Q&A: CB -> CIB -> Distressed
I started at global bank for 3 years doing corporate banking before shifting into a CIB role at a different bank. I stayed there for about a year before moving into a role at a distressed fund. Current role focus on mostly secondary opportunities across the capital structure, with some primary work. Current shop targets ~15% unlevered returns .
AMA - recruiting, comp, deal process, market
Can you provide some color on your fund strategy, do you trade in/out of names or more sizeable holds/active role in restructuring processes? What work streams are you responsible for day-to-day? Do you have any interview case studies that you'd be willing to share? Current working in direct lending thinking about moving down the cap structure/into hairier stuff
Can you provide some color on your fund strategy, do you trade in/out of names or more sizeable holds/active role in restructuring processes?
For credits, we underwrite to takeout, little trading in and out. Equities we do trade of course, but have a minimum return MOIC wise, holding atleast a quarter but usually multiple until the catalyst realizes or thesis changes. Our typical position is $50-100MM. In terms of RX, we are active in smaller capital structures.
What work streams are you responsible for day-to-day?
90% deal work, rest portoflio / admin. Starts with screening deals. - spreading numbers, generating an opinion on busines quality, merits / risks, understanding the situation (i.e why did it trade down,) finding catalysts, doc analysis, and then presenting an opinion to a senior. Basically this part is understanding 1) is it a "real" business, 2) is the capital structure setup right for us to get involved, 3) is the risk to return right. Over half the names I have screened haven't advanced past this stage.
After screening, we typically identify a few things we want to know more on. We then go into a full DD to understand more about these issues. This is a lot of expert calls / networking with advisors & other investors. During this process, often something you thought was important isn't and vice verse. Our underwriting process is robust and usually takes atleast 2 months if its a name we don't own already across our vehicles. Obviously, as you progress in the DD and get closer to presenting, the more you work on it.
On a day to day, it can vary between just screening one name, doing earnings work and working one early stage DD to working on several ICs decks at once. Really depends.
Do you have any interview case studies that you'd be willing to share?
My case was in person and similar to DL cases. Simple LFCF model and a slide and talking high level on what I liked / key risks etc etc. Associates on our team aren't expected to have in depth legal or RX knowledge.
Current working in direct lending thinking about moving down the cap structure/into hairier stuff
My fund is in a broader PE platform that has a big DL fund too., which plays in the BSL market. We work together on some names they owned that traded down. My impression is there's a lot of similarities in the work at the junior level. My team does 80%+ 1L.
Got it, that's helpful. Who're some of the better recruiters for opportunistic/distressed credit? Robin Judson? Would you mind sharing general comp range, assuming you joined as an Associate
Are you me?! I have had the same career path lol.
Hell yeah brother. CB -> distressed pipeline is the most elite on the street
I am a current student just learning about this kind of work. What size shop are you at / have you been at?
How might you recommend learning more about the different roles in the credit space? Seems like there are thousands of firms with different investing strategies / advisory roles to explore. How can I see which ones I want to learn more about?
Thanks!
What size shop are you at / have you been at?
We have about 5b in capital our group, across a few funds. The broader firm is well into double digits billions AUM across all types of PE.
How might you recommend learning more about the different roles in the credit space? Hands down the best way to do this is find people on linkedin and ask to talk to them. You can ask them what types of deals they look at (private, liquid, structured etc), what the deal process looks like, what types of returns they target, how do they think about exiting their investments, what sectors they like etc.
Seems like there are thousands of firms with different investing strategies / advisory roles to explore.
I totally relate to this. Even when I was recruiting with 3 years of industry experience, I had a tough time understanding what made them different. As far as credit investment roles, the difference really comes down to where in capital structure they play (1st lien, junior, mezz, asset backed), is there a sector tilt, how large of a positions they take, how they source deals (syndication, secondary markets, privately originated), fund structure, is there carry?, how long is LP money locked up? Is the fund itself or individual positions levered? if its levered how? CLO, traditional fund leverage, asset backed lines from banks for individual positions) how is carry hurdles are calculated (MOIC or IRR), how frequently is carry paid? what types of returns do they target? are investments performing, stressed, or distressed? This is what makes credit funds and their roles different by nature. Understanding this well is really difficult without actually working in the industry or networking . Fund differences aside, many funds with completely different structures will look at and invest in the same deals. Also they often think about deals in the same way. Credit investing is a type of value investing in my opinion.
How can I see which ones I want to learn more about? Network, ask questions, get some experience. Really takes time.
Thank you very much for the detailed reply. That will help a lot.
