AMA - Credit Analyst (Multi-Strat Credit Fund) >$5bn Fund

Have been on-and-off WSO for a while now, thought it was time to give back. Feel free to ask away

Background: previously in a top RX group (PJT, Laz, HL) that joined a >$5bn multi-strat credit fund that invests across the capital structure (1L, 2L, mezz, prefs, etc.). Went to a semi-target (whatever that means)

Comments (66)

Aug 2, 2019

can u hook me up with a job

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Aug 2, 2019

How diverse?

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Aug 2, 2019

anything

Aug 2, 2019
  1. Does your fund have a distressed debt or event driven strategy? If so, what parts of your Rx experience help you in understanding that space and in idea generation?
  2. How far into your time at the Rx group were you before you started looking at different funds and can you describe the recruiting process?

Thanks in advance

Most Helpful
Aug 2, 2019

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

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Aug 7, 2019

What were the recruiting rounds like? What type of questions did you get?

Aug 2, 2019

Thanks for doing this AMA.

Can you go into what the overall responsibility is for a Credit Analyst at a credit fund is? I have a credit analysis background at a commerical bank where underwriting and due diligence is pretty much the name of the game. I imagine the main difference being the risk appetite between the two, is this accurate?

Aug 2, 2019

I've seen individuals make the jump from commercial banking to credit funds before...I personally believe the job is pretty similar, except with couple nuances:

1) You're hundred percent right the risk tolerance is different, typically we're looking for much higher yielding investments that typically have a "story" to them. We try to differentiate by having a tilt towards more storied credits, industries that are out of favor, or face secular/industry headwinds. Personally, some of the more juicer credits I've seen recently are in the anti-ESG companies
2) For the event-driven / distressed portion of the job, its much more different. Fundamentally, as a non-distressed/event driven credit fund, it's approach is long-only, maybe with some yield compression involved. Sometimes we get involved with CDS, other-times we're looking at modelling out what a recovery could look like in a downside scenario and everything falls apart.
3) Based on my conversation with some buddies at CBs, the job at credit funds may entail more detailed modelling, deeper diligence (given the nature of the credit), and a faster turnaround. There has been situations where we deployed a large sum of dollars for a seemingly highly-cyclical business within ~10 days with minimal materials from the Company or bankers. Given my inexperience with the industry, this involved many late nights

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Aug 7, 2019

What is your firm's process for determining how many dollars to put into an investment? And how about when the company comes back for subsequent rounds of debt financing?

Aug 4, 2019

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

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Aug 2, 2019

Could you talk about the different attributes you'd like to see in a 2L position vs a 1L - i.e., asides from higher conviction in the business and the 2L just being cheap to the 1L, what fundamental business attributes would make a better 2L or mezz candidate generally?

Aug 2, 2019

Off the top, I can think of two ways - when the Company clearly has a growth profile that allows it to grow into the capital structure, or the underlying collateral/company/value/cash flow is relatively stable. Typically, we try to find a variant view from the market why the 2L is priced accordingly...in this market, it's not easy unless there's a clear angle (e.g. a 2L for a strip club...good luck raising money with other institutions that have a ESG bent), or when our "edge" so to speed is speed of execution, certainty of capital, or institutional scale.

Currently, software / SAAS / IOT is the new rage, and historically that has been pretty favorable given the repeating nature of the cash flow and general stability. In this day and age, the last thing you want to do is own equity / loan-to-own.

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Aug 2, 2019

Given the rise of the cov lite structure, what other enhancements/structures is your firm trying to work into deals? Any notable examples?

Aug 2, 2019

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

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Aug 2, 2019

Thanks for doing this. How many years of RX banking did you have under your belt when you made the move?

Do you think that it is feasible for a post-MBA RX IB associate to make the move to your type of fund, or is hiring in this space similar to other buy side jobs? asking for a friend

Aug 2, 2019

Yes, very feasible - just need to break-in and get an interview. I was an associate >1 year before making the move to the buyside. Depends on the background of the candidate as well - did they come from an IB/PE background beforehand, law background, etc. Have seen (first and second hand) of post-MBA associate moving to some great buyside credit shops. At the end of the day, they're just hiring for horse-power

Aug 2, 2019

Great to hear. Thanks for sharing the insight.

