Q&A: Distressed credit HF
I’ve learned a ton from this forum over the years. I want to give back with this Q&A – no private messages.
Background: European, STEM undergrad, analyst at a distressed PE, MBA, Ivy League alumnus.
Current: associate at a distressed credit HF (20%+ per annum since inception). Secured, unsecured, sub, prefs, etc. Generalist. Two strategies: public and private markets (primary & secondary). We can do loan-to-own as we have locked up capital.
Thanks for doing this. SB’d
Im at a MM credit fund and we do all kinds of stuff in Credit.. from DIP and Asset Finance all the way to Special Sits, RE Debt, Lender Finance, Structured Credit, CMBS, Claims, Distressed Debt, Whole Loans, Orphaned/Dislocated Assets, NPLs. 15 to 20%+ IRR. I am trying to move up to UMM or MF and find it hard to explain my deal experience to recruiters and headhunters on paper. My deal experience is mostly middle market stressed/distressed assets, NPL off banks balance sheet, Aviation/Energy/Hotel lending and corporate rescue financing. How would you suggest I phrase my deal experience on my resume.
Thanks again
I don't know, sorry
did you get in on that Intelsat dip
Nope but on a few other big BKs in coal
Your current fund strategy sounds really interesting - could you possibly name any similar funds that you know of? (Assuming you won't name your own)
What’s a day in the life for you? Time you start till time you end?
Also, if you could recommend only 1 book for someone who would like to try to break into the role. Which would it be?
It starts checking the news on names we have a position. After that, I (i) update models/valuations, (ii) catch-up with advisors/traders and lawyers in live transactions, (iii) and/or have meetings with portfolio companies. Additionally, I source new investments through my network. Some days I hold calls with prospective LPs that are doing DD on us.
This workflow is disrupted in the closing of private investment as my schedule is more restricted.
One book every new employee is required to read is Distressed Debt Analysis by Stephen Moyer.
1. Any sub-sectors you've been following lately?
2. What's the split of ideas that you generate vs. names that get passed to you?
3. How are the hours?
4. Any distinct strategies your fund follows when it comes to loan to own (e.g. operational overhaul for retail or manufacturing, cyclical bottom for chemicals / commodities, first to exit BK then roll-up other filers in the industry, etc.)?
5. Do you feel like your ability to think critically about businesses has improved from before you joined your current fund and if so, is that just due to reps or actual mentorship from senior folks?
1. Hotels and industrials impacted by COVID
2. On the public side I'd say 20% generated by me, 30% by traders, and 50% by my bosses. On the private side, 90%+ sourced through advisors.
3. 8 am to 7 pm without live deals on the private side. Whatever it takes with live deals.
4. We split the job with a partner: we focus on the financial restructuring, and the partners focus on running the business. The partner is required to invest new money subordinated to our position. We love to make great operators rich.
5. In terms of hard skills I learned as an analyst at a distressed PE – keep in mind I did not work at IB/consulting. I had to do everything with little oversight and no support from senior members. In terms of soft skills, now I'm learning more about how to create a firm and run a business.
Would you do anything differently if you were starting over again?
I'm fortunate to have no regrets so far. I did not go to GS or McK, but who cares.
How do you play the distressed game without necessarily being the one driving the process (i.e. doesn't own enough to influence the situation)?
d
You are not incorrect, but there are lots of ways creditors within the same class can get screwed by one another and I think its dangerous to assume that you are automatically aligned with another investor just because you hold the same security or even in the same ad-hoc group. Even if you are in the creditor group, you can still get screwed over by an aggressive steering committee who will have more sway with the group's legal counterparties holding the pen to an RSA or other proposal. For example, you may technically have the opportunity to participate in a rights offering or other new money plan, but unless someone is on the ball you will miss out on the incentives given to the bigger creditors who are able to back stop the plan. Not to mention the issue of one or a small club of large creditors having the ability to give consent from your class on a priming deal that you can't participate in. The fact is that if you're playing in MM or larger distressed (> $1bn debt), there is not much you can do but go along for the ride if you're only showing up with $20mn - 50mn holding sizes, or are generally unable to write checks for new money deals. Unless you make a point to be overly aggressive with aligning yourself with someone larger you're probably not going to have the best time in the world and the restructuring process turns into much more of a time sink / observation process than value creation opportunity for you.
Thanks. On a related note, I'm curious why merely 24% of the total equity? Did the secured paper get the rest of the equity?