If it isn't too much trouble, do you think you might be able to provide a preliminary list of prominent funds/firms broadly across the different categories you specified?
Thank you again.
What is all in comp in the senior associate to junior VP level at your current shop
Idk for sure. My guess is senior is mid/high 300s and VP 4-500 plus carry. Definitely some variance based if you're an external or internal hire. Plus internal hire variance based on personal performance. No insight into carry, but have heard that our firm is light in that department.
What’re hours like and how much weekend work? Would you guys ever accept someone coming from plain vanilla LBO private credit at the senior associate level?
50 hours a week normally. Might spike to up 70 when nearing IC. Seniors are focused on longevity of associates, so if you're sprinting, they encourage you to take the foot off the gas after. Staffing is designed this way.
Experienced associate yes have seen this already, direct senior hire less likely. Senior in our group is considered a one year VP tryout, so you're expected to find, underwrite your own deals and lead presentation. Would be hard without participating in it at least a few times, but if you're gifted they won't hold you back.
When screening new companies and making investments, are these mostly public companies or private companies? If both, what’s the % split for each? If private companies, are these being fed to you from bankers? If not bankers, where?
95% are broadly syndicated leveraged loans or bonds that trade openly amongst institutional investors via banks. We get information from data rooms operated by agent lenders, which we get access to after signing confidentially agreements. With these deals, we tell our trading team we're interested and they reach out to get us signed up. They're mostly private sponsor-backed companies, but some fraction (maybe 10-20%) have public equity. For non-traded debt, the process is mostly the same, but banks invite us to take a look, instead of us reaching out to them. From there, the process looks the mostly same except there's usually a defined timeline to close.
So PE firms buy these companies using leverage, and down the line the company has issues leading it to default or break a covenant of the debt, and that’s where you step in?
What’s the intuition behind this strategy? In other words, why don’t you guys: search for private companies that are struggling and would be open to taking on your type of debt, focus more on companies with public bonds that are struggling who would be open to refinancing with you, other?
Along the lines of that last one, when your firm comes in for these secondary positions, are you renegotiating the terms of the debt, and if so, how crucial is this aspect of the deal?
And what is the general size of these companies in terms of revenue or ebitda?
Thanks again for your patience and insights. I’m learning so much from this post.
So PE firms buy these companies using leverage, and down the line the company has issues leading it to default or break a covenant of the debt, and that's where you step in?
We step in usually before this happens. Most of the time, our base model implies the company can rebound without going into a RX process. RX processes have a lot of lender on lender violence, in which majority lender groups and equity holders benefit at the cost of minority groups of the same tranche. Our capital is limited and the fund terms dictate that we must have diversification and our broader firm believe in portfolio theory, so concentrated positions aren't in our wheelhouse. This is to say we really can't ensure we'll be able to make it into majority groups in the majority amount of capital structures we invest in.
What's the intuition behind this strategy? In other words, why don't you guys: search for private companies that are struggling and would be open to taking on your type of debt, focus more on companies with public bonds that are struggling who would be open to refinancing with you, other?
This is a small portion of our mandate. We're generally not looking to give incremental capital to struggling businesses. This type of investing becomes more interesting in higher rate environments like today, because you can get a good risk premium. When rates are low, risk premiums are low cause everyone is chasing yield and inevitably you're forced to throw good money at shit companies to find a return.
A situation where would do this would be when a good company is in a fucked up, temporary situation - e.g. a company that has seen margin erosion due to inflation, but is strategically position with strong pricing power to recover, but has a liquidity need to buy time to introduce price increases. If we can price this debt at the right price - getting enough return relative to perceived risk, we'll do it but our fund mandate only allows this to be a small portion of our capital.
Along the lines of that last one, when your firm comes in for these secondary positions, are you renegotiating the terms of the debt, and if so, how crucial is this aspect of the deal?
The secondary opportunities are our wheelhouse. The philosophy behind it is 1) the market is an inefficient at pricing secondary debt opportunities, 2) through extensive diligence and a "propriety" edge our team is positioned to find opportunities where the market is mispricing risk and 3) our team has the industry connections and investment expertise to prosper through RX processes or even to own the business to a successful exit.
Much like the example above, we're looking for good companies in bad situations. The only difference is we're not expecting to have to provide incremental capital. It starts with valuation, let's say we find a business that's worth 10x and their market implied 1st lien leverage is 5x. This means you have a solid equity cushion of 5x below you and your value is "safe". We think the company has the liquidity to make it through its "situation" and by the time the debt matures, the company will delever to 4x, a level where the primary market will refinance and get us taken out. This yields a 15% return. This is what we're looking for most of the time, but that is a base case situation and we need to get comfortable if shit doesn't goes to plan.
