Q&A - High Yield/Distressed Debt Sell Side Analyst

The easiest way to answer this is to go through our research process from beginning to end. Some of the companies we cover are names our analyst is well established in, but others are special situations that our clients ask us to take a look at, and if the company has a lot of debt outstanding (different classes of debt so Sr. Secured, Unsecured, Convertible notes etc) we'll do a bottom up analysis. Generally this will start with going through the K's and Q's and determining the structure of the industry, the major competitors, going through earnings transcripts and speaking with clients who are involved (aka own some of the debt). Throughout this process we will build a model and project rev/EBITDA/cash flow, meanwhile compiling the best comps to determine a range of multiples.

So I would say its a rather lengthy and detailed process, including speaking with management and doing on-site research (touring a retail store for instance). If the company is on the verge of bankruptcy we will do full chapter 7 & ch. 11 analysis, which essentially turns into a waterfall but under different scenarios. Sometimes we'll do a waterfall even if we have a Buy rec just because most buy-side distressed guys will want to know the down-side framework. The biggest difference in HY/DD research and equity research is going through the Indentures to determine the companies ability to incur more debt, sell assets, what call schedule is there, and everything else that could occur in a bankruptcy. The analysts I work under have a very strong back-round in court-law, even down to the different judges in Delaware to determine the probabilities of different outcomes.

In regards to the sloppy sell side research you allude to, a lot of that is because the big banks are obliged to cover dozens of names due to their banking relationship. Being a boutique we're much more selective in the names we cover, so analysts will generally cover 8-12 names on a primary basis, and maybe another 10 on a secondary basis. The difference between primary & secondary is secondary we don't have a recommendation on, so its much less involved and we won't publish on every earnings. The bulge bracket research is watered down because they have analysts covering 20+ companies on a primary basis, and its simply not possible to stay on top of them. Most of what you see is their junior analyst tweaking a model to maintain their "Buy" rec. There are numerous exceptions to this but from what I see this is what usually happens.

I might not be the best to speak on this, as DCM is much different than research, but I would say no matter what you want to do you need to leverage alumni contacts. Reach out on linkedin and try to get a phone call and ask them about their specific role.

Never heard of "Moyer-type" as an analysis, but he did write the best guide to distressed debt investing, so yes.

Yes we cover public or private, US or Foreign. I'd say Asia is one market i've never looked at personally.

Game theory is a skill that comes into play. Many times situations come down to what is one group going to do vs the other group. Creditors vs comapny mgmt, Senior debt holders vs Jr debt holders, etc. Demonstrating it on a resume is very difficult. It needs to come up in networking, you can mentioned stuff you know about the debt markets, maybe pitch trade ideas like i did.

I'm technically a desk analyst by FINRA standards as i don't publish Buy/Sell recs, don't have the 86/87, but i work under the publishing analysts. So a hybrid of both ahah

I can't think of anything that would stop HY issuance. Companeis will always need credit and many don't have strong credit metrics, therefore must issue at higher yields. There was $500 billion HY debt outstanding in 2000, and there's over $1.6 trillion as of last year. For law, I can see why its pigeon holed, because its about 20% of the size of investment grade debt. But once we have another recession, its the High Yield issuers that are going bankrupt, not the Disney's of the world. Bankruptcy is huge for lawyers. Doesn't look like that is going to ever change.

no books out there on reading covenants. Only advice is to dig in and figure it out. Over time you'll learn the most vital covenants to analyze. Becomes more of an art form than science.

A lot of times knowing the consultants hired by the company helps tremendously as you can get in touch with the players behind the scene and trade info with them.

The only bias i've seen on the buyside is from funds who focus on direct-lending or private equity funds. They want more deal experience. General HY or distressed funds want the fundamental analysis skills that comes with sell side research.

1 & 2) Two main types of valuation are using a multiple (EV/EBITDA by far most common) and the second is a liquidation/waterfall analysis. For the former, determine what multiple of EBITDA the underlying business is worth, and then apply that multiple to the EBITDA to determine Enterprise Value. The waterfall analysis is more relevant if you believe the company will file Ch. 7 and liquidate. So even if the company files bankruptcy, if the value of your collateral is worth 80 cents on the dollar, then it makes sense the bonds trade at 80.

To your question if the collateral is only enough to satisfy secured claims (usually bank debt, term loans etc) then unsecured bond holders will receive equity of the reorganized company. Therefore, you need to determine what the Enterprise Value is of the business, and then determine the equity value (after subtracting out whatever debt is left after the reorg). Lots of distressed investors are what you call "loan-to-own" type guys, where they will buy bonds for pennies on the dollar with the intention to take control of the equity via restructuring and then operate the business themselves (hopefully better than the previous management.

Yes we only have access to public info, but you'd be surprised how little the general investing public understands about the bankruptcy process. Hundreds of documents are filed to the bankruptcy court, and you can find a lot of info if you know where to look. Cross defaults are included in the bonds indenture which is filed with the SEC via EDGAR. Certain info might be only given to the banks (if they are "over the wall") however anything that would affect the bonds has to be in the publicly filed indenture.

Also a big part of a sell-side analysts job is to speak to other buyside investors and glean information from them, and then pass this info to other investors. Takes a long time to get comfortable with this skill.

3) Clients are HY mutual funds, credit & distressed focused hedge funds, even private equity funds as a lot of them have credit funds focused on loan to own as described above.

4) Company's do generally shut down once bankruptcy is filed. However the disclosure in US bankruptcy courts is very detailed. I have not done too much work on European reorg.

answered above

I do not. Argo is a buyside investment firm. I work on the sell side.

This thread was posted 3 years ago bruh.