Credit vs. Equity Research

eltoro454's picture
Rank: Baboon | 106

What are some of the key differences between the two? Obviously the security being valued is different, but I imagine you would still be looking at the strength of the company and looking at the same financial statements, etc. Wondering because I enjoy ER, but have some opportunities for credit research as well. Thanks in advance for any insight!

(I posted to AM forum because I'm interested in buyside, but if more appropriate in the ER forum I will add it there)

Comments (36)

Nov 12, 2014

Credit is focused a lot more on the downside and whether someone is actually gonna get paid back. Take a look at a ER report and Credit report, easy to see the differences

Nov 12, 2014

Thank you for the response. Where can I get these reports?

Nov 13, 2014

Search online and wso, there's a ton floating out there

    • 1
Best Response
Nov 13, 2014

Equity: Owning a company at the very bottom of their capital structure, I would say that the research done for equity has to be much, much more involved in digging into the modeling numbers since the upside and the downside volatility is more significant than in Credit (note: assuming there is a recovery rate to the bonds). When I did equities, we focused a lot on relative valuation, upside/growth scenarios, and peer comps. We also had to have more in-depth analysis and investment conviction. Pros: You know a company really well Cons: You have to spend a lot of time knowing a company really well.

Credit Research: There are a lot more technicals involved in even looking at credit. What is the duration of the bonds, YTW, spread, if it's callable, covenants, unsecured/secured. That is on top of the analysis on where the treasury curve is and will move (bull flattening, bear steepening, etc). Many credit analysts may see that as more portfolio management, but those are all important to consider given how the bonds could behave differently if the company has multiple bonds out or where their peers are trading at different points of the curve. The fundamentals of Credit are the same in understanding modeling the company/revenue/etc. But we put the emphasis on FCF, Cash Flow needs, CAPEX, ST/LT Debt levels, Liquidity at different points in time (when are bonds due, can they come to market and refi, etc). Also important to think how they use their cash flow ($ to buy backs, dividends) vs. paring down leverage. In Investment Grade- there's such a thin spread over the curve, that downside matter a lot more, since upside is capped. Since there's usually a huge cash cushion, it's more about what they're going to do w/ the money i.e. understanding the long term credit story vs peers in the space. HY- this is my favorite vs. IG, this is messy but where you can make money. You get to play in Leveraged Loans and different parts of the capital structure for where the best value is and where you believe you're covered (think Recovery Rates vs. risk you're being paid for). You have to understand the changes in the company and if it can finance itself, its strategy, CAPEX, M&A from internal cash flow generation.. But, generally speaking- because you're in the higher part of the capital structure in Fixed Income, inherent volatility is less (all else equal) so as an analyst I get to cover more industries and companies (wide coverage) vs Equity (Deep coverage). Which is why I jumped over to credit analysis from Equities. I needed the variety.

Now... Emerging Markets IG and HY Credit Analysis? That's where the excitement is.

PM if you have more questions.

    • 17
Aug 3, 2017

I was gonna answer, but this covers it. +SB.

Learn More

Boost your resume and land a finance job by passing the FINRA SIE. 264 pages & 1981 smart flashcards written by a former 8X top Fidelity instructor. Try it for 0 bananas here.

Nov 24, 2014

I've worked in both and I find that credit analysts tend to be more proficient at financial modelling and financial statements analysis. I know that s a very general statement but I've just seen too many sub-par equity research reports and financial models. The skills amongst analyst are not as standardised as you would find in IB or other pockets of finance. There's just too many JT Marlin like shops operating in this industry with too many people calling themselves 'analysts'. If you work at a fund investing in private debt, you would also get exposure to structuring and documenting credit facilities which can be quite interesting as well.

    • 1
Jun 5, 2015

I will be interning as a credit analyst starting Monday. I was wondering what skills I should definitely make a point to learn that are highly transferable to an ER or hedge fund position. Primarily a hedge fund with a berkshire/pershing/sequoia/greenlight mandate of long-term, deep fundamental investing.

Thank you

Jun 5, 2015

From my brief experience, I know the FI team was a lot smaller, less-respected, and more under-the-radar. In fact, I doubt they even had much interaction with clients. Also, in day-to-day responsibilities, the FI team did mostly excel modeling while for equity research, the tasks were more diverse. That being said, if you want to work for a macro fund or fixed income fund, by all means, FI research would give you better exit ops. It all depends on your preferences.

Jun 5, 2015

I agree with the above. I worked in equity research this past summer, and I just had an interview in FI research yesterday. ER is much more client focused and your coverage is more specific. Whereas an equity research analyst might cover 10 - 30 stocks, a FI researcher may cover 10x or even 20x the number of companies. Also, FI researchers (at least at the firm I interviewed with) sit next to the traders on the floor - definitely not a typical ER setup.