So we'll think about what happens if they don't have enough liquidity. This is when a RX analysis comes in. For simplicity, lets say the equity holders don't want to put in more money, lender on lender violence is avoided, and now as debt holders we take the keys. We own the business, but it still needs liquidity to operate. We bought the debt at 5x, now we throw in another turn of leverage to give the company cash to operate. This means we effectively bought the business for 6x, when its worth 10x. You rebuild the business for a couple years and exit for a decent return. In these situations, there can be upside convexity - management grows ebitda more than expected and exit we fetch a 12x multiple instead of 10x. For the incremental capital injection to be considered a successful deal, the return must be higher than what the return would have been with no additional capital and the business just sold through a 363 sale.
And what is the general size of these companies in terms of revenue or ebitda? Large range, but usually between $50 (rough minimum needed for broadly syndicated debt at origination) and $300mm in ebita, can go higher depending on the perceived quality of the business, what the docs allow for in terms of dropdowns, sub debt, priming and a whole host of moves the equity holders can do to protect their investment, who the other lenders are etc.
Thanks again for your patience and insights. I'm learning so much from this post.
My pleasure.
Incoming RX analyst at PWP. Was just curious, how hard is it to get into a distressed investing seat coming from a not a top RX group?(HL RX, PJT RSSG, EVR RX, etc.)
You're in a great spot. There's more than enough to go around for you to get tons of interviews. Headhunters will be all in your linkedin DMs trying to get a piece of you. Good luck
I'm in Comm Bank interested in the CB space....what did you like/dislike about CB? Did you ever envision a long-term future for yourself in CB? What was your typical day-to-day like? What size bank if I may ask? Anything I could do now in Comm Bank to prepare myself to CB?
Thanks!
check out this thread - it'll answer most of your questions. For me, I wanted to be an investor rather than a banker long term. I still think CB is a great career path that offers a great mix of work life balance and interesting work. https://www.wallstreetoasis.com/forum/other/qa-1st-year-corporate-banki…
Current CB analyst looking to make the move to distressed. would making the move to a CLO fund be a good opportunity to get involved in distressed?
Definitely, especially if it's a CLO platform that also has distressed capital. Even if not, you'll definitely go in more depth understanding businesses that are more levered than CB.
I've been trying to leverage my background (business transformation: my interviewers have given me stellar feedback on this) to get into a RX advisory role but haven't progressed to the case study rounds. I've recently started sharing a work sample (to demonstrate my technical skills) when I reach out to these firms. I know you don't have any RX advisory experience, but any advice would be great!
I can't help other than to say make sure your technical skills are strong, you know some recent RX trends and can speak intelligently about a couple deals.
How much of your mandate is actually deep, in process distressed / putting in new money? It sounds like your main objective is to find performing stressed situations that will work themselves out without requiring new capital. That will work, but my view is the secondary market for BSLs/corporate bonds is pretty efficiently priced because there are armies of analysts looking for the 15%, money good piece of paper attached to a de-leveraging credit, which is pretty rare to find outside of significant market dislocation periods, in my experience.
How much of your mandate is actually deep, in process distressed / putting in new money? Maybe 10% by design then another 2-5% of names we bought as performing end up in process.
It sounds like your main objective is to find performing stressed situations that will work themselves out without requiring new capital.
That's the main strategy.
That will work, but my view is the secondary market for BSLs/corporate bonds is pretty efficiently priced because there are armies of analysts looking for the 15%, money good piece of paper attached to a de-leveraging credit, which is pretty rare to find outside of significant market dislocation periods, in my experience.
When rates are low I totally agree, it's not sustainable to target these types of returns with this strategy alone. Previously to the recent rate regime, our strategy was targeting 12% levered returns vs. 15% unlevered now, so there is definitely a little bit of goal post shifting to reflect the markets. Although our bread and butter is finding good risk in the market, we definitely make an outsized portion of fund MOIC from supporting good businesses through restructuring processes. Overall, the flagship fund in our strategy has returned net IRRs of 15% since inception decades ago.
Hi! Thanks for this.
Currently in CB, doing some research about different buy-side roles.
For distressed, is it better to say be in a Coverage side of CB, or more related to the debt side (assuming working currently at a BB with large balance sheet). See a few groups such as Sponsors Credit and Loan Syndications, not sure if you see those are more effective in transitioning than traditional Coverage sectors?
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