Hi all,
I'm sitting a take home case study for a credit hedge fund in London and would really appreciate if anyone could share any tips / precedents ?
I have only really ever seen PE ones and equity case studies so would really appreciate any help here!
Thank you.
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I mean the case itself isn’t different than any equity case… just focus on the business, your view and thesis, lay out the financials and cap structure well and highlight covenants. In the model focus on a good operating model but also cash flow and any relevant credit metrics. Important thing is to let your view on the business and financials help form a thesis which you express via a trade in the cap structure, not the other way around. Keep it concise with a summary and recommendation right at the top because nobody wants to scroll through 10 pages of unnecessary fluff to find a recommendation.
It’s still an investment thesis. That part is really no different than a PE case study. “I recommend going long/short X because of XYZ” is the gist of any investment recommendation.
Ultimately you are just trying to figure out if this is overvalued / undervalued. So you want to look at comps, where they trade, and make a qualitative judgment based on credit metrics / business strength versus peers if that valuation is warranted. Then you need to think about whether there are positive or negative catalysts on the horizon that could help close or widen that gap to peers.
eg I recommend buying the [6.5% 29s] because they trade at a [50bps] discount to peers and I expect that over the next [12 months] company will [sell assets / improve cash generation / tender for bonds / etc] which will help deleverage and close that gap resulting in an 8.5% unlevered total return. At the same time, the company is already trading in line with [worse positioned / more levered / lower rated] peers, providing a favourable risk/reward.
That would be one example of a credit thesis. I’m assuming this is for performing credit but once you go a little further down into stressed / distressed you need to think about recovery values and what a post restructuring capital structure might look like.
The wrinkle in credit is that there are lots of securities in one cap structure. Make sure you map out the whole capital structure including where everything is trading so you can make a specific security or pair trade recommendation.
Thanks
A table of the bonds sorted by ranking and then maturity with columns for trading price / spread / yield
Have you never seen a cap table before?
Hi, thanks for the excellent advice you provided above. I'm currently a student and I'd love to work for an activist / distressed debt HF someday like Elliott or Third Point. What should I learn to get there? I know cap structure is very important but what other things should I read about?
Dude, just focus on a 3.8+ from Harvard first
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