Current Structured Finance/Stressed and Distressed Special Situations Credit Opportunities

Hi guys, this is my first post so I hope I am posting this in the correct place.

I have an upcoming interview with a predominately structured credit (CLOs etc.) focused hedge fund, although they also invest in stressed and distressed special situations credit opportunities.

I have been researching the different products surrounding these but one of my main worries for the interview is that they will ask me for my current investment ideas in the space. As this is a graduate position and I have no previous experience in this space I am struggling with this quite a bit.

I was hoping that someone on here would be able to point me in the right direction in terms of where I could come across ideas on this, or where I could go about starting. If anyone has any ideas they would like to share, that would also be great.

I would also be very grateful if anyone has an idea of anything else I should prepare, or any questions I might be asked.

Thanks in advance!

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Comments (8)

  • Analyst 2 in IB - Gen
Apr 13, 2020 - 6:05am

Can you clarify - so they invest in CLO securities. Does this mean that they also look at stressed and distressed opportunities on a portfolio basis (i.e. ABS / NPL) versus single-security credit?

Apr 13, 2020 - 6:49am
Analyst 2 in IB - Gen:

Can you clarify - so they invest in CLO securities. Does this mean that they also look at stressed and distressed opportunities on a portfolio basis (i.e. ABS / NPL) versus single-security credit?

So they invest in CLO, ABS etc. securities under one fund. In a separate smaller sub-fund they invest in single-name distressed and stressed special situations opportunities (active restructurings etc.). Hopefully that clears it up a bit more, let me know if not.


Apr 18, 2020 - 12:47pm

Just wanted to add a comment to check if anyone has any thoughts on this?

Most Helpful
Apr 18, 2020 - 1:35pm

On distressed - I think there are some other threads on WSO on this so I won't spent time here. Lots of good resources on the internet as well.

On CLOs - this is a tricky one for idea generation. As a graduate, I think it's tough to form a view on why you think one CLO's debt/equity is any better than another's without having access to management, their investment strategy, & portfolio-level analytics.

On ABS - this is easier to form a view on in my opinion. Here's how:
1) Put together a list of assets that are commonly securitized - i.e. aircraft, containers, mortgages, consumer credit (the big credit rating agencies put together reports on recent securitizations which you should be able to find for on their websites after making a free account)
2) Form a view on the sturdiness/longevity of those assets & their ability to produce cash flow - i.e. lots of airlines are distressed right now & will be unable to pay the rent on the aircraft they lease from aircraft lessors (which are frequently securitized) so clearly aircraft ABS will be affected. Question is: by how much & for how long? Do lots of research here & really try to understand the quality of the assets - i.e. for consumer credit, what's the weighted-average credit score of the portfolio? What are the odds people don't pay their mortgages? Etc.
3) Form a view on how sturdy the structure of the ABS is. Read the rating agency reports on the securitizations & make a note of their structure - what's the loan-to-value ratio, what does credit enhancement look like (google this if you want to understand how credit enhancement is done)? Are there good management teams managing the assets? Etc.
4) Determine which level of seniority in the ABS you like the most - i.e. you believe aircraft will lose value & airlines will stop paying their rent & that will affect aircraft ABS, but given your understanding of the ABS structure, you think it's unlikely that the most senior tranches of the aircraft ABS you like will be impaired (perhaps the more junior tranches will be wiped out). This is tough to quantify but it's possible those senior tranches may be mis-priced if that's the case (investors may think they'll be impaired & senior tranche spreads widen)
5) Voila, you have formed a thesis on all the pertinent parts of an ABS: the assets, their ability to produce cash flow, the ABS structure in general, the "relative value" within the ABS structure, & the extent to which other investors do or do not share your view.

Hope this helps!

Apr 19, 2020 - 6:20am

Hi Tsw,

That's a huge help. Thanks so much for taking the time out to answer in such detail!

Are there any threads or resources you'd recommend in particular on the distressed side?

Thanks once again!

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Mar 8, 2021 - 2:12am

Very helpful, thanks! If I'm looking to switch over to structured credit investing in a few years (currently on an ABS Origination team), do you think a math/stats skill set is needed? I've seen a few postings and they mention R, Python, programming, Intex, etc. Unfortunately  did my undergrad in business so I'm trying to be realistic about my chances & exit opps

Mar 8, 2021 - 7:59am

No one is going to ask a graduate to pitch a credit idea. The reality is that it is next to impossible to get bond data unless you have a Bloomberg/Ikon terminal. As for leveraged loans invested through a CLO vehicle, those are private instruments so again there is almost zero chance of being asked to pitch an idea in that space.  

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