Distressed Debt Interview

mackie09's picture
Rank: Monkey | 64

I have a first round interview at a distressed debt fund. Any thoughts on what first rounds look like? I'm currently an analyst in a restructuring group at a bank with some decent deal experience, so I assume I'll get asked about what I've worked on, and I have a credit idea ready to go if asked. I'm also doing some review on the high yield and levered loan market, but aside from that, if there are some things I should be prepping for, please post some ideas for me.

Also, anyone have thoughts on the likelihood of being asked random legal questions?

Thanks in advance for any ideas, really appreciate any wisdom you all can share.

Comments (113)

Dec 27, 2011

You seem to be relatively well-prepared. Maybe also look over the distressed debt investing blog (http://www.distressed-debt-investing.com/) if you haven't. Good to understand what's happened in the markets the last few years as well as it gives the impression that you've followed this for a long time and have genuine interest. If they ask random legal questions that you don't know, it's perfectly fine to admit it.

You don't know as much as you think you do. I did banking as well and when I moved over to the buyside (mostly equities, with a little bit of credit sprinkled in) I learned so, so much in just my first few months. With that said, when you interview my advice is this: (1) show that you've taken every opportunity to learn in your current job (2) you like finance, but LOVE investing and can't imagine doing anything else (3) you're hungry to learn as much as you can and (4) willing to contribute any way you can to the team.

Edit: Also, your pitch says a lot. It's not necessary for us to agree with the idea, but it is very important that (1) your thought process makes sense and (2) you can pitch quickly/effectively and go through only what's important. 30 seconds should be more than enough. We will, of course, probe further, but the initial pitch should be very concise and very short. When I tell my PM about an idea, it's the same way: give him the general thesis and let him dig further on specific points.

Dec 27, 2011

First round should be based on you, your past experience and understanding of the situations you've been involved in so just prepare well for those. Also keep in mind that the second round may only be a few days after the first round so it's best to start preparing for a potential case study and technical interview.

I'm not sure what work at a restructuring group actually involves, but on the investing side, you have to think about the motivations behind all the players in the situation, valuation, event triggers, and legal due diligence. So try to think of your past deal experiences from these perspectives as well (which you may not have done before).

Dec 27, 2011

Seconding that you should be in a pretty solid position. I didn't have a modeling case during my first interview (multi-strategy credit fund) but was asked a handful of moderately challenging technical questions about distressed (not really legal specifically but some tricky structural stuff).

In addition to distressed debt investing blog, I'd try to get your hands on a recent copy of JPM's Default Monitor or a similar publication and make sure you are at least passingly familiar with the current situations out there.

Dec 27, 2011

Thanks to all for your responses.

KP, if you wouldn't mind sharing one or two of the technical questions you mentioned, either on the board or by PM if you prefer that, I'd appreciate it. I'm just trying to get a feel for the type of questions I might get asked, as this is my first interview with a bigger fund.

Dontmakeme and Awon, really appreciate the comments.

Dec 27, 2011

Also, if you have access to Debtwire, search the funds name and see if you can get info on a few credits they are currently involved in. Take a look at related news items to those, and find a way to spin it into any sort of "What do you know about us/what we do" question.

Dec 27, 2011

Thanks Awon, these guys seem very under the radar, so I haven't been able to dig up a ton of info yet. I'll check Debtwire and see if there's anything on there. Thanks.

Dec 27, 2011

Don't remember exactly, but it was something about structural seniority (ie opco unsecured vs holdco secured) and something about cross defaults.

Dec 27, 2011

Ok, thanks. I have some standard form HY, Sr Sec Debt primers that I'm planning to review, so if I'm lucky, those will cover a bunch of the types of situations you're referring to.

Again, really appreciate your help.

Dec 27, 2011

The Moyer Distressed Debt book is a great read if you have time and it covers a lot of that stuff in enough detail to get you "conversational."

Dec 28, 2011
Kenny_Powers_CFA:

The Moyer Distressed Debt book is a great read if you have time and it covers a lot of that stuff in enough detail to get you "conversational."

How easy to read is the book? Is it more like a textbook or can you expect to pick enough by just casually reading it on your way to work and still learn enough to make it worth the price?

Dec 28, 2011
Lubyanka:
Kenny_Powers_CFA:

The Moyer Distressed Debt book is a great read if you have time and it covers a lot of that stuff in enough detail to get you "conversational."

How easy to read is the book? Is it more like a textbook or can you expect to pick enough by just casually reading it on your way to work and still learn enough to make it worth the price?

It's more accessible than a text book for sure. I find it to be worth the price (most finance books are spendy but what can you do.)

Jan 9, 2012
Kenny_Powers_CFA:

The Moyer Distressed Debt book is a great read if you have time and it covers a lot of that stuff in enough detail to get you "conversational."

is this the best one for someone like me who needs to be able to discuss distressed and allocate capital to it, but not necessarily be able to answer interview type questions?

thanks

Jan 9, 2012
samoanboy:
Kenny_Powers_CFA:

The Moyer Distressed Debt book is a great read if you have time and it covers a lot of that stuff in enough detail to get you "conversational."

is this the best one for someone like me who needs to be able to discuss distressed and allocate capital to it, but not necessarily be able to answer interview type questions?

thanks

I would say so-it's not overly technical and it covers a lot of stuff from a very grounds-up perspective. It'd actually probably be a good read for anyone getting involved in high-yield credit, even on a non-stressed basis. The other contender would be the Whitman/Diz book but I prefer Moyer. If I had to coach someone from scratch to talk to a distressed PM they should read the Moyer book and the most recent JPM Default Monitor.

