Distressed debt / special sits investing - On the job

Thanks a lot houstonbound89, your insights are much appreciated. I'll also have a look into this book, seems good at first look!

SB for you!

Any other thoughts are much appreciated.

thank you for the interesting info, SB'ed.

houstonbound89:

At a long-only distressed fund you can crushed if your market timing is off, particularly if you are sitting on paper that is subject to lien or payment subordination and the firm value tanks immediately prior to bankruptcy.

Some funds have lock-ups and the flexibility to go long and short various parts of the capital structure in a normal market. This works for relative value trades (i.e. one tranche is rich relative to another), capital structure arbitrage (cash yields vs synthetic), and long positions with offsets (buy bonds on their way down while simultaneously shorting the equity). Many of the most interesting opportunities arise outside of market selloffs. Consider the Caesars bankruptcy trade: some funds bought the first lien term loan (not deeply distressed) then used negotiating leverage under its credit agreement to put company into bankruptcy after buying CDS on the junior tranches, which catapulted returns. Furthermore, if an investor in Caesars had a fairly accurate estimate of when a default event would be triggered under the CDS they could have even issued short-dated CDS then used the proceeds to purchase long-dated CDS (i.e. a self funding trade). The short-dated CDS would pay out nothing if the contract expires (i.e. during a technical default but not an ISDA triggering event) while the long-dated CDS could pay out $0.80/$1.00 of notional insurance amount.

If you're at one of the few shops with broad mandates and lock-ups, trades like the above become available and in many ways are far better risk-adjusted returns than simply being long value equities / discounted debt. Also, many of these trades are largely uncorrelated to the market so fund performance is dependent on the outcome of several hedged, idiosyncratic events rather than the direction of the SPX.

I would second being able to move across the capital structure as highly valuable. There are a lot of trades you can also construct similar to what the poster above described. We've done strategies where we've gone long the long dated bonds and short some near dated maturity bonds to construct our position in some dicey names.

We are currently in a trade where we're long the bond of a company, have some equity, an also some call options to reflect our view that the company is cheap but very risky and could move lower in value but likely not as low as impairing our bonds but could also very likely be sold due to market position and cash generation so we have some option upside + change of control in our bonds. There are currently two activists in the name both urging the company to sell itself.

markets are relatively illiquid. its a very cyclical business. you price the asset based on valuation methods mainly looking at things like tangible assets (land, equiptment, inventory, proprietary technology, patents) there is no formula for pricing distressed securities.

over the past few years, banks may have one or two traders focusing on distressed securities, in a downturn, they may up the staff if they see fit.

There was a post yesterday asking what the "next big thing" will be. just because a few guys who don't even work in banking say distressed debt is the next "private equity", doesn't mean its gonna happen.

If you have a serious interest in distressed debt, there are some buy side firms (vulture funds) that focus on this. oaktree capital, etc. I would focus my efforts on the buyside rather than the sell side in a field like this.

I have to pick rotations after I return from training and thought this might sound interesting. I think credit prop may be more what I am looking for, but I need good backups.

Interesting - i always assumed that most people in distressed debt were from the banking side rather than the trading side - the vulture funds you talked about - whats the normal route to get into something like that

i only have experience with distressed securities trading, not banking. i try and stay away from anything that has to do with the banking side, that business makes me nauseous....

anyway. vultures funds are basically a hybrid hedge fund/private equity fund that buy up distressed securities. (thats a generalization) so basically you would break into vulture funds the same way you would private equity or hedge funds out of banking or sales and trading. I dont really know the specifics of their recruiting, but get a list of the firms, and try and make some contacts their, idk?

Would you consider David Tepper's fund a vulture fund, or are they more multi strategy?

Just out of curiosity, is there any benefit to going to law school for distressed debt investing? I'd assume there is some legal analysis required, but is that usually done by a retained law firm?

I have a little experience with distressed debt post-Lehman, including the bankruptcy process and the PE bidding process (the firm I work for is a HF but we made a couple of bids on select assets during 2009). Personally, I think distressed debt is one of the most interesting niches in finance because of the potential to get involved in a controlling stake in a company while retaining some of the most interesting aspects of public markets. Whether it's for you is for you to decide, but I would highly recommend picking up the distressed debt book by Stephen Moyer on Amazon. It's not cheap, but it's probably the best book on the subject out there. If you read it, you're going to have a strong gut reaction one way or the other -- "This is really interesting" or "Meh, not for me."

http://www.amazon.com/Distressed-Debt-Analysis-Strategies-Speculative/d…

I am at a midwest ~$500MM distressed debt firm with an NPL and REO strategy.

Dealing with NPLs and REO and depending on strategy, you are basically a "Real Asset" Private Equity Analyst. "Rewarding" is based on ones perspective but I like it.

You will likely be purchasing across a broad range of NPLs with a large mix of it being real estate. In the last month I have looked at a golf course, retail, office, hospitality, a chicken farm, several dairy farms, sawmills, land, and small middle market companies.

As far as a good place to start I would say it is as good as any REPE analyst role. Acquisitions Analyst is usually more sought after than Asset Management. It is also as bad as one, meaning that there is a tendency to get pigeonholed in RE, but it is also very easy to spin experience into LBO or most other PE firms. I think that there is an advantage to actually gaining skills on the distressed side, versus vanilla REPE or REIT work.

"As an acquisitions analyst, is this a good place to work to gain experience and help break into IB?"

Depending on the firm strategy, you will be creating pitch books and gaining strong excel skills, so sure. There are quite a few restructuring analyst jobs from what i can see.

That said, I wanted to do IB before but do not see why I would now. The pay is strong and the hours are good, so it seems like a waste unless I was interested in corp dev or something.

Feel free to ask any specific questions.

1) A lot of times, an organizational chart in an OM or prospectus shows which sub debt is located and whether subs are guarantors/non guarantors. When it's not available there, for bonds, you'd have to check the indenture to see which subs guarantee which pieces of debt. Sometimes it's just hard to find though, you can get some information in footnotes of sec filings or management presentations (For example, Sear's corporate structure was a mystery for the most part until they released a presentation that laid out all the entities). In terms of profitability, if there are guarantors, see the consolidating statements.

2) Tough to find information on these sometimes. Sometimes in the footnotes of sec filings or presentations. Sometimes IR can provide some info on these as well

Lol I love how, whether for career or investment purposes, people always try to time their entry into the distressed space. Like more so than normal...

Distressed will always be around, even during an economic boom (which we're definitely NOT having). Maybe a better question to ask yourself is, do you like Distressed? Why do you like it more than other areas? etc.

there will always be boom and bust, distressed will always be around.

its not nearly important to be in a "hot sector" at the beginning of your career than being in a hot sector 10-15 years in ;)

Hi everyone,

Could you tell me what is the required background to work in the distressed funds industry? I have heard about degrees in finance and law. Personnally I graduated in Finance and I am on my way to get a master degree in Tax & Law. Is it suitable?

Thanks in advance

I did that type of S&T before. Liquidity in that sucks. Unless you're at a super BB stay away.

I know people closely who do, PM me if curious