Q&A: Credit Analyst at +$5B Distressed Shop

HedgeKing

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?

1. Typical fully integrated three statement modeling, though we are obviously more interested in cash flow. Also like to model on a unit economics basis (i.e. for shipping cos, what is the progression of charter rates and how do I see the various components of my vessel opex change over time? is the vessel owner better off managing in-house or hiring a third-party manager. If so what's the impact on my cash margin?). Unit economics are crucial. In distressed, we also have to model the BK waterfall to get to recoveries from various return streams (i.e. cash, new debt, post-reorg equity, warrants). How does providing a backstop facility impact our returns? What if the company is liquidated versus reorganized? We model like equity guys with one additional layer of complexity.
2. Most valuable skillset is my overall ability to analyze situations through my understanding of the company's financials, industry, legal issues, etc. My boss once told me that we're supposed to become Navy Seals - we do all the required training and have all the required skills, and if you put us into any situation in any corner of the world, we'll understand it better than anyone else and probability of success is high.
3. I think these skillsets are critical to becoming a PM, which is my goal in the medium-term.

brandon st randy

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.