Aug 2, 2019

Thanks for doing this.

1) What're the most common backgrounds of people at your firm? Is it at all common to see people skip the banking stint and jump right into credit funds?

2) Do you see many hires that move upstream to your firm or others like it? (i.e. sub $1b private credit fund to a multi-billion fund)

Aug 3, 2019

1) Most of the analysts here have a banking background, and some with PE / HF experience as well. Probably more common nowadays for individuals to skip banking and go straight to the buyside given the new analyst programs many buyside shops have nowadays

2) Pretty common actually, usually its a lateral vs promotion. From what I've seen with the inflows/money being raised, private credit is a pretty hot space right now with a number of firms looking to build out their practice and grow with AUM

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Aug 2, 2019

Was Rx your first job out of school?

I have a similar background (semi target) and am currently in a job in New York right now, but would like to break into Rx in the future

Aug 3, 2019

Yeah, had a pretty traditional background and went to RX banking right out of undergrad. I've seen people come from all walks of life in RX backing - former lawyers, corporate banking, other groups in IB, consultants, etc.

Aug 2, 2019

would love your take on some of the more solid funds that invest across the entire capital structure.

do people at your fund generally stick to one area (senior/1L, mezz, etc.) or do they have ability to invest in all parts of the capital structure?

what are your thoughts on credit funds in general and resilience in this upcoming cycle?

thanks for this

Aug 3, 2019

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.

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Aug 3, 2019

SPC has two groups (Public and Private sides), but the Public side invest across the capital structure (from revolver to equity, as I understand), and is likewise segmented into industry teams.

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Aug 2, 2019

What's the diligence process like for most of your investments? How often are you guys traveling to meet with management, attend MPs, etc.?

Aug 3, 2019

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

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Aug 3, 2019

Cool thread - can you expand on channel checks? How do you go about doing those and the like?

Aug 3, 2019

Thanks for doing this! Do you see people typically going from MM direct lending to credit funds and what's your opinion on direct lending?

Aug 3, 2019

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

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Aug 4, 2019

What extra steps might an analyst starting out at a direct lending shop (1L, 2L, Unitranche, Pref) need to take to be able to transition to a credit/distressed hedge fund and how feasible can this transition be assuming 2 yrs of experience (understandably an uphill battle).

Many private credit groups have a turn-around/work out groups for distressed portfolio companies, would this be an ideal team to be a part of despite not getting to participate in all the other types of transactions that come down the pipeline?

Would it make more sense down the line to target middle market distressed strategies? Thanks in advance!

Aug 3, 2019

Given all of the capital chasing so few opportunities in distress, what is there to do? I've heard a lot of folks say the middle market still has a lot of opportunities but I'm curious what's keeping you guys busy

Aug 3, 2019

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.

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Aug 3, 2019

Thanks for the AMA. Some questions:

How is your fund's AUM / your time split between different strategies (CLO vs. long/short vs. long only, etc.)?

Anyone from a long-only background? How would kind of background that be looked at?

What time-frame are you usually looking at for your trade ideas?

Are you a generalist or focused on various sectors? Any specific sectors you find attractive/unattractive?

Aug 4, 2019

Would say credit is different...there are too many strategies / return profile to generalize as "CLO, Long/Short, Long Only etc." I would say our funds are predominately long-only.

Yeah, some of the analysts here have a long-only background...at the end of the day, most funds are hiring for analytical ability, so a long-only background is fine

Depends on how the pricing trades and the strategy, sometimes it's a 1-2 year trade, otherwise its YTM, it just depends

Generalist - I personally find sectors being impacted by ESG or non-economic factors to be the most attractive at this time, given other investors / firms are not economic actors.

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Aug 6, 2019

What do you think of autos?

Aug 4, 2019

Any advice on the hedge fund recruiting/interview process for a first year analyst in rx? With the timeline this accelerated, would really appreciate any insight regarding how to best prepare for on-cycle recruiting and the merits of on vs. off-cycle. Specifically targeting credit funds where analysts have the availability to invest across the capital structure opportunistically (HY, stressed/distressed, even equities), and less interested in the behemoth credit managers >$20bn and more interested in relatively smaller funds w/ a few B AUM. Thanks a lot for doing this, great thread!

