AMA: Credit hedge fund analyst at MF, former BB trader

big unit's picture
Rank: King Kong | banana points 1,800

Mod Note (Andy): AMA/Interview Tuesdays! Email me ([email protected]) if you'd like to do an AMA or interview for WSO

My background is working in a high yield/distressed trading desk as a research analyst and trader, before making the move to a credit hedge fund within one of the major PE firms. The guys on the public side of the wall are a different breed than the private-side banking guys, who I think have a pretty high level of representation on this board relative to fund guys. A little rougher on the edges, and probably a little more intense in general. Hopefully I can shed some light on the dark corners of the world of credit trading...

I started my career as a research analyst and a trader at one of the BBs back in the 08-09 time period, and got poached by one of the big PE funds for their credit investment group. The personalities on the trading desk are very unique, as is the heavy partying/client interaction aspect of it which I truly think differentiates it from banking.

I'd love to discuss any questions people have on the trading environment at a BB, the type of work at credit funds, culture, goals, etc.

Comments (73)

Jan 7, 2014

What are the people like on both side of the wall? Who has more fun?

Jan 7, 2014

More fun? In my opinion when it comes to going out more and partying with colleagues, and having more crazy stories to share with your non-finance friends, its the flow trading side.

When you are in sales/trading, one of your biggest goals is to pitch clients who are typically former trades/investment managers. Your goal is to take out your clients, show them a great time, and show up to work the next day hungover and execute a bunch of trades with them. Compare this to IB, when you are typically pitching management teams of corporations - you aren't executing trades with them, but rather underwriting real deals. The level of diligence and handholding in IB/private side work precludes a lot of the day-to-day partying and events more common in the trading side.

Thats not to say a lot of bankers don't party - they do, and they party hard but much less frequently in the context of work.

I also think that at the junior levels, traders were typically less of the 'sit in the front of the class' type than a lot of the kids in IB.

And of course, I am talking about the bond trading world. When you start looking at quant traders, you typically don't see them as the partying type.

    • 1
Jan 7, 2014

Thanks for doing this!

1) What are the key things you look at when evaluating how risky a business is to invest in from a DD perspective? I'm sure you look at everything from barriers of entry to how much of an inventory-heavy type company/sector it is in order to MAX liquidation value in case of bankruptcy, but if I asked you for 5 or so things (the more the better) that form the basis of your initial view on the riskiness of the sector/company, what would those considerations be?

2) Without taking in to account the heavily technical aspects of investing in to different parts of the debt capital structure, how do you determine which parts of debt should you pick up (assuming you are aiming for MAX performance with 'reasonable' risk)? Or is it mostly driven by risk/reward considerations?

Best Response
Jan 7, 2014
TheFamousTrader:

Thanks for doing this!

1) What are the key things you look at when evaluating how risky a business is to invest in from a DD perspective? I'm sure you look at everything from barriers of entry to how much of an inventory-heavy type company/sector it is in order to MAX liquidation value in case of bankruptcy, but if I asked you for 5 or so things (the more the better) that form the basis of your initial view on the riskiness of the sector/company, what would those considerations be?

2) Without taking in to account the heavily technical aspects of investing in to different parts of the debt capital structure, how do you determine which parts of debt should you pick up (assuming you are aiming for MAX performance with 'reasonable' risk)? Or is it mostly driven by risk/reward considerations?

1) In terms of how risky a business is, I typically take a top down approach. I look at the overall sector drivers and then focus on the company itself. That makes it easier to frame the story - for example, if I'm talking about a iron ore miner, I'll start the conversation off discussing the macro demand drivers, supply, and recent trends. Then look at the main players, then look at the specific company, then within the structure which tranche makes the most sense. I guess my main considerations when analyzing the company's fundamentals:
- the sector overall and where within the sector the company at hand fits in (for example, within the energy sector I would view a pure exploration company differently than a service provider)
- the company's operating performance relative to peers within the sector (basically a Porter Five Forces lite)
- the company's debt profile and leverage, including the history of issuance, as well as a covenant analysis of each tranche of debt
- the company's cash flow generation ability and how its invested its cash flow
- How these fundamentals fit in with the investments potential return, and what the catalysts are
I think the biggest difference from sellside is evaluating the business much more than just the financials - the competitive position, contract structures, buyer/supplier relationships, macro outlook, regulations, etc. play a big role in our investment pitches on top of just saying 'Free cash flow over debt is 20%' or 'Leverage fell from 7x to 5x'

2) In terms of deciding what part of the structure to invest in, at a high level there are two main things we consider:
- Coverage versus yield: typically people simplify this as basis points of spread per turn of leverage, but really its looking at where you have protection. If you are secured by real assets or actually pari passu, if you have a 1st claim on cash flow, etc.
- Amount of leverage we can apply - a higher quality security yielding 6% but that can be leveraged 2x might make more sense then a 9% security that is relatively illiquid and gets no leverage

Hope this helps - pretty high level, I know

    • 3
Jan 8, 2014
big unit:

2) In terms of deciding what part of the structure to invest in, at a high level there are two main things we consider:

- Coverage versus yield: typically people simplify this as basis points of spread per turn of leverage, but really its looking at where you have protection. If you are secured by real assets or actually pari passu, if you have a 1st claim on cash flow, etc.

- Amount of leverage we can apply - a higher quality security yielding 6% but that can be leveraged 2x might make more sense then a 9% security that is relatively illiquid and gets no leverage

Hope this helps - pretty high level, I know

Could you please expand on this... What do you mean by "coverage vs. yield" and "basis points of spread per turn of leverage"? What is the spread? If you could provide an example with a real or fake company with different tranches and how you would look at them, that would be great.

On the second bullet, how is leverage applied when you invest in a loan/bond? Are you guys are actually borrowing money to go along with your equity investment like in a buyout scenario? What would the structure and terms of an investment you make look like there? I never fully understood how leverage at a credit fund is applied so am curious about the process and how decisions regarding it are made.

Aside from the questions on the above, how did you decide on a credit fund vs. a traditional buyout shop besides your background on the desk? Were there other factors you considered in your decision and how would you weigh a buyout shop vs. a credit fund?

How did your interviews go? I'm prepping for mine now and am trying to understand how to properly talk about my sell-side deals in the perspective of a sponsor. What kind of questions would you be asking me from the other side of the table and wanting to dig into? How can I be most impressive in talking about my deals and what would you actually like to hear about? I've read you should focus a lot on the numbers and modeling but your above answers make it seem like you care less about the financials (i.e. your comment on how bankers only care about cash flow % vs. debt in a deal) and more about the qualitative stuff, which honestly I am required to think about very rarely as an analyst...

Sorry for the thousand questions. I'm a current LF/DD analyst (so granularity in your answers is fine) and am trying to decide between buyout vs. credit fund and am not overly familiar with the credit fund side.

Finally, silver banana for you, this has been VERY helpful so thanks for doing this

Jan 8, 2014
wackovia:
big unit:

2) In terms of deciding what part of the structure to invest in, at a high level there are two main things we consider:

- Coverage versus yield: typically people simplify this as basis points of spread per turn of leverage, but really its looking at where you have protection. If you are secured by real assets or actually pari passu, if you have a 1st claim on cash flow, etc.

