Q&A: Credit Analyst (Multi-Strat Credit Fund) >$5bn Fund

1) Yeah, we have quite a bit of our capital deployed in the distressed / event driven space. Probably rely on that fund for Ups vs the performing credit arm (which is more of AUM fees) imo. Personally, have seen some pretty strong distressed /event-driven investors come from more "traditional" backgrounds such as M&A and LevFin. At the end of the day, distressed is just another form of investing, taking advantage of the disconnect between the "price" and "value". In my opinion, pretty easy to teach someone how to go through a bankruptcy docket, understand how payment waterfalls / guarantees / liens work, subordination, etc. At my current shop, quite a few of the analysts have come from a RX background as well, but could've made the jump if they had M&A or LevFin experience instead, just had the horsepower. For me, personally, what I found helpful from my RX experience was having a grasp of the bankruptcy process, knowing what documents to look for (first-day declarations, SOFA/SOFLs, DIPs, 13 weekers), getting reps modelling the various transaction scenarios / recovery analysis which helps with being more efficient/faster than other analysts that had to learn the process from scratch. The small incremental benefits have definitely benefited into larger advantages through compounding (get to work on more interesting work, interact more with other investors, etc.). In terms of idea generation, a lot has come from reading the news, scourging the web, trade desks, and other analysts, and thinking through the broader impact / ripple effect on certain industries, supply chains, or companies

2) Probably took longer than most - did not go through formal recruiting process. Instead, waited a bit longer and gone through the ad-hoc recruiting process (which in hindsight, is pretty par course given the hiring of credit/distressed funds, less turnover and no need to hire every year). My process was pretty typical, HHs reached out to me, made an introduction, interviewed multiple rounds, then an offer

Having worked at a bank and in a private credit role, on top of what OP said, credit analysis at a commercial bank is WAY simpler. Significantly less digging, much easier to get approvals, and just filling in a boilerplate memo. This is because 1) bank credits are usually significantly less leveraged and 2) banks make their money off cross sell, not the credit

Given the cov-lite nature of the deals, we'll have to price accordingly and either require a higher rate, or lower price. There's not much you can do given the cov-lite nature of the market...think its 75-80% of the credit market is cov-lite right now. Effectively, you get a seat at the table a lot later than usual (there are still covenants in the credit, just not financial credits such as FCCR or leverage). In theory the purpose of financial covenants is to stem the bleed, and allow the creditor a seat at the table much earlier before value is truly destroyed. If that protection is gone, there's more downside risk and will need to be fairly compensated for doing the deal

1) Some of the better firms that invest across the structure include Benefit Street / Anchorage / Silver Point. The model for BSP/ACP is very different from SP, where the investors at BSP/ACP cover an industry and can invest across the capital structure, where as SP has two seperate groups 2) Yeah, we can invest across the cap stack 3) Personally think that'll be interesting and seeing the results when we hit a downturn - in a bull market everyone's a great investor right? Theoretically, credit funds should perform fine given their margin of safety / lower creation point, but who knows given the market we're in, lofty EBITDA adjustments and valuations. LTV is usually based on what the market is willing to pay at that time...if EBITDA declines and multiples compress, could see many loans being impaired (even in a equitization scenario). The funds with strong lock-ups will perform better than the quarterly liquidity funds given the mark-to-market declines in that type of market, and potential forced selling. Every fund has been pitching economic resilience, strong underwriting standards and dry-powder to deploy in a downturn...but we've seen in 08-09 the behavioral elements and liquidity being dry right away. Takes a certain type of credit investor (who's usually downside focus) the fortitude to deploy capital during a downturn.

It really depends on the type of deal, how much time we have, and what information we can gather. Usually, we run a pretty quick initial screen to see if we have senior buy-in, if so we begin our diligence process which involves (potentially) management meetings, industry calls, channel checks, Q&As. After a while, there's generally familiarity with what the senior professionals are looking for, and a "feel" for what can get through or not. At the end of the day, this becomes a question of return-on-time-invested. I can find a great opportunity, but if the dollar figure doesn't justify the time, just not worthwhile. If I find a great opportunity but know it won't pass muster (either we have an institutional view or not), won't spend my time on it. If we like a deal, we are willing to throw resources at it to continue our underwriting process. Some deals have been down in less than two weeks, other deals have been months. It just depends

I've seen it before, the difference is direct lending is more private focused with a lot more information, whereas credit funds are public with less information, more public trading, technicals, and you have a live market coming into play

I think Direct Lending may be past its heyday in the early 2010s...previously there was a clear void after the recession when banks stopped lending to higher yielding credits, you have a bunch of funds that jumped in to fill the void...and get paid handsomely for tacking on the risk. Nowadays, private credit is probably one of the hottest space right now with a lot of capital chasing not enough deals. As a result, you have very loose docs, lower pricing and weaker protections as direct lending funds are competing on deals to deploy capital. There's still a place and time for direct lending, and I don't see it going away anytime soon. One thing to keep note, is many MM PE firms (MFs already do) are starting to have credit arms, and it'll be interesting how that'll affect returns going forward

Currently, most of my time is focused on credits where I believe the market has mispriced the risk (yield compression e.g. trading at ~10% yields but I believe its closer to 6% yield...look at PG&E), stressed/storied credits, and run-of-the mill CLO credits where it's pretty vanilla & fits a certain ratings threshold/portfolio requirements

Re: what's to do in distressed In my opinion, there's not much to do in distressed right now, as most companies are distressed for a reason (not just a balance sheet issue, tough fundamentals), there's a lot of capital forced to be deployed in this space (more capital than opportunities), and any decent company can re-fi or get an extension. Some of the more topical names include PCG and Windstream...with Windstream being very tough to get an edge or angle. PCG - early on when it was trading in the high 70s/low 80s, there was a pretty clear angle there, and a lot of funds made quite a bit of money on it (trading in ~110s last I checked). Historically, distressed was an interesting class as there were forced selling / uneconomic holders that were forced to sell at any cost regardless of price or fundamentals...and nowadays we have less of that happening. There's also the theory that there's a lot of credit that's junk or BBB rated...and if a recession hits, approximately 20-30% will default or become highly levered...and then distressed will be busy again.

For me value from SS is less about the idea but more the behind the scenes info you can get. What types of investors are in the book, has it transitioned from HY to distressed guys, anyone starting to from a group. Was it just a seller looking to punt the position, is he fully out, or is it a bigger issue. Stuff like that. For sourcing, I think a nudge in the right direction might help but you have bb, you see all the price movements, etc. not sure how much true idea generation SS really does despite the plethora of research.