High Yield (Credit Analysis) Interviews / Case Studies

Hi, I was just wondering what questions are typically asked during interviews for high yield (credit analysis) positions? Also, what types of case studies are given during these interviews? My background consists of investment banking and three years at a buyout firm, working mostly on LBOs and PIPEs, so credit analysis is not an area that I have much expertise in. Any helpful feedback would be greatly appreciated. Thanks.

 

For non-distressed HY, the main difference between credit and equity as far as I can see is the focus on FCF and downside (as opposed to EPS and upside/growth) based on the sell-side research I read. Understanding how the credit side of the capital structure works is important but even things like covenants and credit agreements and distressed are not part of most every-day research reports.

Interview discussion topics for my current job at a high-yield credit (grab-bag of mezz, l/s HY, distressed, and structured credit): *Minimal accounting (though make sure you know the standard leverage stats obviously) *Industry analysis type questions (more just chatting about what we thought about industry x) *A fair amount on credit agreements and reorg-related stuff (structural subordination, liens, bankruptcy process) *Products within the credit universe (bonds vs. loans, CDS vs. LCDS vs. TRS, CDX tranches etc).

After the interview I had a case study for a LBO asking for my opinion on the various debt tranches. I did an LBO model but a simpler model would have been fine because the cap structure was set.

I assume but do not know that a sell-side credit analyst would spend a lot more time focused on the 1st and 2nd bullets.

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Just giving a basic breakdown- In High Yield Credit Analysis, key is to always make sure you are being paid for the risk you are taking. One of the key aspects: look at the spread. Other factors to think through: Gross Debt/ EBITDA; Net Debt/EBITDA; Spread/Turn of Leverage. Those are the basic metrics. Understanding where the bond sits on the cap structure, and what assets secure the bonds are also important.

Example: All else equal (duration, non-call, un/sec, etc) if a bond is BBB- rated trading at T+150, and another trading at BB+ at T+250, you go one rating lower but pick up 100 bps in additional spread. Credit Analysis: are you being paid enough to take on that risk?

 
Best Response

Leverage matters a lot, but there isn't really a "cut off" point without other considerations. (Note: Rating agencies could have a threshold in which they would consider a ratings downgrade = credit negative") But, it's important to know what risk you are being paid for. i.e. if a bond is 3.5x levered with a ramp up CAPEX plan vs. bond that is 4.2x de-levering story. All things aside, I could go to the higher levered but credit improving thesis. When I look at my HY companies- I also think about capital structure, asset coverage, recovery rates, Cash vs ST debt and leverage cut off becomes just point in my decision.

Hope that helps. Feel free to msg me if you have more questions.

 

advice is don't come up with bs for #2. a hf - especially small ones -is entrepreneurial and will laugh at that. (you'll be talking to the principals not some HR idiot.)

if you don't know the answer why are you doing it? (eg. '$$$', 'friends told me to, i'm a lemming')

 

1) Can't help sorry. I've worked buyside but not at a credit-oriented fund. Diligence levels are going to be wholly dependent on the style/manager. The range could be super-intensive (e.g., "A report sent to azo shareholders in 2001 states that employees [from Eddie Lampert's HF] had visited or spoken with people at 690 of the more than 3,000 AutoZone stores.") to cursory (i.e., simply reading sell-side research). Maybe you should just ask what their research process and investment criteria is.

2) Can't really help if you don't already know.

crotchshot7:
My background is one year in a MM restructuring shop.
I'm doing the same work. How hard/easy was it for you to snag this, or other, buyside interviews?
 

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