- Amount of leverage we can apply - a higher quality security yielding 6% but that can be leveraged 2x might make more sense then a 9% security that is relatively illiquid and gets no leverage

Hope this helps - pretty high level, I know

Could you please expand on this... What do you mean by "coverage vs. yield" and "basis points of spread per turn of leverage"? What is the spread? If you could provide an example with a real or fake company with different tranches and how you would look at them, that would be great.

On the second bullet, how is leverage applied when you invest in a loan/bond? Are you guys are actually borrowing money to go along with your equity investment like in a buyout scenario? What would the structure and terms of an investment you make look like there? I never fully understood how leverage at a credit fund is applied so am curious about the process and how decisions regarding it are made.

Sure - when I say coverage I don't mean 'interest coverage' - I rather meant asset coverage of the bonds. So you try to take a look at the underlying business (either from a EBITDA multiple or collateral value perspective) and see how that covers your bonds given its security.

In terms of turn of leverage versus spread: spread is just the level of yield you get from the security over existing treasuries. So if you get 5% more than match-dated treasuries, your spread is 500bps.

For example, say you are looking at a two-tranche structure, with a $100mm secured loan and $300mm in unsecured debt. The company's EBITDA is $50mm. The secured loan is yielding 4% and the unsecured bond is yielding 10%.

1st lien loan: $100mm/$50mm = 2.0x leverage. 4% yield/2.0x leverage = 2% yield per turn of leverage.
Unsecured bond: $400mm/$50mm = 8.0x leverage. 8% yield/8.0x leverage = 1% yield per turn of leverage.

So from yield versus turn of leverage, you are 'getting paid' more for the 1st lien loan. The incremental leverage of the unsecured bond does not offset the additional yield you pick up. Now once you do this analyst, you have a few options:
- Go outright long the 1st lien, getting 4%.
- Go outright short the 2nd lien, for example if you think the company is going to file or prime these bonds to raise liquidity, the yield could actually become even worse.
- Do a pair trade: if you think EBITDA is going to increase 50% next year, you can take the view that the unsecureds will rally more than the loan (perhaps the loan's upside is call constrained). Here you can short the loan and go long the unsecured.

The turns of yield (or spread, where you just substract the match-dated treasury yield from the calcs) is just a basic way to establish a framework, but not a way to make a real decision.

In terms of leverage being applied, this is something my PM handles with our sellside counterparts that provide us leverage - from my understanding, its a grid-based system based off of the credit ratings (so if Moody's has a loan as a BB, it can get more leverage than a B). Of course, banks all compete to provide leverage because that increases their share of other services, and you can get a discount on leverage if its a loan/bond that the bank is the lead dealer for.

Typically, we run at 4x-5x leverage from my understanding. If we think a CCC bond yielding 12% is going to move to 8% in 3 months following a strong earnings announcement, even if we can't get leverage, we could still like the potential return. If we think a BB bond yielding 4% will go to 3%, but we can get significant leverage on it, that is still favorable.

    • 3
Jan 8, 2014
wackovia:
big unit:

2) In terms of deciding what part of the structure to invest in, at a high level there are two main things we consider:

- Coverage versus yield: typically people simplify this as basis points of spread per turn of leverage, but really its looking at where you have protection. If you are secured by real assets or actually pari passu, if you have a 1st claim on cash flow, etc.

- Amount of leverage we can apply - a higher quality security yielding 6% but that can be leveraged 2x might make more sense then a 9% security that is relatively illiquid and gets no leverage

Hope this helps - pretty high level, I know

Aside from the questions on the above, how did you decide on a credit fund vs. a traditional buyout shop besides your background on the desk? Were there other factors you considered in your decision and how would you weigh a buyout shop vs. a credit fund?

How did your interviews go? I'm prepping for mine now and am trying to understand how to properly talk about my sell-side deals in the perspective of a sponsor. What kind of questions would you be asking me from the other side of the table and wanting to dig into? How can I be most impressive in talking about my deals and what would you actually like to hear about? I've read you should focus a lot on the numbers and modeling but your above answers make it seem like you care less about the financials (i.e. your comment on how bankers only care about cash flow % vs. debt in a deal) and more about the qualitative stuff, which honestly I am required to think about very rarely as an analyst...

Sorry for the thousand questions. I'm a current LF/DD analyst (so granularity in your answers is fine) and am trying to decide between buyout vs. credit fund and am not overly familiar with the credit fund side.

Finally, silver banana for you, this has been VERY helpful so thanks for doing this

For me, the credit fund vs traditional buyout shop decision was made when my entire analyst class was either fired/moved to different teams, and I was put on a public side trading desk as opposed to a banking group. As a result, the buyout shop route was closed to me. I was looking at either multi-strategy or credit only funds, and was entirely focused on hedge funds/Asset Management (a lot of hedge funds do both, and the big PE shops certainly do both due to the scalability of the AM business).

My interview process was fairly brutal - the hardest part was getting out of the office frequently. It was 3-4 rounds of fit/light technicals initially. The usual 'walk me through your background', 'why us versus KKR or Carlyle, or why us versus a hedge fund' and 'Why do you want to leave GS/JPM/DB'. There were a few 'pitch me a story' or 'tell me a story that is interesting that you worked on'.

One of the senior analysts and the PM already knew me from my work with them when they were my clients. By the time I was at my 3rd interview, the PM reached out directly to a few of the senior sales guys and traders on my desk to get their perspective on me. At that point, the 2-3 guys who knew I was interviewing supported me and gave me strong recommendations - if I was thinking about leaving, it might as well be to one of their top clients which would help build their network.

After the first set of fit/light technical interviews and after I got a strong reference from some of the guys on my team, I met with a few of the senior folks at other funds within the firm who grilled me. That was unpleasant.

The final interview was a massive three-part case study. One was basically 'pitch whether you would go long or short this company', the second was 'where in this capital structure would you invest' and the third was 'give me a macro idea that we can executive using bonds'. This was brutal because I received the email on a Sunday morning and had until the following Saturday to complete it (Saturday interview). It ended up working out well.

The types of questions I ask people who are interviewing focus on what they know about businesses and industry. By the time you are an associate on the sell-side, you should have the modelling aspect of the role down pretty cold. People are more interested in how you think about things as an investor as opposed to marketing. I'd ask you pair trade questions, what parts of the market are overvalued, and if you had an industry orientation I'd ask you to drill into which of the subsectors have positive dynamics and how to play that thesis through loans/bonds.

The BIGGEST thing you can do RIGHT NOW if you are an analyst on a lev fin team that wants to move to the buyside is to start reading equity research primers on your sectors, and getting trade ideas that you can pitch.

    • 1
Jan 7, 2014

What specific sector within HY bonds were you trading and how exactly were you recruited? (i.e. were you poached by the MF to trade that same product / sector) As a former banker I had 10+ headhunters I met with but my friends in trading were nowhere near as involved with buyside headhunters.

How do you like the work at a credit HF and what is the total AUM dedicated to the credit book (can give ballpark to avoid giving the name up) How many trades do you execute in a day?

