Q&A: Credit Analyst at +$5B Distressed Shop
Have lurked on WSO on-and-off since pre-crisis days. Reading the material on here helped me get my first internship - time to give back. Happy to answer anything and everything. Quick background below. - Beginning third year as investment analyst at a $5B event-driven / distressed debt fund - Invest in global credit situations throughout the cycle (performing, defaulted, liq claims) across the cap structure (bank debt, HY bonds, busted converts, credit-themed equities) in all geographies (US, Europe, Asia, LatAm, etc) - Spent one year at elite boutique covering an industry - Ivy League undergrad with Econ degree Fire away.
Thanks!
Love the answer to 3.
To answer no 3: Why didn't you consider fixed income buyside in a Asset Management or long/short credit fund?
Thanks!
Can you elaborate on this? Klarman and Marks both seem to pooh-pooh the idea of the short-term, speculative, trading dynamics, arguing that it's impossible to reliably predict and monetize. Obviously I understand the trading dynamics have an impact on your returns (i.e. you might make money from taking a position in an undervalued stock, but you'll make even more if you enter the position after a broad market sell-off since the stock becomes even more undervalued). But how do you optimize for stuff like that (if it's even possible)?
Advice on dipsetting from banking as early as possible (starting at an EB)? to a hedge fund.
Thank you!
What industry did you cover at your EB? Do you think that coming from one industry group vs. another (generally speaking not bank specific) provides any advantage/disadvantage for those wanting to break in to a fund such as yours? Thank you very much for doing this.
I covered media, an industry that has seen a lot of transformation in the past decade which has brought a lot of winners and losers. While everyone likes to invest in winners, we look for value in the losers as well - something L/S equity guys largely can't do. No advantage or disadvantage in terms of industry versus product. As mentioned above, understanding how companies generate cash is most important. We look for "athletes" not finished products when we hire junior members.
How much of your work is from your own ideas vs. what your PM tells you to look at? How do you go about identifying new investment opportunities? Did you feel you knew enough about distressed debt after a year in industry coverage or did it feel like you were in over your head at first?
I generate all my own ideas at this stage. Idea generation comes from your typical sources: going through BK filings, sell-side analysts, other buy side analysts, setting up alerts on Bloomberg, talking to companies, etc. a lot of this has been covered by BlackHat in his thread. Some of my best trades have come as a result of a Bloomberg screen that tells me a bond has dropped 30 points in two trading sessions. Others have come from going through filings.
Definitely in over my head at first, but there was an infrastructure in place so I could always pick the brain of my PMs or more senior analysts.
Thanks for doing this!
Any opportunities for BB credit analysts at a shop such as yours? Or are the analysts mostly former IBD analysts?
Definitely! We have no bias between credit research and IB. As mentioned, we hire "athletes" at the junior levels.
Do you see alot of former LevFin analysts at your
What kind of modelling works do you do at your fund? What do you think are the most valuable skill sets you have developed at your current position? How do you think these skill sets will help you in your future endeaver? What's your future plan, both long term and short term?
Thank you for the reply. I have got two more questions.
First, do you hedge the currency risk? Second, are you happy with the accounting transparancy of those foreign companies?
Why is value overrated?
OK now for my serious questions. At this point in the credit cycle do you think there are still good NPL opportunities left in the U.S or have you shifted to mostly performing stuffs like many others have? What do you think are the best places to look for yield in the U.S credit space? Which countries and asset classes do you think offer the best yields right now?
Many Thanks for doing this BTW.
Hate making sweeping generalizations but I see no value in the US credit markets right now. I'm spending most of my time in international situations. My favorite trades right now are 1) long bank debt of a global shipping company, 2) short HY bonds in some sectors in LatAm and 3) long busted converts in a quasi-merger arb situation in the UK. I think there is attractive value in shipping, given you can buy assets at historically low valuations at the bottom of a cyclical industry. I'd caveat that by saying you have to know where to look - if you're piggybacking off the Oaktrees and Davidson Kempners of the world and participating in HSH or Danskebank auctions for NPL portfolios you're looking at very low IRRs. However, if you're looking at more off-the-run situations with smaller cap structures, you can find some attractive opportunities in shipping.
Thanks for your explanations. These largely concur with my own observations as well. It is inane to get into bidding wars with the Oaktrees of the world over NPLs or junk bonds like many are doing. In fact Oaktree and the likes are none too happy with the returns they'd expect from some of those auctions, compared to the returns they were used to be getting. Unfortunately for them, their AUMs have gotten so large that it is difficult to get into smaller cap structures and other situations that require much smaller ticket sizes, unless they team up with smaller local players and co-invest into their positions on a bulk/portfolio basis.