This is just a guess, but FI research probably has better exit ops into trading because of this relationship. ER kind of limits you to continuing in ER or moving onto the buy-side with a hedge fund, etc.

Jun 5, 2015

quaker.. i just PM'd you..

Jun 5, 2015

in my experiences, equity research covers less stocks and exit opps are mostly to L/S HFs. FI covers a few more companies but credit analysts understand CDS bonds loans lcds as well as equities. FI sits on the trading floor and interacts with traders more often. exit ops include trading as well as credit hedge funds (distressed, hy, cap structure arbitrage, etc)

Jun 5, 2015

anyone have ideas on how to prepare for a FI/credit research interview?

Jun 5, 2015

Thanks all for the replies. Two quick follow ups:

1) Salary+bonus potential for each. Sounds like sometimes, the salary of an FI researcher is dependent on the quality of advice and subsequent pnl of the traders who trade on the advice?

2) When we talk about research in FX, commodities, interest rates, etc., these would be completely different animals? No longer company specific and with a substantially different set of tasks and exit opportunities?

In terms of the intellectual rigor and how interesting the job is on an objective basis (as much as that is possible here), is there a difference between the many different areas of research? Or is it purely how motivated one is and how much interest a person has in the particular sector/area?

Jun 5, 2015

Wanted to bump this old thread. Thinking specifically about commodities research vs equities research, and what offers a better trade-off longer term for hours worked vs financial rewards. I like the intellectual rigor question too, and don't have a solid answer for that. Anyone else want to chime in?

Jun 5, 2015

Bump, interested as well

Jun 5, 2015

Bump - old thread I know. I have a credit research analyst interview with a large BB focusing on a particular industry and probably focusing on the investment grade side (as opposed to HY).

Can anyone provide some more color on credit research? Also, any suggestions on how to prep for the interview?

Float like a butterfly, sting like the bee.

Jun 5, 2015

Also interested in credit research...exit to credit fund a possibility?

Jun 5, 2015

I'd lean toward the UBS offer simply because it's more well known. It helps a recruiter make an easier decision when there is a recognizable firm name on the resume.

Jun 5, 2015

Bump. I need to decide on Monday. Anyone else have any thoughts?

Jun 5, 2015

UBS. You can often go from Credit to EQTs, but not the other way round.

One last thing on credit, if your thesis is right, at maturity you'll be proved right, there's a legal catalyst. With equities, you're still at the whim of the market.

    • 2
Jun 5, 2015

Good point. x3 for UBS.

Jun 5, 2015

Equity you research equity, credit you research credit (those bond and debt things) and economic you research the economy and shizz.

Credit is the bestest. All the best research credit.

    • 1
Jun 5, 2015

Word; less writing.

Jun 5, 2015

So in equity research, you're building a model with outputs like Price-to-Earnings, Return on Equity, and fun things like 'Price Targets'. In your reports you're probably talking about "WHAT THE MARKET DOESN'T UNDERSTAND," even though the market probably understands it perfectly well and you're just looking for a way to justify your opinion to a client or your boss. In debt research, you're basically building the same model but with outputs like Leverage and Coverage, and your report will say something like, "X IS SIMILAR TO Y BUT X HAS A HIGHER YIELD SO LET'S BUY IT, YO."

Meanwhile, economic research involves picking whatever topic is currently en vogue -- Yellen v. Bernanke, for example, or maybe what this holiday season is going to look like -- and saying "THIS IS THE MOST IMPORTANT THING EVER IT WILL DRIVE MARKETS THIS IS HUGE, GUYS." If you're working in economic research, it's important to explain all market moves in terms of this singular topic. Regardless of whether it moves up or down, you need to have a convincing, causal story to tell.

All three basically boil down to putting lipstick on a randomly generated pig, with that pig being your "Analysis."

Hope this helps. (I work in one of the three).

    • 2
Aug 3, 2017

in terms of recruiting, is one more competitive than the other (credit vs equity research)??

Aug 3, 2017

i think its equity, but not too sure which sector
anyways they are strong in economics and derivatives research if that is of any help

Aug 3, 2017

jpm's credit research group is ranked #1 on the street: http://www.bloomberg.com/news/2010-09-02/jpmorgan-...
jpm's equity research is ranked #2 behind barclays

Aug 3, 2017
hills107:

jpm's equity research is ranked #2 behind barclays

Barclays is not above JPM in research.
Barclays is not number 1 in research (close in the US, but nowhere near in Europe or Asia).

Aug 3, 2017
Comment
Aug 3, 2017
Comment