Firm I'm interviewing with asks for a Credit Analysis
So I'm interviewing for this very small L/S equity & fixed income-focused hedge fund ($300M AUM) doing Portfolio Research.
The firm's focus is on fundamentals, whereas I come from more of a quanty/stats background and also just graduated last month so not much experience in this field. Anyways, for the next step in the interview they gave me a public company and asked me to do a "credit analysis" report on them - with the intention of investing into their corporate bonds.
For those in the industry, what sort of things would you expect to see in this report? I'm going to pick up a book on credit analysis and learn the core topics tonight.
Also, what are some ways I could apply my more quantitative background for this report? I'm much more well-versed on time series modeling, regressions, etc rather than how to read a financial statement.
Thanks!
Hi hughwattmate, whoops, looks like nobody chimed in here.... maybe one of these discussions below is relevant:
If we're lucky, the following pros may have something to say: CTC kapilb illuminato
I hope those threads give you a bit more insight.
bump, curious as well
I am no expert but I would start off asking four questions,
1 - Can they meet interest payments
2 - Can they meaningfully pay principal down over time
3 - Can they refinance at the end of the loan
4 - Can assets retain value over time
In regards to question 1, there is more to this question than looking at FCF or EBITDA and seeing if the interest costs can be met. You need to evaluate the whole debt structure and priority of your claim in regards to others.
2 - Although Bonds do not amortize and usually will have a prepayment cost associated with them you would want to see the firm have the ability to amortize the bonds theoretically over time this gives you greater security but really more just reflects the firms ability to produce FCF as it is highly unlikely it will sit on a large cash balance.
3 - Most debt will get refinanced instead of paid off therefore you need to assess the firms ability to refinance. This is more of an art than a science and I do not have enough knowledge to talk about this in any real depth. I would look at the DEBT / EBITDA of there last financing and then do sensitivity analysis around that multiple based on a future EBITDA when the debt matures. If the firm financed at 3x it is unlikely it will be able to refinance at 8x.
4 - This question will require you to read about the offering IM in detail to understand the covenants and security of the debt. If it is unsecured (unlikely) then this doesnt really offer any bearing at all as you only really care about the value of the assets in a default. But essentially you need to understand how the business creates value and how sustainable this is over time and in the case of a default event how much value you as a debt holder would be able to extract.
Other points I would make is looking at the price of the bonds, the yield comparing them to other debt the company has and comparing it to the debt of its competitors. You want to compare all multiples across the sector. Is the debt cheap or not if so why? How does the yield fare to the risk and in comparison with other companies. There may be a play to look at buying the debt in the case of a chapter 11. It may be worth posting this question in the PE board as there are a lot of specialists in distressed debt on that board who will be able to give you a better more comprehensive answer. As I said I'm no expert this is just what I would look at to start with and then bring in some ideas that you find through your reading / what other users suggest / say.
Interesting, thanks for the detailed response.
I ended up preparing a report based on how to protect their fixed income portfolios by increasing duration and convexity through investing in the target firm's long-term bonds. Did a logistic regression/machine learning classification to determine risk of default, and they just blankly stared at me during the presentation. Was quite funny actually - not really a good fit though.
Did you get the job? lol
Wow this sounds way over the top. Usually you just want to download the last 2-3 Moody's reports and plagiarize
Sounds pretty interesting are they a quant firm? What were the determinants of default? Did you base your analysis on any particular book / article?
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