Distressed Debt Hedge Fund out of College - Prep Advice
I'm in the midst chatting with a distressed debt hedge fund along the lines of York/Cerberus/Davidson Kempner/Anchorage etc. to join as an analyst.I have no banking experience and would be joining straight out of undergrad and would work on a bunch of things like secured/unsecured NPL portfolios (consumer, real estate backed etc.) securitisation, think maybe CMBS stuff too.
I'm wondering what sort of advice you could offer to prepare for starting the job
I plan on reading - Moyer I got a pdf the other day (can share if anyone wants it)
Is there any good books to read for NPLs/securitisations?
I thought I would learn the following for each of the coverage countries:
-General Macro/micro business trends
-Political structure/environment
-Bankruptcy proceedings
-Brush up on my accountancy/valuation - re-read rausembaum & pearl ect.
-Banking system
Reading Moyer and learning about bankruptcy proceedings is fine and would show an interest, but I don't really think it'd be the best use of your time. Distressed/bankruptcy is really something that is best learned in practice and there are so many twists and turns my feeling is you're better off waiting to learn that stuff on the job. They're hiring you out of college, they know you have limited experience and I hardly think they're going to ask you to run a Ch.11 solo on your first day.
What I think the best use of your time would be is to polish up your credit analysis skillset and really try to understand the differences between equity and credit investing before you show up. Having the right mentality and a framework for looking at credit will serve you a lot better when you show up than having read Moyer, etc.
I like to think of HY/distressed analysis like a game of 3D chess.
1st Dimension: Fundamental Analysis.This is not really that different than what you'd do for an equity analysis. Focus on business economics, competitive positioning, margins, balance sheet, capital structure, etc. The key here is to get a strong handle on the Company's EBITDA/cash flow trends and whether or not they can meet their obligations, which is the most important part of credit analysis - will I (the lender) get paid back? Your focus should be on the downside - how badly can this business hurt before your principal becomes impaired? This is the step that the majority of equity analysis you see stops at. Not saying thats a good or bad thing, just pointing it out.
2nd Dimension: Capital Structure/Bond Specific Work. Although you analyzed the capital structure in the previous step, including the relevant leverage and interest coverage ratios, etc once you have a view on the Company's fundamentals you need to decide where the value is in the capital structure and how you want to position yourself. Maybe a Company has three options you could invest in - bank debt, bonds, and equity - based on what you know about their cash flow and downside potential which makes more sense to invest in? This will also depend on your own mandate/risk/time horizon. Once you've decided where in the capital structure you want to be its time to understand exactly how your issue fits in to the overall corporate structure. Which entity owns it? What are your covenants? How badly can the Company fuck you (because they will if they can).
I kind of want to explain that last point a little more because it is very important. You need to understand what your collateral is and whether or not the Company can take that away from you, so here is a hypothetical scenario. Lets say we have an over-leveraged retailer who may or may not be improving operations, but regardless you think there is an okay-ish chance they'll cover your issue. In this example we'll use a totally fictional company, lets just pick a random name out of the air, first thing that comes to mind, and call it Smevlon for instance. Now lets say that you want to buy their bank debt because your collateral is their IP which you think more than covers your par value. However, upon further inspection of the bank debt's covenants you discover that there is nothing restricting the Company from using their restricted payments and additional investments baskets from creating an unrestricted subsidiary, investing their IP assets into said subsidiary, and then borrowing against that IP to fund god-knows-what and priming your bank debt in the process.
Although you may think that the Company is fine from a fundamental point of view, structurally they are fucked and this may be a reason for you to pass on the investment.
3rd Dimension. The Players. An often overlooked (in my opinion) aspect of credit analysis is figuring out who the players are in all of this. Who else is in the capital structure with you, what are their reputations, and how do they generally conduct themselves in distress situations? If I were looking at a 2nd lien bond heading into a bankruptcy, and certain of the firms you listed in your OP were loaded up in the 1L, I'd probably pass because I don't like getting fucked without being bought dinner first. Who are the management? Do they have a history of fucking bond holders? There are certain scenarios (including several real life going on right now) where management is enriching equity holders at the expense of bond holders which is going to bite them (equity holders & management) in the ass when the economics catch back up to them down the road. So tl;dr, try to understand who you're playing with.
Tl;dr of credit analysis - figure out if you will be fucked or not.
Thats really the best explanation I can come up with. Sorry its a bit long winded. If you wanted to work on a pitch I think one of the best ways you can demonstrate understanding the framework I outlined above is coming to some conclusion like "well I'd buy the bonds but would avoid (maybe short?) the equity because of XYZ. FYI - you don't have to have a legitimate long/short recommendation to impress anyone in this case. Credit analysis is based on avoiding downside, so if you do a lot of work and simply come up with a "pass" because of XYZ credit-specific factors that will still reflect well on you.