On to what everyone cares about - how is your comp relative to sell side trading as well as to buyside PE? If the PE fund has a home run year, do you all see a bump in comp (or conversely, shrinking comp)? Is your team's compensation based SOLELY on the credit fund's performance, and do you get any carry?

Because you're an ancillary piece to the firm's focus (megacap PE), are you involved with the PE guys at all? My friend works for Golden Gate Capital and he knows literally nothing about the guys that work at their debt fund. Makes sense to me, but I query whether it differs at other shops.

Lastly, what are your exit opps / long term plan? Do you think you could transfer to a dedicated credit hedge fund easily? Why did you choose to work for a credit fund within a megafund PE firm and not just a vanilla hedge fund?

Sorry to bombard you with questions. As a typical banker->PE guy, I'm always very curious to hear the stories of my S&T counterparts (so many of us practically flipped a coin when deciding to take the offer in S&T or banking).

Jan 7, 2014

Hawainpalmtree:

I started off in HY/distressed research as a desk analyst, then moved to trading for 1.5 years before getting poached. I basically formed a great client relationship with a few of the big funds, and when they were looking for a resource I got the look. I was competing against mostly restructuring/lev fin analysts from the private side. In my opinion, headhunters go to bankers because there are A LOT OF BANKERS, whereas there are only 2-3 people per trading desk that are below the VP level (so out of every 10-15 people, you'll have 2-3 analysts/associates). In reality, if your clients have a strong relationship with your bank and your trading team, they'll reach out to senior traders/research analysts and see if they have any recommendations. In my case, they reached out to me directly.

Credit HF work is great - I like it a lot, and the pace is much more oriented around 'getting it right' than 'getting it done'. I do miss having other junior people and sales guys to party with, as everyone here is not only generally a little older (I'm the youngest by 8-10 years) but more serious. But everyone is extremely respectful, hardworking, intelligent, and overall the people here are very high caliber both personally and professionally. More meritocratic than sellside, where every team has their share of knuckleheads who's uncle is a a client or something.

I work very closely with the firm's private side guys through compliance on big stories, but in general we don't interact that much in terms of workflow. They are doing deals, we are making trades. Its really on the industry level knowledge that we have the biggest benefit of sharing - we let them know how the market is thinking on certain industries, they give us access to consultants and research that helps us learn more deeply about key factors in key industries.

I probably won't give our specific AUM, but I will say our strategy within credit is ~$5B, but our overall credit book is huge. We do 5-10 trades a month that are smaller/maintenance in nature, and maybe 3-4 larger trades a month that are where we hope to get our alpha from. We target 15%-20% returns.

I have no carry, but I do get some sort of matching in the form of allocations of our funds. Its kind of complicated. In general, PE associates at megafunds are pulling $600k-$750k over their 2 years as associates (backloaded. I'm technically not a pre-MBA associate but I'm in the similar comp range.

    • 1
Jan 7, 2014
hawainpalmtree:

Lastly, what are your exit opps / long term plan? Do you think you could transfer to a dedicated credit hedge fund easily? Why did you choose to work for a credit fund within a megafund PE firm and not just a vanilla hedge fund?

Sorry to bombard you with questions. As a typical banker->PE guy, I'm always very curious to hear the stories of my S&T counterparts (so many of us practically flipped a coin when deciding to take the offer in S&T or banking).

Ah, I forgot your question on exit opps/long term plan...well, I'm 5 years out of school, and I'm getting jealous of some of my friends who are getting their MBAs. Seeing nerdy kids act like they are ballers because they are surrounded by even nerdier people in business school is an interesting phenomenon. However, MBA makes absolutely no sense for me from anything but a purely social perspective given I have my own coverage.

I think my main goal is to work my way up here, build a network, and...I guess stay here? I really like this firm. The credit business is

Maybe after 2-3 years if I don't see a lead PM role for myself opening up I'll transition to a separate fund or something. I'm not really a long-term thinker unfortunately.

    • 1
Jan 7, 2014

What's the most memorable distressed situation you've been involved in? What happened?

Jan 7, 2014
StJamesPark:

What's the most memorable distressed situation you've been involved in? What happened?

Hm - I've seen a few epic ones play out. I would say the hardest situations involved the ones where retail investors got hurt. That would include the holders of General Motors bonds. GM was rated investment grade, and GM bonds were among the largest and most liquid bonds in the market. Many retail clients held these bonds, only to see them absolutely plummet ($0.05 on the dollar). Seeing that story play out was an exceptional experience.

I also want to point out I was on the trading/HY side - so we worked with liquid HY/distressed, but I was never part of a workout. I will add the energy and coal sectors were among the most exciting to work with during the downturn.

    • 1
Jan 7, 2014

A clarifying question, if I may -

For the credit investment side, are all of your colleagues former desk analysts / research / traders, and then the private side guys are the former bankers / restructuring / lev fin guys? Just trying to understand the breakdown of what the credit investment arm of a MF would be looking for in terms of experience / background, so I'm trying to get a handle on the typical background of people on each side.

Great write up, by the way - appreciate it.

Jan 7, 2014
BusinessGreek:

A clarifying question, if I may -

For the credit investment side, are all of your colleagues former desk analysts / research / traders, and then the private side guys are the former bankers / restructuring / lev fin guys? Just trying to understand the breakdown of what the credit investment arm of a MF would be looking for in terms of experience / background, so I'm trying to get a handle on the typical background of people on each side.

Great write up, by the way - appreciate it.

Hm - I would say across the credit investment team in general here, about 85% started their careers in leveraged finance or restructuring. The remaining 15% started as desk analysts. No one came from trading on the investment team - our traders came from trading, but they are more for execution/desk relationships as opposed to idea generation. Thats not to say what they are is not important, but they are more focused on the market, hedging, and making sure the trades are done in the optimal way, as opposed to coming up with ideas and going through docs.

I think the key thing to remember is that its all about the strategy. If you are a distressed investor who wants to control assets, go through workouts, restructure businesses - than you come from a restructuring background. In contrast, if you are mostly focusing on high yield/liquid stressed trades and levering up your trades, using derivative hedges, etc. the desk analyst background makes the most sense. The more liquid the strategy, the more likely a background from the public side will be useful.

I also want to emphasize, as I mentioned earlier, is that headhunters and the buyside in general recruits bankers because there are a lot of them. The number of high yield / distressed desk analysts/associates on the street is about 2% the number of lev fin analysts/associates, or at least that is what it seems like. If you are a hard working desk analyst, you will get plenty of interviews if you go out of your way to meet headhunters. I interviewed at multiple MF credit arms and a few credit only shops, but discontinued the process after accepting this current role.

The lev fin/restructuring background might help get your foot in the door more often, but once you are sitting in front of a PM, its all about what you know, how eloquent you are, and if you truely understand the market or if you are just someone who wants to do PE and is using a HF role as a backup.

    • 2
Jan 7, 2014

Thanks a bunch for the previous answer! High level is perfectly fine. I thought I may ask another question if you don't mind.

Apart from your SS experience, what resources (i.e. books/blogs etc.) taught you the most about HY/DD? Any texts you found to be perfect primers to the field of HY/DD? Probably quite hilarious questions - an equity guy trying to learn about DD here!

Jan 7, 2014
TheFamousTrader:

Thanks a bunch for the previous answer! High level is perfectly fine. I thought I may ask another question if you don't mind.

