HY Credit Case Study
Hi all,
I have an interview coming up for an asset manager that deals with HY corporate bonds from EM. It's essentially a 30 min presentation of a case study - a credit memo, followed by a 30 min Q&A. One of the things I am supposed to include in the case study is a "bond valuation". I haven't seen a bond valuation section mentioned in other discussions when it came to credit memo case studies. I've been provided with the bond offering memorandum and a separate file with the bond's ask price, ask yield, coupon rate, maturity, etc, which is basically an export from BBG. I know how bond valuation works in theory, but I'm just at a bit of a loss because all the results I would be calculating for seem to be provided in the DD material.
What do you think they expect me to model and present here? I've never done a case study like this before, so I would really appreciate some pointers.
Thank you.
There are two ways you can approach bond valuation.
So basically, you should calculate all of those metrics for your business and then compare to both other credits in the industry / sector as well as the index. The brief valuation pitch for a performing credits is something like "XYZ 2029 Bonds trade at 8.5% YTM / +440bps and we believe bonds should tighten 150bps, inline with competitors ABC and EFG, as NTM EBITDA inflection should drive 2x turns deleverage through the secured tranche providing a one year xx% total return opportunity". Total return = coupon + price difference between 8.5% and 7.0% YTM (the 150bps tightening).
Thanks for the reply, it's really useful! I just have one question about the last part of your example. Could you explain what you meant by the "2x turns deleverage through the secured tranche".
I get that it's obviously just an example, but I think it would help me make a better recommendation for my case.
As I mentioned, you generally want to have a view on whether a situation is leveraging or deleveraging; is debt / EBITDA going up or down. “2x turns deleverage” in my example just could mean leverage going from 5x to 3x.
Could I pm you?
Yes
For your HY corporate bonds case study, the "bond valuation" section likely expects you to go beyond just restating the provided data. Here's what you should focus on:
Yield Analysis and Comparables:
Credit Metrics and Risk Assessment:
Scenario Analysis:
Recovery Analysis:
Intrinsic Value Assessment:
Catalysts and Risks:
Recommendation:
By incorporating these elements, you'll demonstrate a comprehensive understanding of bond valuation and credit analysis, which is likely what the interviewers are looking for. Good luck!
Sources: Distressed publicly traded credit - case study help needed!, Dalio's all weather Portfolio - Value Investing version, Private Credit Secondaries Case Study Insight, leveraged finance interview - what to prep, Notes for Technical Interview Questions
What Principal in HF outlined is a bit more complex - not every story needs to be tightening or widening with some strong view on where the business is going.
A more plain vanilla version to the above it just saying the yield you'd recommend buying at and the corresponding price you'd pay. You'd use comps, as mentioned above as frame work. You can look at things like how many basis point your being paid per turn of leverage relative to comps, other relative metrics, etc. Also, its not just metrics you gotta include some qualitative info as well. If the bond has a coupon of 8% and is priced at par, so its yielding 8%...but you think that price is to rich relative to comps, you might say you recommend buying at a price of 95 or lower to get a yield of X, or conversely you might say you'd be willing to buy up to 103 for a yield of Y.
In terms of a chicken & egg, are you saying you consider the desired yield to be the primary metric you'd look at with the price you'd pay to be a function of that? So the price of the bond might mathematically make sense as is, but you think the Company's risk profile warrants a higher yield, so you'd lower the price you'd be willing to pay then?
? Yield is the inverse of price and vise versa. So it is impossible for the price to make sense but the yield be insufficient, unless you are in a bankruptcy situation where yield is irrelevant.
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