We buy debt on the secondary market and originate loans on the primary market. The risk profile in the loans we originate is lower as we negotiate documentation in asymmetric situations – where we have the leverage.
How do you like being in a buy side restructuring seat?
We create consortiums with other funds, hopefully gaining enough relevance to influence the process. Right now, as banks are not prone to bridge the new money needs, we are restructuring balance sheets before we enter into a situation on a super senior basis or subordinated to other lenders (2L, unsec, mezz) with shorter maturities.
1. What're the hours and comp like from the most junior to most senior level.
2. Do non targets with no MBA have a chance of breaking in if they have BB experience or is this field mostly reserved for the elites.
3. What's diversity like on the credit/distressed side (I am black so trying to avoid hostile environments which unfortunately I have experienced before).
4. What background in term of work experience is best to break in.
1. Hours: answered above. Comp: cannot disclose
2. If you come from RX, you have a shot. If you come from doing plain-vanilla stuff at a BB, chances are lower.
3. Higher compared to 2000s.
4. PE > RX > HY/direct lending
What would the HY/direct lending role be?
Would be interested to hear how you think distressed credit performs through the cycle?
I can understand how the strategy would do well during an economic downturn where there should be better buying opportunities but how has the industry performed during the past few years?
There are failing companies consistently throughout the cycle.
When markets crash, we raise capital and divest after 2-4 years. We become smaller/opportunistic/funky and wait for the next crash opportunity.
There's an enormous multi-year opportunity now.
How much does your work vary between doing PE-style long term work on loan-to-own deals and asset manager-style work on making smaller positions within credit structures?
Before joining the job, how did you make a network of people across distressed? Do you view having a network within distressed as being any more important than within another asset class?
In the middle of the COVID crash, we were 80% in public/liquid securities and 20% in private. As we divested in Q3-Q4, now we are 80% in privates. From that figure, 30% is loan-to-own, 30% is new money with balance sheet restructuring, 20% is bridge financing, 10% is new money without restructuring.
What is your outlook on the distressed credit space in the near and long term? There seems to be an oversupply of capital in the space hunting for opportunities in relation to the amount of distressed co’s.
What does your idea generation and vetting process look like?
Recs to enter the space from an Rx role?
Outlook: hard, especially if you are a multi-billion fund (see the returns of Oaktree, Angelo Gordon, King Street, etc); good if you are below
Idea generation: through advisors/banks
RX: it should be easier now as RX banks will need help with the deal flow that is coming
Where's the best spot to look for returns of those firms (BB, Pitchbook)? Thanks for doing this!
This guy started an AMA and his only response thus far has been "I don't know, sorry". Lol.
damn where did OP go?
Do you guys have in-house lawyers working on live deals?
Nope – pretty flat investment team
Hi, thanks for doing this. Not really related to your background, but I would appreciate if you could give your views on moving to credit funds from Corp banking(sits along with IB in my bank). How feasible is it and how should one approach it? Thanks again :)
Definitively yes, although mentality is different. One of my bosses comes from a senior position in a BB bank managing distressed loans. He has an A+ network. After the BB, he went into a distressed PE, and then into my firm.
Hey, thank you for doing this.
I am an IB analyst (6 months into my first year) and am interested in distressed asset investing/activism. One firm that really catches my eye is Brookfield Asset Management. Any advice on breaking in would be much appreciated. I am currently working at a boutique bank in Toronto in the Merchant/Investment Banking division.
I am starting to take on modelling now, so any advice on how I can pick it up faster and really become proficient at it along with sharpening my accounting skills would be much appreciated!
Thank you
Master hard skills, get top reviews from peers, and network your way into PE.
What made you want to pursue an MBA if you already had distressed buyside experience? Why not network / lateral directly to a credit HF? Do you think your MBA provides meaningful value to you day-to-day now? Did you go to H/S/W or one of the other top programs?
I tried a lateral move but my current firm did not even answer my email. Everyone above me in my firm has an MBA from a top school.
MBA: do not expect it to be harder than an analyst program in Wall Street. Network and people are the key drivers for the decision. I met my future wife in my MBA class, so I'm biased. I went to a top program.