Apart from your SS experience, what resources (i.e. books/blogs etc.) taught you the most about HY/DD? Any texts you found to be perfect primers to the field of HY/DD? Probably quite hilarious questions - an equity guy trying to learn about DD here!

Learning is learning - ask as many questions as you want. Now are you in equity trading/ECM/banking/ER?

I would recommend "Distressed Debt Investing" by Stephen Moyer, as well as any other leveraged finance resources. Get familiar with concepts such as structural seniority, secured versus unsecured, free cash flow, leverage, covenants on the fundamental side.

I would also suggest reading a couple of covenant primers such as this:
https://www.lcdcomps.com/d/pdf/hyprimer.pdf

Then read this case study:
http://www.HL.com/library/bsttcacs.pdf

Read how other analysts think on this site:
http://distresseddebtinvestorsclub.com/

Now the biggest thing between gapping the bridge between equity and credit is the focus on balance sheet, but many of the concepts within HY/stressed/distressed investing are similar to what you look at from a private equity perspective. There is plenty of overlap - learning how to analyze an industry's competetive position is valuable across asset classes, its really what you focus on (growth versus protection) that changes as you shift gears.

    • 2
Jan 7, 2014

Excellent, already doing/did all of that (far from the whole Moyer book though). Hopefully that means I'm on the right track. ER, incoming ER to be exact.

Jan 7, 2014
TheFamousTrader:

Excellent, already doing/did all of that (far from the whole Moyer book though). Hopefully that means I'm on the right track. ER, incoming ER to be exact.

Incoming ER as in, you'll be starting on the sell-side in ER this upcoming summer? Not bad - you should be able to lateral to a credit role if you show interest fairly quickly, particularly if you bring it up during training to HR. That is, if you are interested in credit to the point where you'd want to commit to it.

Jan 7, 2014

Yes, starting on the sell-side in ER this upcoming summer. Even though HY/DD sounds very exciting, I will definitely stick with the Equity side for a couple of years. Needless to say, I do understand that it's probably easier to transition from credit to equity rather than the other way around.

Jan 7, 2014

What do you wish you knew when you started your career?

Looking back would you have done anything differently?

What areas would you look into if you were just starting a career on the street (maybe credit, loan to own real esate, PE, etc.)

What should I be on the look out for (experience wise) as a 1st year analyst in Lev Fin?

Thanks for doing this, hope to be in your shoes in a few years.

DLJ Analyst Class '96

Jan 8, 2014
TheMilkman:

What do you wish you knew when you started your career?

Looking back would you have done anything differently?

What areas would you look into if you were just starting a career on the street (maybe credit, loan to own real esate, PE, etc.)

What should I be on the look out for (experience wise) as a 1st year analyst in Lev Fin?

Thanks for doing this, hope to be in your shoes in a few years.

Hm - honestly, I was on WSO back in '07 and '08 when it first started, so I had a lot of good knowledge about the industry before jumping into things. I do wish I had learned the 'not everything your boss says is efficient' rule. By the time I was a second year, I was significantly faster mainly because I cut out some of the 'busy work' my senior analysts tended to focus on.

I also would have been more aggressive from a social standpoint at networking events. Because the trading/sales/research side is so top heavy, social events and group outings can be awkward because literally everyone is older than you. I think by the time I was a 2nd or 3rd year I was much more comfortable interacting with my colleagues as peers rather than superiors (even though they were superior to me from a professional standpoint).

If I was starting a career on Wall Street today as opposed to 08-09 - I would say PE and credit are the two most interesting areas. Credit will always be a major asset class, given HY/distressed are such major market segments and have such significant levels of capital in them. Private equity is extremely exciting too - I work closely with PE given we do some middle market financing. However, that pace/lifestyle is absolutely not for me, but the intellectual standpoint and amount of knowledge you gain in the PE due diligence process is top notch. You sound a lot smarter when you focus on one thing for 3 months than three things for 2 weeks.

As 1st year lev fin analyst, my biggest suggestion is 'learn the business' rather than just 'doing the deal'. Don't give cookie cutter responses to investors, don't just look at the marketing materials, but really learn the business and industry. That is what will separate you as you transition to the buyside. It might be hard given the hours you work, but the real value add comes from industry knowledge and not just setting up a model correctly.

    • 1
Dec 29, 2017
big unit:

However, that pace/lifestyle is absolutely not for me, but the intellectual standpoint and amount of knowledge you gain in the PE due diligence process is top notch.

Sorry but what exactly is the lifestyle and whats wrong with it in your opinion?

Jan 7, 2014

does working as a credit analyst give you the right skills to move into the HF space??

alpha currency trader wanna-be

Jan 8, 2014
watersign:

does working as a credit analyst give you the right skills to move into the HF space??

Working in credit, will not, i repeat, will not prepare you well for a credit hedge fund. Actually.....

"After you work on Wall Street it's a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side." - David Tepper

Jan 8, 2014
Oreos:
watersign:

does working as a credit analyst give you the right skills to move into the HF space??

Working in credit, will not, i repeat, will not prepare you well for a credit hedge fund. Actually.....

I think working as a credit analyst is step one to having the right skills - if the fund is just looking for someone to crank models, 2-3 years working in Lev Fin is all you really need. If the fund needs you to come in and cover a small sector and actually be the lead investment professional on certain stories, you need to have both industry knowledge and know what to focus on from a qualitative standpoint much more.

The problem with lev fin is that you are typically so disconnected from the trading side that simply being able to look at trader runs is a learning experience for people who make the transition, but again, if you are bright and hard working you can make the move regardless of whether you start in lev fin or on a trading desk in a research capacity.

Jan 7, 2014

Thanks for doing this!

My questions:
1) I'm starting FT S&T this coming year and was hoping to rotate on the distressed desk. However, I was a quant major at my school but always had an interest in value investing. Would this be a disadvantage or do you know of desk analysts who were not as proficient at accounting when they started?

2) I was also pretty interested in credit derivatives and was curious to know if you dealt with these while on the HY/distressed desk? Like if you thought there was a curve trade for a particular name or if you wanted to trade the butterfly on the curve as a proxy to being long or short vol on the name, stuff like that? What was the general time horizon for ideas generated on the desk in the sell side?

3) Would be nice if you could elaborate on the desk analyst/trader relationship on a sell side trading desk. From what I gather it's similar to an analyst-PM role at a HF.

Thanks again!

Jan 8, 2014
therapist1:

Thanks for doing this!

My questions:

1) I'm starting FT S&T this coming year and was hoping to rotate on the distressed desk. However, I was a quant major at my school but always had an interest in value investing. Would this be a disadvantage or do you know of desk analysts who were not as proficient at accounting when they started?

2) I was also pretty interested in credit derivatives and was curious to know if you dealt with these while on the HY/distressed desk? Like if you thought there was a curve trade for a particular name or if you wanted to trade the butterfly on the curve as a proxy to being long or short vol on the name, stuff like that? What was the general time horizon for ideas generated on the desk in the sell side?

3) Would be nice if you could elaborate on the desk analyst/trader relationship on a sell side trading desk. From what I gather it's similar to an analyst-PM role at a HF.

