Lloyds, wrote back. So he drove to its regional office in Liverpool for an interview. But as soon as he stepped into the office and started chatting with the regional human resources manager, he could tell things were not going well and his interviewer was not interested.

But then something changed.

"By pure chance, he was a keen fencer. Our conversation revolved around fencing and what I was doing."

Doing what's interesting

Mr Taylor impressed the manager enough to be moved through to the next stage of the interview.

And he got the job.

To this day, he believes his passion for fencing got him through the recruitment process.

Trying something new, and grabbing opportunities along the way, would become a recurrent theme in his career.

After spending some time in Lloyds on its graduate trainee scheme, Mr Taylor moved on to Japan's then-Tokai Bank doing corporate lending in London, and worked for a while in Tokyo. There, he saw the rise of third-party mortgage lenders: companies, often sponsored by banks, lending directly to the UK mortgage market. At the Japanese bank, he worked on a couple of big loans to these lenders.

But he felt his progress was limited as he was not Japanese. So when the opportunity came in the late 1980s, he moved to S&P to become a mortgage-backed securities (MBS) analyst.

"The European market was starting. I didn't know what MBS was but I liked the idea. So I stumbled into credit ratings, and thoroughly enjoyed it," he says. "It was challenging. There were always complex things I didn't understand. I had to present to the credit committee and recommend a rating, so I had to make sure I understood."

Indeed it became apparent to Mr Taylor, as early as the late 1980s, that half the people talking to him about mortgage-backed securities had no idea what they were talking about.

Understanding what one is rating is critical to becoming a good credit analyst, on top of being able to explain matters in a clear and precise manner. "You need to be tenacious digging into details and facts," Mr Taylor says.

In 1994, he made his next big move. He joined financial services firm Duff & Phelps, which was spinning off its credit ratings arm. At that time, he was heading the European finance team at S&P. But he decided to leave the safety of S&P to build a competitor.

The business took off, built out of a growing structured finance market in Europe. Fitch then acquired the business in 2000, and Mr Taylor would soon be running its European business. In 2006, after a reorganisation, he was made head of Fitch's non-structured finance ratings business.

But he would soon return to take over Fitch's structured finance business as the world lurched towards the global financial crisis.

Taking responsibility

Then, Mr Taylor entered what he called the toughest time in his career.

At that time, financial assets around the world, including mortgages and credit card receivables, were being securitised into various asset-backed securities and collateralised debt obligations. These assets were divided into tranches theoretically containing different risk profiles depending on their cash flows. Senior tranches would get the cash first, and some would be rated as high as AAA - the top grade - by credit rating agencies.

But many of these instruments would become too specialised and complex for those packaging and selling them to understand, including the credit rating agencies which played a role in the process. Neither were their risks fully understood, for some were repackaged and resold to other financial institutions.

As it turned out, numerous highly-rated debt obligations had to be impaired. In a crisis situation, mark-to-market accounting on illiquid assets forced institutions to take giant paper losses, making investors fear fire sales to meet regulatory requirements.

As the financial world collapsed in 2008-2009, Mr Taylor, along with a colleague, had to visit clients in the US in what he termed a "mea culpa" visit.

"These were incredibly difficult meetings, most people were just angry," he recalls. "We said we're not going to hide, we listened to what they were saying and exchanged views." Half the meetings he terms "awful" given the anger. But the other half included an acknowledgement that "we got it as wrong as you did, what are we going to do about it".

As the meetings went on for six months to a year, Mr Taylor says clients recognised the effort Fitch was putting in. "They said, you're the only guy who came to see us.

"We managed to be seen as people trying to do an honest job, trying to be as transparent as we could be, listening, coming up with our own ideas," he says.

In 2010, Mr Taylor was made president of Fitch Ratings, running analytical teams. And in 2012, he was made CEO.

International opportunities

Despite the fallout from the global financial crisis, credit rating agencies still play a role in helping buyers understand what they are buying, he points out.

Opportunities will arise as new markets develop or become more open. One of them is China, which, as the world's second largest economy, has been issuing plenty of bonds. However, the Chinese market is still in its early stages, he says.

One issue is the availability of information or sufficient disclosure, which sometimes prevents ratings from being assigned. "We don't want to do anything in the market that jeopardises our reputation. We don't need to," he says.

There is also an appetite for information in the financial world, and opportunities to package proprietary data for analytical use.

Other than its ratings arm, Fitch Ratings, and its credit market data arm Fitch Solutions, Fitch Group also owns BMI Research, which analyses emerging and frontier markets, and Fitch Learning, which offers training courses in a broad range of financial qualifications.

Fitch is majority-owned by media group Hearst, which owns cable television networks like ESPN and History. It also owns newspapers, magazines, and digital websites such as the Houston Chronicle, San Francisco Chronicle, Cosmopolitan, Elle, BuzzFeed and Vice.

Mr Taylor says he enjoys understanding the issues faced by these various media businesses. Hearst is doing OK, he adds. "There's an early recognition that you need to move to a digital format, but you can't do that too quickly."

More downgrades

Asked about the current slow patch in global growth, he notes that credit fundamentals are not changing as dramatically as the headlines. However, the world is going into a negative credit rating cycle after a period of very low defaults and volatility.

There is overcapacity in China and in some sectors like US energy. The banking sector is also facing challenges, even though banks are stronger than they used to be.

"Default rates have started to tick up. I think this will continue for the rest of this year and into next year. Financial markets don't reflect that. The mere fact that rates are so low have kept unviable companies afloat," he says.

On his native Britain leaving the European Union, what worries him the most is the generational divide. There, younger voters used to travelling and working around Europe backed the Remain camp. Older voters, worried about immigration and arguing that funds channelled to the EU could be put into the National Health Service, wanted out.

Mr Taylor does not think Brexit signals an end to Europe. In his view, how negative the impact will be depends on how negotiations play out.

Fitch itself has 1,000 people based in London with quite a number of Europeans.

But Brexit itself will not affect the company's operations until it knows what the rules are. "I can't imagine for one moment that the UK authorities will make it difficult for Europeans to work in London," he says.

While Fitch has offices in Europe, it is not as easy to base people there as compared to London. "London has a deep, robust employment market ... I would not want to move staff around because of this."

Ultimately, what is important is that the company does not get its ratings wrong, he says.

"There'll always be individual situations where we misread ... If you assume ratings are about reading the future, we're always going to be wrong at some stage, something we didn't predict. The most important thing for us is on a systemic basis, there can't be something we didn't explain well."

And as for his unexpected journey from fencing to the top of Fitch, he could only say: "Be ready to take advantage of what comes up."


CEO, Fitch Group

1963 Born in the UK

1983 Graduated from Lancaster University with a BSc in Management and Marketing; began first job with Lloyds Bank

1989 Joined Standard & Poor's (S&P), rose to become Head of European Structured Finance

1994 Joined Duff & Phelps Credit Rating Co, rose to become Executive Vice President, DCR International

2000 Joined Fitch as it acquired Duff & Phelps, became Group Managing Director of Fitch in Europe, Middle-East & Africa (EMEA)

2008 Head of Global Structured Finance, Fitch

2010 President of Fitch Ratings

2012 Appointed CEO of Fitch Group

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