Seeing that you are covering deals from several continents, do you feel the need to travel or is it generally sufficient to follow the markets from your office in NYC?
What's your investment process? Like, how much work do you do before you put ~20mn in a position. And how much do you utilise consultants? Your investment memos, 10 pages, 50 pages?
Along with above, where are you seeing value these days? A lot of the guys we speak to are doing 15+% IRR direct lending in shirty countries, but with okay rule of law.
I'm a distressed desk analyst, and you have my dream job, so cheers for piping up.
Ha you may as well be talking about my firm. Shirty countries/okay rule of law or otherwise, what matters most to people like us is come up with the right deal structures to shield our interests and have real meaningful controls over the collateral. Plus 15%+ returns are hard to resist in this yield environment, and when levered/securitized/syndicated out, you can easily make well north of 20%.
Investment process is fairly standard. Once I've identified an interesting situation, I try to understand how the company generates cash flow, which will involve going through financials, MD&A, the entire BK docket if it's a chapter 11, and modeling out the business. In the meantime, I'll put together a memo which can range from one page to twenty depending on the complexity of the situation. We do not use consultants - our analysts are taught to be resourceful. For example, if we are trying to get up to speed on the geology behind an oil field in Canada, we'll call up the local department of geological services which has a massive amount of data. We spend a lot of our days figuring out how businesses work.
We do less of the full bilat stuff, but will invest in emerging markets under the right circumstances. We'll generally by USD or EUR denom debt with external law, and we'll tend to only buy liquid cash bonds where we can get in and out of positions quickly. I've discussed the value bit in a prior post with specific examples. True idea generation and value sourcing is immensely difficult, but the key driver of alpha. For example, a lot of funds have identified Europe as a fertile ground for new opportunities in distressed but believe me when I say that there is a TON of capital chasing limited opportunities. This means auctions are crowded or asset prices are ahead of fundamentals. At that point, you are buying assets at 90c and asymmetry is largely gone.
You mention you like liquidity, but also like to find under the radar situations, there aren’t a huge amount of those (by very definition), would you prefer to give up liquidity or returns? And how risky is too risky for you? Pescanova? Icelandics?
I’m in London, I know how ridiculous it is, particularly when you have the likes of Oaktree coming to us asking for ideas which yield 8%+ as part of a "new" fund, or KKR buying whole Italian bad banks.
did IBD set you up better for this then some type or credit trading / credit research / credit desk analyst role? Can you just talk about the pros and cons of ibd over the latter roles in terms of working at a credit fund?
While we don't formally differentiate between these types of analysts, I have a bias for IBD analysts simply BC I came from an IBD program and I know the type of work product these analysts produce. If I hire the IBD analyst from GS or Evercore, I know that he knows how to model and I know he has experience thinking about businesses. If I hire a credit desk analyst from Barclays, yes they may know more about the markets, but I have no idea if they can model complex situations. Getting up to speed on market technicals and lingo is much easier than teaching someone how to appropriately use INDEX/MATCH and modeling out the three statements.
How much value add, or is there any value add, over private equity debt funds versus a high-yield bond mutual fund, over a 10 year time horizon? I've seen value add in buyout over public markets, and I've seen it in top-decile venture, but I don't often run across too many debt funds that really are compelling.
Yes I get that it can be "non-correlated", but over a 10-year LP agreement, does that really matter? Serious question--I'm not trying to be argumentative.
Not sure I'm understanding your question, but it's pretty clear that returns from alpha-oriented multi-strat but credit-oriented managers tend to outperform whatever PIMCO product you own in your Roth IRA.
Great questions guys. Will respond over the weekend.
Thanks for this. I have a couple interviews coming up at credit funds so this will be especially helpful for me. Some of the above covered a lot of the strategy questions but I am hoping you could give me some insight on your general day to day and how your current lifestyle is compared to banking. What ultimately made you choose credit / distressed over other strategies?
Finally, any advice you can give on how to prepare an investment pitch for a credit fund would be very helpful. I feel I have a good grasp on value and l/s pitches but am at a bit of a loss on where to start for credit.
Thanks again, this is massively appreciated.
