Credit HF Pro-tips/Advice
Any protips/advice for incoming distressed debt analyst coming out of undergrad?
Also, I was wondering if anyone has recommendations on learning to efficiently/properly analyze credit docs and do covenant analysis. Don't have any background here and am looking to learn. Thank you.
I would start with Moyer's distressed debt investing book. It's the best book out there when it comes to distressed investing.
I would also read the distressed / stressed credit sell side material. It would at least give you a good idea of the topical names and how they're viewed. Reorg research is pretty good if you can get access to it.
As with any junior role, make sure your modeling is up to par as well as ability to lay out a firm's capital structure.
Good luck!
Thank you! In terms of modeling, what level of knowledge/difficulty would you expect? I recognize its difficult to say without knowing exact place/details.
PnL with operating/unit economics plus cash flow for sure and certain balance sheet items.
They (whoever they is), say equity ppl focus on the income statement and credit ppl focus on the balance sheet and cash flow...
As a credit person you really need to build realistic 3 stmt models (w/ accompanying schedules, esp a debt schedule), and a strong focus on free cash flow (i.e. how will you as a creditor be repaid). I can't highlight the word realistic enough. Credit ppl tend to invest with minimal assumptions, and those assumptions used are strongly substantiated (i.e. don't randomly pick a growth or cost number). Absolutely understand how free cash flow goes to pay different creditors, this needs to be incorporated in your model. Adjusted EBITDA is great and all, and def needed for covenants, but it doesn't pay back debt holders.
Best of luck!
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Models are quite basic, assuming public credit we are talking about. You need to model out the quarters for the current year so usually I would have a model with 2019 and 2020 (all 4 quarters), then 2021 estimates with quarters, then just do FY estimates for 2022 and 2023. You do this mainly to highlight any liquidity issues, especially in working capital heavy businesses where a W.C. build up or a lack of an unwind can see the company face cash problems. Also need to add revolver capacity and covenant triggers to see if company can drawn down any RCF in any period where there could be a liquidity problem.
Model would be as follows: Revenue down to EBITDA (adding/subtracting for clean/recurring EBITDA). For cash flow, EBITDA - cash taxes - cash interest +/- other non cash items (think pension paments, etc) +/- changed in W.C. = operating cash flow. Deduct capex and you have FCF.
Biggest focus should be on laying out cap structure (all debt and priority ranking) with as much detail as possible on who owns debt, who are lending banks in RCF, are there any big distressed players in any of the bonds.....it's basically a chess game to work out what each player wants and how best to get there. Also having a good org chart showing where all debt sits (usually in offering memorandum) which gives a bird's eye view of all creditors.
Totally agree with this. I find it helpful to track things like asset sales, equity and debt issuance / (repayment), M&A etc below the FCF line to track extra curricular activities the Company does to generate cash and then tie net change in cash into the cash roll forward to see if RCF needs to be drawn / net leverage change / minimum liquidity covenants etc. At that point, it basically is a condensed 3 statement model.
Good resource for the basics on understanding credit docs is "A Pragmatist's Guide to Leveraged Finance: Credit Analysis for Bonds and Bank Debt" by Robert Kricheff
Not sure about Telemachus’ answers besides reading Moyer. Even in distressed I’ve never had to really model out 3 statements and debt schedules. In reality there is no FCF allocation to paying down a debt waterfall like in an LBO cash sweep model. Excess cash flow sweeps aren’t super common, as a creditor you’re not getting paid back through cash flows but rather on coverage and EV.
As for covenants, honestly forget it. Go read the covenant review for the docs. Credit in this day and age has such loose covenants (cuz investors are thirsty af for yield) that any deal that is a non-distressed/cap solutions/spec sits new issue will have gaping holes that allow equity owners to move assets, dividend shit up etc. this is always a risk this day and age and not specific to an individual credit. Just have to game theory it out but don’t expect to read through credit docs and find meaningful sources of comfort/protection, and you can’t be deterred by the holes you see because every doc in credit has them as I mentioned unless rescue deals, and even then some of those have crazy holes which is insane. Look at AMC’s 10.5% 1L deal that was done at the beginning of the pandemic, docs were still so loose for incremental debt and RP baskets etc. for a rescue deal it’s insane
Not sure about Telemachus’ answers besides reading Moyer. Even in distressed I’ve never had to really model out 3 statements and debt schedules. In reality there is no FCF allocation to paying down a debt waterfall like in an LBO cash sweep model. Excess cash flow sweeps aren’t super common, as a creditor you’re not getting paid back through cash flows but rather on coverage and EV.
As for covenants, honestly forget it. Go read the covenant review for the docs. Credit in this day and age has such loose covenants (cuz investors are thirsty af for yield) that any deal that is a non-distressed/cap solutions/spec sits new issue will have gaping holes that allow equity owners to move assets, dividend shit up etc. this is always a risk this day and age and not specific to an individual credit. Just have to game theory it out but don’t expect to read through credit docs and find meaningful sources of comfort/protection, and you can’t be deterred by the holes you see because every doc in credit has them as I mentioned unless rescue deals, and even then some of those have crazy holes which is insane. Look at AMC’s 10.5% 1L deal that was done at the beginning of the pandemic, docs were still so loose for incremental debt and RP baskets etc. for a rescue deal it’s insane
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