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Aug 5, 2019

Never involved with on-cycle recruiting, but generally, know your deals, know the firm, potentially have an investment in hand, and have a general understanding of what makes a good / bad business. In general, the prep for distressed / other funds should be pretty similar...just make slight adjustments here and there for the group and specific strategy. If you're targeting specific strategies - have a good reason why. Understand a lot of this is very generic - but that's because its so widely applicable

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Aug 7, 2019

Besides distressed debt analysis, what else differentiates people / helps them better understand distressed debt funds in particular?

Aug 5, 2019

How are your hours and comp compared to RX?

Aug 5, 2019

Comp - Believe recently, comp for banking has improved drastically, so comp is comparable between buyside and sellside on average (asides from the tail events on the buyside).

Hours - Materially better, around ~60 hours a week, could spike beyond if an event / deal ramps up, but generally very manageable. Had a pretty decent RX banking, probably averaged around ~80-90 hours a week

Aug 7, 2019

Thanks for the AMA!

  1. What kind of modeling do you do / what's special about your models (compared to normal LBOs)? Does this differ a lot between cap structures?
  2. What are the different levers and foci when looking across capital structures?
  3. If your fund is long-only, does this mean most of your investments are ones where you gain comfort investing in a company's debt and wait for quarterly interest payments? How does your firm's investment focus differ?
  4. Thoughts on staying long-term at the fund? What are typical paths for people at your firm?
  5. Why did you choose to do credit besides the natural background from RX?
  6. How does your firm compete / what are the competitive advantages against say an Oaktree?
  7. How often does your firm go out and raise funds?
  8. Thoughts on this space given an impending recession?
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Aug 11, 2019

Wow that's a lot of questions. Will respond later after I go through some of the other threads. High level - modelling is just a part of the job and helps (me at least) think through the process and how the numbers lay out. There are some senior guys here that can talk through a deal or do a lot of back-of-the-envelope calculations on a sheet of paper...and I don't think modelling is much of a differentiater at this level. Have done LBOs before, some waterfall / recovery models / financial forecasts etc.

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Aug 9, 2019

How much does bank group matter for recruiting at your fund and others? Would you say Rx and Lev Fin are the two best groups? and any particular reason you chose to not follow the on-cycle recruiting timeline?

Aug 9, 2019

How does the sell-side/sales coverage add value for you in distressed and HY? Do you use the sell side to source ideas? I did some trades in a couple of distressed plays this year, (mostly bonds and a few loans) but it was just a function of the fact that we were making markets in it and the client saw our run and reached out about it. When I tried to reach out proactively about a couple of situations that we were involved in it went nowhere, which I know is the nature of the beast but I was curious if you knew of things that the sell-side was doing that you liked and thought was helpful.

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Aug 11, 2019

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.

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Aug 11, 2019

Agreed, for me the, the value of the sellside desk is getting market color. They're in the direct flow of information and helps provide a additional context to what's going on. We typically hear if certain funds are lifting the bid, some forced selling due to fund closures, what other market participants are thinking etc. In general, its used to gauge market commentary and how the market is thinking about the deal. They've pitched ideas to me before (more off the run stuff...but ironically when they pitch it becomes part of the run), and can provide a quick overview / get me up to speed on the situation, but most of the in-depth research is proprietary imo. Given the distressed nature, bankers also provide quite a bit of value in terms of market color, group formations, if there are pitches being set-up, who's leading the SteerCo, etc.

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Aug 10, 2019

I just wrapped up an internship at a big Reinsurance brokerage, mainly covering Mortgage Credit Risk Transfer. Im really interested in the debt market, and Credit/Credit Risk is what I want to do. Any advice moving forward? Thanks!

Aug 11, 2019

From what I've seen - easier to recruit with a traditional background (banking, or starting out on the buyside). Personally think risk transfers are pretty interesting by itself, could leverage your existing internship to a traditional background

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Aug 10, 2019

Best way to learn about credit markets? I have a basic understanding of bonds but would like to really dive in to all the different concepts and securities.

I just graduated from semi-target and will be joining a fairly large credit fund as a trade support analyst. Looking to become a trader down the road; whats best path for me or approach to make this switch?

Any tips

Aug 11, 2019
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Aug 12, 2019
Aug 12, 2019
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