Credit Opportunities

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For the shops that are originating new debt, you should be able to model cash flow projections with sensitivities around top line, margin compression, etc. From there, you can calc credit stats (fixed charge coverage ratio, etc). You should also be able to model/project inventory/AR for any asset backed loan.

Then you need to be able to really think about how to protect your firm in the event of a default. how can you design covenants that get you back to the table before you are over-exposed as a lender.

If they are doing distressed stuff, you should also have an understanding of liquidation order in bankruptcy, as that is the backdrop against which you will be operating. You will also be doing your projections on a much more detailed basis -- weekly instead of monthly.

Cap structure, normal operating models, liquidity analysis, valuation models, liquidation analysis, restructuring analysis etc.

Normal distressed debt work. Most of it you'll learn on the job. Important to understand cap structures and basics of distressed investing if you're interviewing at a fund.

I work for a credit fund that does a grab-bag of strategies and could fairly be called "credit opportunities. Big picture, "credit opportunities" is usually used by debt managers who don't want to pigeonhole themselves into one thing and can mean distressed, loan-to-own, mid-market, private placements and mezz, long/short and relative value, convertible/special situations credit arb, etc.

In practice, particularly when you're dealing with the credit arm of a big sponsor, it's going to depend heavily on organization how a) the funds themselves are organized and b) how the teams are organized. Some sponsors (BX, GSO, Apollo, Ares) have huge credit arms that do everything under the sun, while others are more focused on distressed, loan-to-own, or mezzanine.

To me, the natural flow is PE>Mezz, DIP and loan-to-own and private mid-market debt>Public Distressed (since you may end up with the keys)>Senior debt and CLO management (since a lot of the debt is LBO financing and the funds have a PE-style life cycle)>General public market credit strategies. There start to be natural conflicts and grey areas and organizational challenges in terms of separating the investment process. Gala Coral is a good example where various "smart-money" stakeholders shade back and forth between mezz, distressed, and PE.

Here's an example: BX's credit arm, GSO, has the following strategies listed: Leveraged Loans (basically CLO management) Customized Credit Strategies (essentially separate accounts for their CLO platform) Mezzanine Strategies (duh) Distressed Strategies (duh) Secondary Markets (basically a HY fund) Rescue Financing (basically DIP or loan-to-own) And lastly, Special Situations Credit Strategies (basically credit opportunities): "GSO’s credit strategy is focused on investing in the leveraged finance marketplace. It invests in long/short credit, event driven opportunities and liquid stressed and distressed securities. GSO may invest in both public and private non-investment grade and non-rated securities, including leveraged loans, high yield bonds, distressed securities, second lien loans, mezzanine securities, common and preferred equity securities, and credit derivatives."

So as you see, the SSCS is basically a grab-bag of every other strategy (they say liquid, but liquidity is a term of art in this universe). How this is organized from a legal structure standpoint can vary, but let's pretend it's like this: GSO manages GSO Leveraged Loan LP, Mezz Strategies LP, Secondary Markets LP, Rescue Financing LP, and Special Situations LP. Each of these has their own set of investor commitments/capital (though there is likely overlap.) On the investment team side, you might have a different desk for each "product" (distressed, senior debt, mezz, mid-market, synthetics, relative value) or by industry, or what have you and each contributes to the credit opportunities fund as sort of a "best ideas" sleeve. Alternatively you may have separate teams for each fund but in my experience that's not the case because it's just not good division of labor.

(To be continued)

sb to ^^^^ if i have any

Very interested.

Kenny, what was your path to the fund you are at now?

Also, im currently in a role where I underwrite and structure bank debt products. I deal with public companies with anywhere from 0 to 6.5x leverage(lease-adjusted) at Wells Fargo. If I wanted to move into a credit fund from my current position, what kind of path would you recommend following? Do you feel there are any skills I would be lacking after doing this for a few years, that I would NEED to develop elsewhere before making the ultimate switch?

That's really helpful guys thanks a lot. In terms of interviews, what types of questions would you prepare for? I've heard it's mostly discussing your deals, maybe coming up with an investment idea, and talking about the markets. Any modeling tests to speak of or other means of prep? Any links to helpful websites are welcome. I feel like there's tons of info around traditional PE prep but the process for credit funds seems more opaque.

Its not a DCM role, so pricing is not our job. I'm in WF's Corporate Banking group, which basically means I'm a cross between a credit analyst and a pitchbook monkey that focuses only on syndicated/pro rata facilities. We deal only with Senior debt products, so exposure to junior debt is minimal.

Does that help?

I do not have exposure to many of the models you stated that you use in your previous post. On the quantitative side, my work is limited to DCF, valuation comps, covenant comps, operating/cashflow models, LBOs, and typical credit analyses.

I think that a mid-market lending fund is likely a good fit. The biggest things you'd be lacking in my eyes are exposure to the riskier parts of the cap structure and to "the market" as such for more liquid products and by extension their derivatives. Just my 2 cents.

this is for a credit fund, not gonna mention which obviously

we give candidates an initial lbo screen, lbo is not necessary on the job but it helps us to filter out guys who don't understand technicals. This one is comparable to the normal pe interview. no case, just need answers from simple lbo questions

second round is a case, we give you the 10k 10 q, indenture and the credit agreement. You have about 2 hours to do the case and explain to us whether or not if you want to invest in the company and which capital structure do you want to invest it in and why. Obviously focus on the big stuff, what's the capex like, what's the unlevered fcf and what's the levered fcf and what's the yield on each tranche etc. We want to make sure that you have the business commonsense and be able to spot the important stuff (does this company have a huge pension liability? recurring legal problems? huge capex? can't generate cash? how covered are we?)

going back to the candidates...we only really look at restructuring, m&a and sponsor guys so guys like moelis, evercore, greenhill, cs sponsor etc

pm you

Long-time reader, first-time poster. I'd echo what everyone else has already said. Best way to describe "credit opportunities" generally is the excerpt Kenny posted regarding GSO's special situations fund. Interview process very similar to what Ricqles mentioned from the case study perspective. I don't think the softer questions are that different from a PE interview except there's obviously a much greater focus on debt.

i.e. presenting a good investment from the credit perspective, knowing what specific metrics debt investors look at, being able to describe what contributes to differences in spread across companies / cap structures, explaining why you're interested in debt versus equity (surprisingly a question that most candidates do not have a good answer to)

Thanks for all the responses, guys.

Kenny, do I have a realistic shot at getting into one of those funds? How does one even find these positions?

Are they only advertised via headhunters?