How does your firm handle covenant analysis - thinking in terms of (i) relative time/importance spent and (ii) process: first pass by the investment team with legal advisory follow-up as needed / outsource to a law firm / other? If there's enough wiggle room to do a non-pro rata priming deal under existing docs and the circumstances call for it, do you look at that as a reason to stay away or opportunity to be a provider of additional capital / benefit from that looseness? Assuming the answer is 'it depends on the situation,' what factors do you consider?
On the private side, covenants are critical.
On the public side, the legal analysis comes after reviewing the business and the situation. Frequently we do not have more than a couple of days to establish a position as traders get rid of cheap securities fast. We hire legal advisors when we have doubts. To avoid potential legal risks, we do not generally do PE-backed deals. We spend quite a lot of time thinking of ways to deteriorate creditors' positioning to gain comfort with the downside.
How viable is lateraling to a distressed credit fund from a workouts / restructuring group on the buyside? We also do a small amount of distressed investing, although typically in firms we're already restructuring / invested in.
It should be ok.
Hey thanks for doing this. For someone in DCM - doing HY origination, how hard can it be to lateral to a distressed shop ?
Base on your profile, the question is whether you can source good deals on a sustainable basis. One former employee at my firm was a top trader in a trading desk of a BB. He sourced good opportunities for 18 months – as he knew where top investors invested. After that, he put us on bad and binary deals – and he had to leave.
At what point does sourcing really become an individual's responsibility?
You mentioned that idea generation comes mainly from banks/advisors and the seniors, but the guy above e.g. seems to be an associate and your answer focuses on sourcing only.
How should someone currently entering TMT at an MM IB position themselves to have a career trajectory that ends up in a distressed investing role? Will it be possible to pursue Distressed PE opportunities this recruiting season? Should I just lateral out of this bank?
If you do not have a personal fit with complex situations, I´d think about staying in TMT.
Hey thanks for this - from your experience, would HY traders be also considered for your position?
Yes
I am interested in doing a JD/MBA from a top 10 program with interests in RX and distressed investing. In your case, how did you know distressed investing was the right fit for you? I was recently networking with a JD/MBA at a top school who recommended to consider your personal 'world view' when pursing investing styles (distressed vs something more growth oriented)
I am sensitive to losing money. I learned early that distressed investing is about limiting your downside and making some money in the recovery. That was appealing to me.
Distressed vs. Growth: 100% agree. Personal fit is the bottom line. While distressed has an oversupply of funds, growth seems to have an undersupply - especially on the buyouts side as lenders do not provide aggressive turns of leverage. But that will change.
What classifies a company as distressed? Specifically, what do I look for on the balance sheet? I saw some things on the internet talking about the bond market and ratings but I’m just curious what you look for?
The theory says that distressed credits have spreads of 1,000+ basis points. You could include companies with net debt > enterprise value as well.
What about credit and distressed investing interested you?
Limited downside, unlimited upside.
Unlimited upside? Can you provide an example from past public BKs or public case studies where a credit fund had limited downside and unlimited upside? Always thought of credit as something with limited upside..
What materials/book/podcast would you recommend to an undergrad looking for a career in distressed credit?
Moyer, fabozzi, distressed debt investing blogspot and the Best interests blog
I'm fortunate to have no regrets so far. I did not go to GS or McK, but who cares.
Hi, thanks for the Q&A.
Currently at a fund doing mostly performing (unitranche/2l/pref) + some rescue private deals; no experience in public.
Do you have any advice on how to prepare a “trade idea” / “case study” ahead of the interviews? Note I am not talking about a case study where you are given a name but rather finding a situation that fits the bill and then doing some initial analysis on this. I guess equivalent in equities would be a stock pitch.
Many thanks.
This Q&A is like pulling teeth. 0 value-add.
When you make investing mistakes, are they more likely to be coming from making a wrong fundamental call on the business, from covenant related issues, or valuation issues (i.e. paying too much)?
A related point - how would you rank the skill set above (valuation, industry understanding, and covenant/legal knowledge)?
Thanks.
Assuming that you're working in Euro shop / did work in a Euro shop then did an MBA, could I ask why you decided to do an MBA and do you think it helps through promotion in Euro? (working off the assumption that Euro area dont really need an MBA to senior roles based off what my senior peers are doing and have done).
Thanks for doing this - would like to hear your thoughts on what some are calling 'manufactured defaults' e.g. Aurelius v Windstream or Blackstone and Codere. Do you think these types of trades will become more common, especially if the bull market continues to ramp up and the opportunity set in distress was to narrow?
These trades carry negative stigma /relational risk in general
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