Thanks again!

1. Do NOT worry about your lack of accounting skills. What you should do is download a book on financial accounting and a few on value investing, and go through some 10-Ks. When it comes time to interview for spots in your rotation, you'll be largely on the same page. I had NO accounting skills - I didn't even intern in finance the prior summer, I worked at Bain/BCG and lateraled for FT.

2. We traded a fair bit of CDS, but because of the risk weighting for CDS holdings, we typically did not have much of a prop position in CDS and instead focused mostly on market making. We did do some compression trades, but it was typically the hedge out risk in the cash book within the same name. CDS is an interesting product from an investing perspective, but given the relatively low spreads in the liquid names and the illiquidity in the truely stressed/distressed names, my trading 'pod' usually stayed away.

The most common trades we did were basis trades (long cash short CDS, picking up spread). Man, I haven't done CDS in so long I totally forgot about it. Its a crazy fun product to trade if you have a lot of share though. Given we were focused more on stressed/distressed there wasn't that much liquidity in what we did.

3. Desk analysts on the sellside typically cover 2-3 sectors and basically give recaps and ideas to sales/traders to pitch. Basically, we come up with ideas, traders get the position accumulated, after a value appreciation/depreciation (if long/short) we then try to trade it to clients. Research on a trading desk is an odd role because you only look at a select few situations where you think there is actual fundamental drivers of a trade, but in reality most of the revenue from sales/trading comes from market making the most liquid issues where there isn't that much of a downside/upside catalyst.

It is totally different than an analyst-PM role. My PM is a boss (though they usually act as a 'first among equals' at my firm). The traders I worked with as a research analyst were technically my peers - a senior research analyst and a senior trader both reported into the head of the group, as opposed to the analyst reporting into the trader.

    • 3
Jan 8, 2014

From my, fuzzy, memory, you don't aim to convert into equity (either to control, or just own) of the business. it's handled by your PE guys? Why did you choose to focus on the stressed / distressed portion of the market rather than the deep distressed / loan-to-own?

Background: desk analyst, passion for deep distressed / loan-to-own

"After you work on Wall Street it's a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side." - David Tepper

Jan 8, 2014
Oreos:

From my, fuzzy, memory, you don't aim to convert into equity (either to control, or just own) of the business. it's handled by your PE guys? Why did you choose to focus on the stressed / distressed portion of the market rather than the deep distressed / loan-to-own?

Background: desk analyst, passion for deep distressed / loan-to-own

Nope, our loan-to-own fund is a separate fund within our larger credit business. We are the fund that does more liquid stressed/distressed. This ranges from outright leveraged longs, long/short pair trades, outright shorts (less so this). Sometimes we use equity derivatives to hedge (ie buying calls to offset a short on bond to hedge out risk of acquisition and bond takeout). We sometimes also take illiquid tranches off of trading desks if we believe in the long term story. We try to NOT get involved in restructuring and workouts, and we typically hand those off to other teams within the firm.

I guess the best way to describe it is that we are public side: my team works with sellside traders and sales people to establish our positions and put on our trades, whereas our loan-to-own business works with restructuring bankers or PE firms that have busted investments, as well as commercial banks. They rarely work with distressed trading groups, though they sometimes do. They usually don't do on-the-run stuff though.

For me, I just really love the markets, but I also appreciate fundamental investing. I want to wake up, come into work, and spend the first hour looking over positions and looking at whats happening in China/Europe and then extrapolating what that means for the names in my portfolio. I like seeing fed minutes come out and seeing the market shift. I like pinging sales people about what their best offers are or if they have any actionable odd lots of some 10%+ yielding paper (though if the position was more significant my PM would take control of this aspect).

I don't want modelling and legal structuring to be the majority of my work, and so I never thought I'd be a good fit for a loan-to-own. I see myself as being a PM who puts on liquid trades one day as opposed to someone who oversees the turnaround of a business. Maybe that will change down the road.

In terms of who handles what: we handle our firm's liquid credit, our loan-to-own handles the pure distressed workouts and restructurings, our lending team handles mezz, and our PE firm has several subgroups, including a group focused on distressed PE. I'm assuming our distressed credit business works closely with our distressed PE team, and they are both on the private side of the wall.

Just curious - are you in a loan-to-own/special situations role on the sell-side right now? How has the risk tolerance shrunk in that business?

    • 1
Jan 9, 2014
big unit:

Just curious - are you in a loan-to-own/special situations role on the sell-side right now? How has the risk tolerance shrunk in that business?

Nice missive.

Not loan-to-own, just on a distressed desk (L-t-O, is the long-term plan).

Shrunk, yes. I haven't many personal data points, but generally most post new issue trading (as quick execution is required) is aiming to be done without balance sheet. Which is becoming doable because real money is chasing yield (or have set up distressed desks, it's scary talking some of these clients through distressed situations) and there's a lot more money in the space . And in any of the opaque European situations (remember, i'm in London), i see no bank money being used.

"After you work on Wall Street it's a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side." - David Tepper

Jan 8, 2014

How common is it for someone in credit structuring in s&t to move to this kind of work, are the skills transferable?

Jan 8, 2014
Rixium:

How common is it for someone in credit structuring in s&t to move to this kind of work, are the skills transferable?

Hm...I don't really know much about the structuring side of the biz. But if you work hard in structuring, I don't see why you couldn't lateral to sales/trading. The most common switches are between roles within a product class though, simply because you work more closely with the people who's teams you'd want to join.

Jan 8, 2014

This is excellent - thanks for doing this.

I'm going to be joining the credit arm of a mega fund in a similar role in the summer. I've been growing increasingly excited to make the transition over there and this thread has made me even more so.

I'm also weighing the relative merits of the CFA and MBA as I think about the longer term. Obviously the common answer is "it depends on the person/situation", but given that we are in essentially identical situations (only difference is I am coming from one of the private side roles you mentioned), would you universally say the MBA is not as likely to be worth it for those in our particular position?

Assuming I enjoy the firm and perform well, I would prefer skipping the MBA and staying on/transferring to another firm if promotions were not available, but wonder about the longer term implications. Do you feel like pursuing the CFA would adequately cover the same issues people are seeking to address via an MBA (i.e. standing out against the competition if they were to pursue a role at other hy/distressed AMs or hedge funds, credibility in potentially starting a fund some day, job security, etc.)?

Thanks very much!

Jan 9, 2014
JointBooksRight:

This is excellent - thanks for doing this.

I'm going to be joining the credit arm of a mega fund in a similar role in the summer. I've been growing increasingly excited to make the transition over there and this thread has made me even more so.

I'm also weighing the relative merits of the CFA and MBA as I think about the longer term. Obviously the common answer is "it depends on the person/situation", but given that we are in essentially identical situations (only difference is I am coming from one of the private side roles you mentioned), would you universally say the MBA is not as likely to be worth it for those in our particular position?

Assuming I enjoy the firm and perform well, I would prefer skipping the MBA and staying on/transferring to another firm if promotions were not available, but wonder about the longer term implications. Do you feel like pursuing the CFA would adequately cover the same issues people are seeking to address via an MBA (i.e. standing out against the competition if they were to pursue a role at other hy/distressed AMs or hedge funds, credibility in potentially starting a fund some day, job security, etc.)?

