Special Situations S&T
What does this group within s&t do? How is it different from distressed? Would love some color on this area, have read that BofA has a good group that sits within s&t.
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If no one answers, this guy seemed to be in one of those groups and says they mostly trade loan portfolios (performing and NPL), structured credit, and bespoke credit derivatives from a principal (no agent, hence capital-intensive) role: https://www.wallstreetoasis.com/forum/trading/st-special-sits-associate…
Hey, happy holidays.
I've been an analyst on a distressed/special situations sell-side seat for a little over a year now, so hopefully I can give a good overview.
Generally speaking, we deal with companies/situations that have a less-than-ideal balance sheet, are in a declining industry, or are simply entrenched in very...unique problems. While we have both a sales and trading team, like the majority of desks on the sell-side for a product, we require an additional group whose sole job is to analyze these companies' fundamentals, legal situations, and everything in between. This is where I sit.
Bottom line, the desk as a whole not only provides flow/liquidity on these names across the capital structure, but is also able to take views on the credits as well.
To be clear, I absolutely love my job, but I'm also very conscious that I'm extremely lucky to have it in the first place. As such, I'm more than happy to field questions from anyone interested.
What kind of skills do these desks look for? Like to my understanding, there shouldn’t be much of a difference between trading this and low liquidity equities in general? Why should the desk have a dedicated legal team if they’re just providing liquidity?
I can see the confusion, but the difference comes with the actual asset class.
Firstly, common stock can be seen as the residual value of a capital structure, or in plain English, the value remaining after all senior claims have been paid. Given this subordination, there's not much of a reason to need a legal team -- in 99% of cases, you're going to be last out anyway. However, when you get to credit land, one of our main jobs is to find out the order in which each lender gets paid out.
Do we have a claim on the company's collateral? What lien do we have on this collateral? What collateral specifically do we have a lien against? Are we first or second out? Can the company move this collateral away from us because our credit agreements had a loophole? Can we keep our seniority, or is there a way for them to issue more debt above us? Where is the debt structurally within the company's corporate entities?
These are just a couple of questions, but I hope the point shines through. The reason we need such in-depth analysis is that there are just inherently more strings attached to distressed credit. If a trader is not aware of one of said strings, they can be blindsided pretty quickly. For example, if a trader is quoting a secured piece of paper at 85 1/2 x 86 1/2, but they are unaware of the potential for their lien of collateral to be primed, it could lead to that note trading down significantly from a single announcement that the company is thinking about issuing more debt.
By the way, that's predicated on all of the other fundamental research and analysis that goes into each company...at the end of the day, we can fight about the slices of the pie each lender will get until we lose our voices, but we also have to determine the size of that pie. If a business isn't terribly leveraged but exists in an industry that is simply vanishing (Idearc, or the Yellow Pages, is a great example), then a small amount of debt can quickly snowball into an insurmountable maturity wall with tapering cash flows.
This leads to what a distressed desk looks for (or really what any sell-side desk wants). Unfortunately, universities don't teach a lot of the topics mentioned above, so there's very little expectation to come in with any technical knowledge. However, we do want someone who is going to work harder than anyone else, is not afraid to ask a plethora of questions, is genuinely someone we can sit next to all day, and, most importantly, wants to learn. Someone who comes with no knowledge of distressed credit but clearly wants to learn as much as possible is a thousand times better than someone who thinks they know what they're talking about and is impossible to give feedback to. It may seem obvious, but those truly are the skills we look at.
TLDR: Credit requires more legal analysis given capital structure subordination and the same, if not more, quantum of fundamental analysis compared to the equity side of things. Moreover, given the massive learning curve, we look for people who are truly curious and want to learn as much as humanly possible.
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