Credit investment sample model / writeup
Hi - anyone have a sample writeup of a credit-focused investment? Can be distressed or regular-way HY, just trying to get a sense of the approaches that people take with respect to modeling. Usually I see shortened models including revenue / EBITDA / FCF and a waterfall for recoveries, but curious as to what the day to day is like for modeling on the credit side.
Thanks!
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Go to Value Investors Club and search for "Term Loan"
Responding on performing credit (HY/LL) here. My fund does some distressed/special sits stuff as well but it's a relatively small chunk of the portfolio (<10% usually) and I don't work on it.
On the performing side, the modeling isn't all that different than equity, but with a different emphasis. I'd frame it as we're more short-term focused than a traditional LO equity strategy, but longer-term focus than a pod shop. By virtue of operating in this space you wind up focused on a lot of highly cyclical businesses, which shortens the horizon IMO but I like it over the "buy high quality business and hold forever" approach because you get a bit faster velocity of investments as a result. We don't build shortened models at my fund, still full three statements with same type of detailed build out that you'd see on the equity side (e.g. including KPIs with ability to flex them up/down and have that flow through the business). My PM runs a concentrated book, so I think that drives a more intense research process than you might see at other credit managers, but I have only worked here so YMMV. We are more focused on EBITDA/FCF at the end of the day, but the general analysis is similar.
As I mentioned, I'm working on performing credits, so the extent of my recovery analysis is usually something to the effect of "in a downside case, business will generate $x of EBITDA, I think it's a 7x business in this case, we're attached at 5x downside EBITDA therefore we should be fully covered" but will vary and become more of a focal point if things deteriorate after we buy.
Hey! Few questions. Do you build these 3 statements from scratch or a template? How long does it typically take?
Also a bit off topic, what type of person would prefer this over direct lending (my background)? I like the idea of being rewarded for your ideas, but it feels very research-intensive and "silo'd" - not transactional. Reading 10-Ks and spending a lot of time without any interaction with team mates - but this could just be what I saw at one very small credit manager. What returns have you made and what do you most enjoy about the role? Thanks!
Yeah, we all build from scratch - my PM insists on it. I'd generically say it takes me a day to build out a full model, but could be shorter depending on how similar the business is to other names I already cover. After the first day it's generally a matter of refining things to adapt to what my PM is looking to see or new information that I want to incorporate. Obviously if I'm familiar with an industry's KPIs already and what companies within the sector typically report from that perspective, it can make things faster because I don't have to spend a lot of time thinking about how I should build revenue or cost drivers, etc.
I was attracted to this because I really enjoy the idea generation and research part of the job, and love learning about companies and forming opinions on them. I like that we have a concentrated book so are required to know businesses more deeply than I think you might encounter in other credit roles. You're right that there's a very siloed feel in a sense - you could hear a pin drop in my office because basically the only talking you do is when you're on an expert call, or talking to sell side/IR. The rest of the time is spent reading up on companies/industries, catching up on news in your coverage, etc. We're a fairly small team and I think we all have a similar personality in that everyone is very chill and likes the work but are also pretty introverted relative to other areas of finance. It's really a perfect fit for me, I'm kind of an awkward guy and I used to be in a front office role that I hated because working with clients fucking sucked. I like the self-directed nature of the role a lot, but YMMV on that and I have friends who have worked on the public buy side in equities and credit and hate the lack of structure.
I'm still early on but my picks have been decent so far. I'm just starting to get coverage that is relatively attractive in the sense of my PM actually being interested in adding it to the portfolio. In terms of the fund itself, the main fund we invest out of is top decile since inception, but there are few different buckets of capital and all have done well. My PM can be tough to work under sometimes but he is generally a nice guy and has a great track record so happy I get to learn from him.
First time I've ever heard of building models from scratch for performing credit...but I guess it makes sense if you're concentrated and lower-velocity.
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