Thanks very much!

Why would you get a CFA if you are already working at a credit fund? I always thought CFA was a way for middle-office/back-office people to try to switch to front-office, and it certainly is a good way to do that. But if you are already front-office, I don't know why you'd get a CFA - you'd likely sacrifice your social life, networking ability, and perhaps even work quality to get a certificate that says you have the skills to do the job that you already have...I don't get the CFA for front office professionals.

In terms of MBA, I would consider this over CFA. If you go to a top b-school, you can actually build a network and have a lot of fun. Its insane that some of my nerdiest friends from undergrad/finance have 'reinvented' themselves into party animals in business school. Its pretty funny. I think the social aspect of b-school and the permanent network you build are the two big advantages. If you are a post-MBA role in finance that you enjoy or at least will have significant exits from, from an economic standpoint MBA makes little sense though.

Most of my friends who went to MBA were either at major PE funds and finished their 2 years, smaller structureless PE firms, or were at a tier 2 consulting firm (Accenture, Deloitte, PwC) who are using MBA to lateral to a bigger consulting firm or finance. I don't know many people who work at hedge funds or got a direct promote at a strong firm who made the decision to leave for MBA.

Jan 8, 2014

Thanks so much! Very insightful! SB!

A couple of questions.

1) What are most Credit Funds looking for in potential BB S&T canidates? Do they mostly stick to the traders and desk analysts, while the salespersons are on the outside looking in? Do the funds tend to focus on HY/DD and look over IG or EM Credits?

2) What were some of the most valuable things you did to help you prepare for your stint at a BB? While you were at a BB? In your transition to the HF?

3) Lastly, would you ever think about returning to BB in the future?

Once again, thank you!

Jan 9, 2014
WallStreetHope:

Thanks so much! Very insightful! SB!

A couple of questions.

1) What are most Credit Funds looking for in potential BB S&T canidates? Do they mostly stick to the traders and desk analysts, while the salespersons are on the outside looking in? Do the funds tend to focus on HY/DD and look over IG or EM Credits?

2) What were some of the most valuable things you did to help you prepare for your stint at a BB? While you were at a BB? In your transition to the HF?

3) Lastly, would you ever think about returning to BB in the future?

Once again, thank you!

1) Well, they aren't looking for sales people or traders. I was an exception because I worked as a desk analyst (in a research role) and then moved to a research-intensive trading role. They hired me because of my research experience, though the trading experience was a positive differentiating factor.

The type of funds you want to work at focus on HY/DD. No research analyst focuses on IG unless they are at an insurance company or slow-money fund. I don't know anything about EM but I'm sure that is an interesting space.

Both IG/EM is very macro driven as opposed to fundamentally driven like in domestic HY/distressed. IG is VERY rates driven - just look at the Apple bonds it issued in 2013, they dropped to 85 cents on the dollar because of the move in rates.

2) The things I did to prepare for my role at the BB - I just read a lot about the space and got prepared to work hard. You learn most of your skills on the job. Just go over basic accounting and get ready to learn. The skills to transition to buyside involve taking what you learn as a junior in sell-side (modeling, building presentations, reading and checking documents) and taking it to the next level (understanding an industry, predicting earnings trends, filling in for your seniors as much as possible).

Reading up on things other analysts publish, and leveraging your firms research data base to learn industry primers is a great place to start. Also becoming nifty with Excel and Bloomberg is pretty key - try to build out the databases and earnings trackers for your team by using Bloomberg API code - these are things that can make you useful to your team right off the bat.

I think the biggest thing you can do for yourself is getting a compact workout routine - getting 30-45 minutes per workout, working out 2-3 times a week, is the biggest thing you can do over the first few year outside of on-the-job learning. Your health, both physical and mental, is key. And I've seen so many of my friends in finance get 'skinny fat' since college - its pretty sad. Don't become skinny fat.

3) Would I return to a BB? My quality of life is much better here, my upside in terms of learning is much higher, the level of respect you get on your time is much higher, plus the regulatory burden on BBs is only getting worse. There's a reason why most 'all-star' traders are leaving BBs - its just become harder to put on your own positions, and instead the focus is purely on market-making in many product lines.

So no - right now I wouldn't return to a BB. Plus, since I'm so close to all my colleagues from my BB, they take me out all the time and put it on the corporate card - nice perk. I'd lose that if I ever go back :)

Jan 8, 2014

Where do you see the distressed arena going in the next few years?

Have you seen an effect from the BBs pulling back their distressed and principal strategy positions?

I worry that like PE, there are too many funds chasing too little deals. Will we continue to see moves such as Sound point's recent acquisition of a USB distressed portfolio?

Also what would an interview be like at a fund such as yours, would there be a focus on deal experience and trading strategy, etc.?

Thanks again, this is bug for a kid that's gunning to be in your seat one day.

DLJ Analyst Class '96

Jan 9, 2014
TheMilkman:

Where do you see the distressed arena going in the next few years?

Have you seen an effect from the BBs pulling back their distressed and principal strategy positions?

I worry that like PE, there are too many funds chasing too little deals. Will we continue to see moves such as Sound point's recent acquisition of a USB distressed portfolio?

Also what would an interview be like at a fund such as yours, would there be a focus on deal experience and trading strategy, etc.?

Thanks again, this is bug for a kid that's gunning to be in your seat one day.

As BBs pull back from distressed and middle-market lending, a lot of buyside guys are filling that role. I think the lack of desire for proprietary risk at the BBs is the big reason why a lot of talented people are leaving - you are more of a marketer as opposed to an investor, even on relatively illiquid products.

I would say over 50% of my peers within the S&T side went to MBA, 25% went to buyside. I do know some all-star traders who have become senior traders with their own books (particularly in equities and mortgages), but even they will likely make the move over at some point.

At a fund like mine, you'd be asked for investment ideas as opposed to your specific deal experience. Trading strategies such as how to hedge (for example, buying equity calls on a short credit position) might be touched on at a high level. Its really about how you look at hte investment process.

What team are you joining at a BB - banking or S&T&R side?

Jan 9, 2014

Thanks for the post! I know mega funds are expanding to the middle market. Are you familiar with anyone coming from a middle market lender/lev fin analyst stint? I currently work as an analyst at a well-known senior lending shop.
The way you explain your investment rationale through a top down approach is similar to what I am doing at my current firm on the underwriting side. I am aware it may be a stretch, but looking for any insight.

Thanks again

Jan 9, 2014

why can't sharks swim backwards?

Jan 9, 2014
CaR:

why can't sharks swim backwards?

They just turn around?

Jan 9, 2014

Could you talk a little bit about what these funds look for in a restructuring type background hire? And where do they look for them? Obviously there's a handful of different fields within restructuring... there's law firms, turnaround consultants (AP/A&M), and financial restructuring (HL, Lazard). Is one better than the other? Or does it really just depend on what you know/how much experience you have/what unique skillset you bring to the firm?

Jan 9, 2014
jckund:

Could you talk a little bit about what these funds look for in a restructuring type background hire? And where do they look for them? Obviously there's a handful of different fields within restructuring... there's law firms, turnaround consultants (AP/A&M), and financial restructuring (HL, Lazard). Is one better than the other? Or does it really just depend on what you know/how much experience you have/what unique skillset you bring to the firm?