Lifestyle is infinitely better compared to banking. In the office around 7:30 and leave around 6-6:30. The work is much, much more interesting as there is a lot of autonomy and very little handholding. I've mentioned the "why credit versus equity" before, but I'll paraphrase Boaz at Saba: if you like a stock, there's only two ways to express a bullish view (buy the stock or buy a call option). In credit, you have different parts of the capital structure (1L bank debt, 2L bank debt, senior secured bonds, sr unsecured bonds, sub debt, converts, trade claims, etc) you can invest in that offers extremely different return profiles. You can buy or sell CDS. You can put together a term sheet and structure a debt instrument. For publicly traded bonds, there's different parts of the curve. Opco debt vs holdco debt. I just think investing in debt is more flexible than equity.
I've covered the pitch advice before but I will say keep your pitches short (less than 3 minutes) and let people ask q&a. This forces you to know your stuff cold since you'll have questions coming from everywhere.
Thanks for your input. As a follow up, are there any books / blogs / etc youd recommend for learning about valuing distressed debt?
This is a re-post from another thread, but I am interested in hearing your perspective on this.
If it's a public company, just drop their IR contact an email and explain just that. Most are happy to talk - that is their job after all. Best of luck with the interview.
Thank you, very helpful.
Amazing stuff, valueisoverrated. Thanks for setting aside part of your weekend to do this!
Four quick questions if you don't mind:
Thanks again!
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Pardon my lack of familiarity with the phrase, but what do you mean by you look for "athletes" when recruiting junior members? Thanks for doing this!
same question
Thanks for doing this. This is great. Interested in answers to questions as well.
What resources would you recommend to a L/S equity analyst looking to learn about distressed investing?
second this request.
Moyer's Distressed Debt Investing is required reading. Theres a couple good interviews on Bloomberg about distressed opportunities. A lot of credit managers tend to be more hush-hush about distressed or special situations - you don't see a lot of managers go out and do a whole presentation on a thesis like Ackman/HLF. If you have the time, I'd spend a few hours going through a BK docket and try to back into the thesis. Why did they buy the bank debt vs the bonds? A lot of these questions become pretty apparent when you go through the filings.
Thanks. Backing into a thesis for successful investments is one of the most underrated and underused methods of learning imo.
What factors go into how you determine who you give an axe to / How do you decide which broker-dealers to pay for ideas, and how much?
That's the traders job, not the job of an analyst.
How would a background in high yield research at a top am shop transition to a fund like yours? Seems like the skill set is transferable, but not something you see often.
We've hired several people from a research background. Skill set is obviously very transferable.
Thanks for doing this - heading into IB and interested in moving to a distressed debt fund so this is a great thread. Couple of questions:
1) Do many in your field have JDs, and do you think a JD is helpful (enough to warrant the time and cost of the degree) when working at a distressed debt fund? 2) If your answer above is no, would it change to yes assuming an analyst starts overseas and moves to NY? Would the degree lend additional credibility etc?
For context, I'm going to be in IB in another country and will be getting an MBA in the US in a few years - considering a JD also.
Thanks, that's helpful
Do you have any book/resource reccomendations on your space? (modelling/ideas etc)
This thread is gold. Thank you.
I know you've mentioned that you (personally) might have a preference for IB anaylsts (vs. desk analysts / research / traders) - curious how those with Restructuring backgrounds are viewed by your firm / others. I'd guess it's a favorable background to have given some of the similarities.
Second, any insight on more experienced professionals joining distressed / event driven shops? IE, is it possible as an Assoc or VP to make that jump, or is it largely just IB analysts (and similar levels) moving in at the junior level, and lateral hires from other funds?
SB and thanks for your time - posts like this are (IMO) some of the most value-add to the WSO community.
I am not sure whether you have answered this before, but can you share which headhunters are the best for HFs in your opinion?
Dynamics, Search1, Options Group, and Robin Judson. The best jobs come through word of mouth.
Thanks for doing this! How big of a role does politics play since every fund is smart enough to do the valuation? Is it true to assume that most funds are pretty chummy in such a tight knit community even though they can be on the same side today and opposite side tomorrow? Does some fund command more influence/dominance than others? Any fund that you think highly of? Love the Oaktree/Midtown reference by the way.
Do many of the analysts at your shop have (or consider working towards) obtaining their CFA charters? I've heard from some people that DD/Ssits analysts don't typically pursue CFAs or hold them in as high regard as other fundamental investors.
Thanks for doing this by the way, great resource.