A lot of the senior guys in our pure distressed strategy come from senior restructuring roles (both legal and financial). Restructuring is much more process driven. Whereas in a HY/liquid distressed investment, you can decide you like the fundamental story and execute the trade with a sell-side trading counterpart, for illiquid strategies you need to go through a bankruptcy process that is much more oriented around a court process, negotiations between different parties, and a longer term back and forth.

A restructuring/workout process is outside of the core competency of most market driven liquid credit teams, which is where the illiquid distressed guys come in. What our distressed strategy looks for: understanding the steps in a workout, understanding the value drivers, and also having industry knowledge that you can combine with your technicals. The background of the junior staff focused on our illiquid distressed strategy is 2 years LevFin/M&A/restructuring. So given some come from an M&A or lev fin background, I think they are looking more for people with strong general skills that then specialize.

I would not try to lateral from a turnaround consultant role - rather, I think financial restructuring is the best fit. The people with a legal background on our restructuring team came from our legal advisory firms, not surprisingly, and focus more on the legal process, whereas those from the restructuring background focus more on valuation.

I think working at HL/Lazard in restructuring is a great stepping stone to a variety of roles within finance (both buyout and investing) - I don't think turnaround consultants would be able to lateral into an investing role as easily though.

Jan 9, 2014

In leverage loan underwriting/structuring role at MM bank, hoping to switch over to pure origination team. At solid bank that competes with lower BB lenders (UBS, DB, CS, GS, JF, GE). Also looking out to see if a spot opens up in SS Desk.

Appreciate any thoughts you have on career progression.

DLJ Analyst Class '96

Jan 9, 2014
TheMilkman:

In leverage loan underwriting/structuring role at MM bank, hoping to switch over to pure origination team. At solid bank that competes with lower BB lenders (UBS, DB, CS, GS, JF, GE). Also looking out to see if a spot opens up in SS Desk.

Appreciate any thoughts you have on career progression.

That is a good starting point in terms of gaining a relevant skill set, and its clear that you already know your objective should be to lateral to origination or a market driven role, assuming you have an end goal of moving to a buyside investing role focused on leveraged products.

The biggest things you can do (assuming you are

Jan 9, 2014

Hey BigUnit
thanks for doing the AMA..its been really informative so far. I was wondering about your previous role as a BB Distressed/HY research analyst. What drew you to the role and could u go into how sell side analyst think? I'm prepping for a BB post similar to yours and would like to see how it differs from the buyside. Cheers

Jan 9, 2014

Really appreciate you taking the time to respond.

Just started this position out of UG in the summer, trained with the banking class so feel like I'm in a good positon to make a move if I can secure a recommendation.

I think if all else fails, I can move to a mezzanine focused or MM lender as you stated but the upside at those shops seems limited, let me know if you agree.

Lastly, what is your opinion of analysts that work for CLOs and BDCs? Curious on lifestyle as it seems more portfolio management focused vs. Deal volume.

DLJ Analyst Class '96

Jan 9, 2014
TheMilkman:

Really appreciate you taking the time to respond.

Just started this position out of UG in the summer, trained with the banking class so feel like I'm in a good positon to make a move if I can secure a recommendation.

I think if all else fails, I can move to a mezzanine focused or MM lender as you stated but the upside at those shops seems limited, let me know if you agree.

Lastly, what is your opinion of analysts that work for CLOs and BDCs? Curious on lifestyle as it seems more portfolio management focused vs. Deal volume.

Well, CLO and BDC products usually operate within the same types of credit platforms that the hedge funds are located. The same investment team typically does a few different funds, such as long/short, leveraged return, and CLOs. All these products require the same fundamental investing skill set. So when you work at a CLO, you likely are working in the overall leveraged credit platform and the CLO is one of the products you manage. The people who are solely CLO focused are the PMs/structurers that focus on the deal monitoring, but the investment team likely overlaps w non-CLO investments as well.

MM/mezz lending has become pretty saturated, but likely would be the most smooth transition for you and a great starting point to move to a BDC type role.

Jan 9, 2014

So TPG

Jan 9, 2014

Do you think someone who will be starting at a mezzanine debt fund at a brand name firm (think Kayne, Oaktree, GSO, Sankaty, Ares, etc.) straight from undergrad has the chance to move into private equity after his or her 2-3 years are up? You would think that the investing experience - doing primary diligence similar to that of a private equity professional albeit with a debt hat on - would trump banking experience (in general). Or do you think the Mezz guy/girl will be able to only look at other debt opportunities (perhaps distressed?) if he/she wanted to move?

Thanks in advance for your help.

    • 1
Jan 9, 2014
wso929292:

Do you think someone who will be starting at a mezzanine debt fund at a brand name firm (think Kayne, Oaktree, GSO, Sankaty, Ares, etc.) straight from undergrad has the chance to move into private equity after his or her 2-3 years are up? You would think that the investing experience - doing primary diligence similar to that of a private equity professional albeit with a debt hat on - would trump banking experience (in general). Or do you think the Mezz guy/girl will be able to only look at other debt opportunities (perhaps distressed?) if he/she wanted to move?

Thanks in advance for your help.

Hm, I think if you started in mezz right from undergrad would somewhat hole you up in the world of credit as opposed to moving to PE. While the due diligence is intense for both fields, your focus on asset coverage would trump the focus on growth potential, and so the skillset is somewhat different. The bigger thing holding you back would be the fact that most of your network and potential recruitment opportunities will remain in the credit space, and moving to traditional buyout might be more difficult. Then again, my experience was very different from what someone doing mezz out of ungrad was - so take what I say with a grain of salt.

Jan 10, 2014

Do you have any opinions on some of the top desks at BBs right now and over the next year if you were thinking about a career in SS/DD investing?

Also, can you give some insight into what you would do different starting out at the BB in terms of groups and the best course of action on how to advance your career if you're in a spot you would not like to be in.

Maybe pros/cons of lateraling to a different firm or internally for a lev fin type role vs S&T (nature of the work and impact on career progression)?

Thanks for doing this!

Jan 10, 2014
KingHasReturned:

Do you have any opinions on some of the top desks at BBs right now and over the next year if you were thinking about a career in SS/DD investing?

Also, can you give some insight into what you would do different starting out at the BB in terms of groups and the best course of action on how to advance your career if you're in a spot you would not like to be in.

Maybe pros/cons of lateraling to a different firm or internally for a lev fin type role vs S&T (nature of the work and impact on career progression)?

Thanks for doing this!

Hm - if you want to move to a buyside credit role, the places on the sellside you should start are: lev fin, restructuring, high yield research (publishing), and desk analyst (hy/distressed non-publishing). I would not recommend sales or trading. Now this might seem dumb because I worked as a trader, but I spent the beginning of my career doing pure research, and my trading role was fairly research oriented.

These are the most common ways to transition into a buyside investment team role. If you are in a spot you don't want to be in (for example, sales instead of research, or IG trading instead of HY), the best thing you can do is network with the people you are interested in working with. The great thing about the S/T/R side is that everyone is physically closer to one another and so interaction is easier, compared to banking where different teams may sometimes sit on different floors. Being on a big trading floor means you have more 'water cooler' type interactions. Going out for drinks with people is always pretty clutch.

Honestly if you are on the sellside now, I would aim to be on the private side as opposed to public side trading research. Regulations have impeded the ability of sellside research to add alpha to their trading desks given the decreased propensity to take large positions.

Jan 13, 2014

Any insight on how Credit Rating Agency experience stacks up? I think generally it's lower on the totem pole for recruiting, but I was hoping you could give an idea of the kind of experience you'd need to make the transition, and perhaps if anyone you know has had that experience coming into a buyside role. Fundamentally, I would think the major difference between Credit Ratings and sellside/trading desk research is the investing focus that sellside/trading desk research provides. Maybe there's more to it that I'm not totally aware of?

Thanks for doing this AMA.

Jan 13, 2014
nsjkd:

Any insight on how Credit Rating Agency experience stacks up? I think generally it's lower on the totem pole for recruiting, but I was hoping you could give an idea of the kind of experience you'd need to make the transition, and perhaps if anyone you know has had that experience coming into a buyside role. Fundamentally, I would think the major difference between Credit Ratings and sellside/trading desk research is the investing focus that sellside/trading desk research provides. Maybe there's more to it that I'm not totally aware of?

Thanks for doing this AMA.

Hm - I think the majority of people with the ratings agency experience lateral to sellside, then make a move to buyside after that. I think its a good experience and a common place to start at before moving a sellside analyst role - primarily because it involves publishing and writing recommendations.

Dec 29, 2017
big unit:

I would not recommend sales or trading.

Whats wrong with sell side HY trading (in order to go to the buyside)? I would have thought the illiquidity would mean that the sell side role would involve a lot of research.

Whats the point of having a HY sell side desk research analyst if you are not doing something similar to the buyside?

Jan 10, 2014

really insightful post, big unit, SB for you!! I have also PM'ed you for advice, it would be great if you could shed some light into my issue. Thank you!!

Jan 10, 2014

Can you explain how your day to day would be different if you were on public vs. Private side? I would assume public would be more market making focused.

What funds are leaders on the but side excluding your typical KKR, Apollo, carlye GMS?

DLJ Analyst Class '96

Jan 10, 2014
TheMilkman:

Can you explain how your day to day would be different if you were on public vs. Private side? I would assume public would be more market making focused.

What funds are leaders on the but side excluding your typical KKR, Apollo, carlye GMS?

Public side - we work on public securities that move every day, we aren't involved in the legal process of a workout/restructuring, we aren't sourcing our deals directly with company management teams. Rather, we are most often trading high yield/distressed with the banks via sales/trading or through primary issuance, and where things such as Fed minutes or job numbers change prices every day.

We also focus on a lot of different investment ideas a month - we probably executive 10-15 trades a month, with a few of them being larger in size, and some being smaller. On private side, its a smaller number of targets, but longer level of due diligence per idea.

I'll note I never worked on the private side, but my roommates are both in PE and the increased DD in PE is a common theme. You have less to go off on the public side, but you also can capture

I don't want to dive into who the leaders are on the buyside - but typically all the major PE shops and credit only shops that have significant AUM are strong. They typically compete for the same pool of investment professionals, and you have a lot of lateral hires.

    • 1
Jan 11, 2014

great thread

Jan 15, 2014

Fellow distressed analyst here. My question to you is where are you finding value nowadays when CCC paper is trading above call price and US HY yields are at ~6%? My other question is do you wish your group had a broader mandate (ability to invest in credit-themed equities, illiquid bank debt, sovereign/intl credit, etc) or are you happy with your opportunity set?

Jan 20, 2014
valueisoverrated:

Fellow distressed analyst here. My question to you is where are you finding value nowadays when CCC paper is trading above call price and US HY yields are at ~6%? My other question is do you wish your group had a broader mandate (ability to invest in credit-themed equities, illiquid bank debt, sovereign/intl credit, etc) or are you happy with your opportunity set?

We've mostly moved into strategies using more senior debt and applying leverage in general. I always feel I'm busy enough - and I don't have any true experience with sovereigns, though that would be an awesome area to learn. We generally use equities has hedges, so some experience there. I guess my answer is that I want to become more fluent in my current opportunity set before broadening it - hopefully I'll have that level of confidence sooner than later.

How about yourself? Any strategy drift for your team? I feel like all the markets across credit are somewhat overheated now.

Jan 19, 2014

Great stuff, thanks!

Jan 21, 2014

What are the important things you look for as you try to assess the true run rate cash flow of a business? Same question as to putting the right multiple on that cash flow. Just would like to read your thoughts on either.

Jan 22, 2014

Every situation/sector/subsector is different. In general we look at unleveraged free cash flow first - EBITDA less maintenance capex, less cash taxes (assuming working capital build is neutrial, and looking at return on investment for growth expenditures) is how I initially take a look at a business. Looking at margin maintenance and cusomter concentration.

However, since we have sector specific coverage, you can use EV/EBITDA multiples and then look at capex needs/working capital build/tax credits on a separate basis but within a sector.

I would describe my analysis much more qualitative than quantitative - looking at cash flow multiples is one thing (and a great way to get a ball park sense for what value is), but looking at the businesses's strengths/weaknesses from a contract perspective, market share perspective, and end market growth perspective are all absolutely key two. This becomes especially relevant when you are doing a long/short trade within a smaller subsector based on what you think is a key competetive advantage (which could mean concentration in different geographies, access to better transportation, more favorable raw material contracts, newer infrastructure, less legacy liabilities, etc.)

Jan 27, 2014

Hi, I was wondering about how transferable (geographically) the HY skillset is - e.g. if I go into HY in UK, would I be able to move to work in the US in the same role in the future, and vice versa - could you advise on this?

Also, does your experience in evaluating businesses' strengths mean that transferring from HY to equity L/Short is a viable exit opp?

Jan 29, 2014

Hi! Looking at these HF's, would really appreciate opinions on them:
Jamison Cap,
Harvest,
HG Vora,
Golub Cap,
Fred Alger,
Pacific Global,
Weiss,
Acadian,
Scopia,
Causeway Cap,
Mayo Van Otterloo
Thanks :)

Jan 29, 2014
WWW:

Hi! Looking at these HF's, would really appreciate opinions on them:

Jamison Cap,

Harvest,

HG Vora,

Golub Cap,

Fred Alger,

Pacific Global,

Weiss,

Acadian,

Scopia,

Causeway Cap,

Mayo Van Otterloo

Thanks :)

Never heard of a single one of them.

Feb 7, 2014

Thanks for running the thread! Curious about your thoughts on being an RA out of undergrad at JPM Equities. Looks like they really invest in their team. How does it look as a long term gig and otherwise are opps after at say a bottom-up value long-only eq fund manager good too, any idea?

Apr 20, 2014

1-Click to Unlock All Comments - 100% FREE

Why do I need to be signed in?
WSO is a knowledge-sharing community that depends on everyone being able to pitch in when they know something.
+ Bonus: 6 Free Financial Modeling Lessons with 1-Click Signup ($199 value)
May 9, 2014
Jan 14, 2015
Jan 14, 2015