Yes, we have a few CFAs but actually more MBAs. Absolutely not a requirement (CFA or MBA). Frankly, a lot of people pursued MBA to switch careers (Big 4 TAS or sell-side to buy side). I'll leave it to others to discuss which is more relevant, but my point of view has always been that direct work experience trumps both. I know many don't have the luxury of going IB to HF, so I get why the question is relevant. Coming from the perspective of someone who has conducted buyside interviews, I'd say that I give very little weight to either. If you can impress with pure analytical rigor, that's what's important.
thanks this is very useful.
does your fund hire people from credit structuring desks from BB s&t? I know there aren't many, but there are some desks close to the trading floor but heavily involved in SPV based, IBD-type deals.
We haven't hired from a structuring desk as far as I know, but as I've mentioned, we don't close the door on anyone if they're smart. Ultimately, we look for candidates who have high intellectual horse power and enjoy numbers and investigative reporting.
Thanks for your insights regarding distressed investments. You mention many times in your comments about opportunities that can be seized from the shipbuilding industry.
Currently, there are many shipbuilding companies and shipping firms in South Korea that are in the distressed zone. Apparently, they go head to head with China, and many firms seem to have great track records and technological edge, but it seems that the long downturn in this sector has made many firms financially vulnerable.
The question is, have your firm ever considered investing in South Korean shipbuilding or shipping firms? If not, what made you against opting out from any potential investment opportunities? Would the reason be more of a business aspect, or something that has to do with the market per se, i.e. regulatory issues, non-existent distressed market except for npls, etc.
And what's your overall view on the shipbuilding sector? When do you think it will fully recover? If you made an investment at 50% of the par value right now, at which point do you believe a given company would be able to attain 100% of its face value?
Thanks.
Haven't looked at shipbuilding, I've only looked at ship owners. My view on shipping is relatively straightforward: if you can buy cheap assets (either through cheap debt or an outright vessel) at the bottom of a notoriously cyclical industry, you can generate outsized returns without leverage. Charter rates for bulkers are up significantly since 1H13 and even secondhand valuations for 5yr 310K DWT VLCCs are creeping up. The problem is can you find assets that are cheap enough. As Wilbur Ross has said, the fundamental recovery is probably in the 4th inning but prices are in the 8th inning. Very low IRRs out there given 1) residual capacity in certain segments and 2) competition from a new class of buyers (PE firms and HFs). Finding the right opportunity is very difficult.
What's the background of most analysts/PM's at your fund? Can banking associates make the cut?
Banking associates can def make the cut. I'd say most of us are ex-bankers and traders from large BB. Some exceptions here and there. Many PMs and analysts have CFAs or MBAs.
Do you personally see any value in taking the CFA?
You said you are usually the only HF in some of the opportunities you find. Is it your mandate, AUM, maybe both... that affords you these opportunities? Thanks. Great thread.
We are a global credit shop but have been involved in EM for a long-time. EM issuers are generally smaller and don't have publicly traded equity, so fall outside the scope of many funds (this becoming less and less true as US HY is so tight that even the biggest funds are now looking at EM). That "first mover" advantage is huge. And EM is just one example. We are proactive in sourcing new opportunities where people don't have the patience or know-how to look at.
Thank you for this thread - very helpful and +1. Could you comment at all on what an actual bonus range might be for a first, second, third year analyst? I know it's extremely dynamic and depends on the fund, but I'm just looking for a ballpark figure. Is 1x base salary on the low-end? I have had trouble finding info on WSO...
Do any of the investment professionals at your shop have a background like this:
Long only value oriented shop out of undergrad;
So, no banking or transaction experience.
Just a few question; thanks for posting.
How much time is spent analyzing (i) the covenant package in the debt instruments to see how loose they are (restriction on RPs, investments and the like) and (ii) financial definitions and other definitions that feed into maintenance covenants?
How do you analyze the insolvency regime risk? Do you have lawyers you consult with, or is it more through your own research?
If your main goal is to buy debt at a discount, how much do you care about yield on the debt? Do you care more about where the debt is in the capital structure (1L vs. 2L or subordinated)?
Good questions.
Where do you see the credit markets headed for in the next 1-3 years? Specifically, with credit spreads very tight in the HY market and default rates historically low in the distressed world, it's hard for me to see where things are headed. Is the focus going to remain with leveraged loans? I just can't see where this market is going as interest rates begin rising more consistently and with participation so saturated (everyone is in this space, consensus says it's overvalued, bubble like aspects in HY).
Thanks for doing this, amazing info!
Thanks for doing this AMA. I know this is a bit cheeky but would you mind giving a rundown of how to credit market has changed over recent years and, tying in with the previous poster, some of trends going forward?
Cheers!
Are people from rating agencies desirable at all? Presuming they covered a particular sector your fund is interested in.
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