Dec 27, 2011

Yeah, have read that and Whitman's Distress Investing, but it was a while back so it might help to refresh.

Thanks again for all the help.

Jan 9, 2012

I had an interview to sit on a desk that covered distressed, so it's not fully comparable, but figured I add to the convo. I went through a case study and they asked me what security, price, upside/downside. I was given a couple of bloomberg printouts, company name and plan of reorganization (if you haven't before I suggest reading one if you have time, but if not just read how the bank values the company and who gets what). I was given 30 minutes and then we discussed the case for 30 minutes.

Jan 9, 2012

Read Marty Whitman's Distressed Investing. It has some good case studies too.

Jan 9, 2012

I think I found this somewhere on WSO previously:

http://www.hl.com/library/bsttcacs.pdf

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Jan 9, 2012

this is great!!

Jan 9, 2012

@CRE_Banker, that looks like a solid document. Thanks
@brandon, thanks, I'll definitely look into it

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Jan 9, 2012

moyer.....

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Jan 9, 2012

I've had a chance to read Moyer. Very good book. I recommend for anybody that wants to read on the topic.

Jan 9, 2012

I actually work for a company that produces distressed debt/high yield intelligence and research. It is a highly popular product used by all the main distressed shops and prop desks. I've even come across a few of my customers on this site.

If anyone is interested please PM me for more details. I really don't mean this comment to be a cheap sales pitch piggybacking on your post, but it is applicable as we are a very trusted resource.

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Jan 9, 2012

I'm all for learning, but I fall asleep sometimes reading though all the different Motions and Orders of bankruptcy filings.

Jan 9, 2012
Muzach:

I'm all for learning, but I fall asleep sometimes reading though all the different Motions and Orders of bankruptcy filings.

If you don't fall asleep reading that shit, you've got problems.

Jan 9, 2012

Thanks, Marcus.

Jan 9, 2012

I'm not sure distress investing is something one can pick up through action without some kind of guidance like a book (or a good mentor to learn from). Unless someone already comes from a leveraged finance or restructuring background, I really don't see how they can go about it. Some kind of background is required for the financial and legal due dilligence involved. I think it would be better to read a related book first (e.g. Distressed Debt Analysts by Stephen Moyer, or Distress Investing by Whitman) before digging into a bankruptcy you find interesting.

The distressed investors club which Marcus linked to is a very good resource, but you need to submit a distressed investing idea to be granted membership, and that's not something one can write up without some familiarity with the distressed space.

Jan 9, 2012

I'd say you can. Thats part of the learning process, you figure it out as you go along through whatever resources. Until you're applying it in a practical setting its all theory.

Also, you can get a guest membership to the distressed debt investing club, but there is a waitlist.

Jan 9, 2012

Do you mind reposting the Houlihan case study?

Jan 9, 2012

you're right marcus, it's all theory until put into a practical setting; although i do applaud the effort to do case studies trying to get more hands-on exposure, nothing will beat a gig in restructuring and understanding the process. Distressed debt opps are very limited (even more so now given the shrinking # of jobs in the distressed market) and these jobs highly favor restructuring backgrounds for obvious reasons.

Jan 9, 2012

although the best learning tool is experience in this space, reading disclosure statements and understanding distressed valuation is important. understanding the biggest variable: the bankruptcy judge is probably the most important aspect. doesn't matter how in-depth your analysis, a judge is going to interpret the law and, within certain constraints, has free reign.

A link to disclosure statements;

Jan 9, 2012

Is the Houlihan Lokey case study you're referring to the one on their website ("Buying and Selling the Troubled Company")?

Jan 9, 2012

I've been trying to get into distressed investing and recommend the distressed investors club. The old write-ups are very useful. I'm currently reading through Whitman's book and it's a good intro- has anyone read the Stephen Moyer book and if so is it any good? But yes-reading the documents seem to be the most useful it's just been a steep learning curve...

Jan 9, 2012
Marcus_Halberstram:
Omoba De Jonz O:
Marcus_Halberstram:
Muzach:

I'm all for learning, but I fall asleep sometimes reading though all the different Motions and Orders of bankruptcy filings.

If you don't fall asleep reading that shit, you've got problems.

I dunno about that, I've actually found some of them pretty interesting. Like the Chrysler fillings for example. I was a big supporter of Obama till I read those.

You read one document of one of the most historic bankruptcies in history/. Try reading documents where the docket listing all the various motions alone is 25 pages.

Fair point.

makers mark:

I've been trying to get into distressed investing and recommend the distressed investors club. The old write-ups are very useful. I'm currently reading through Whitman's book and it's a good intro- has anyone read the Stephen Moyer book and if so is it any good? But yes-reading the documents seem to be the most useful it's just been a steep learning curve...

I read Moyer's first, then read Whitman's from chapter 10 onwards. I don't see the point in reading both books end to end as there's a lot of overlapping material.

Another website I'd strongly recommend for people interested in distressed debt is debtwire.com. If you can find a login for the site (if you have a mergermarket one, the same login should work), there's an amazing abundance of information on there.

Some other free sites(blogs) I look at are
Activist Investor Alert
ABI Blog Exchange
chapter 11 Blog
WSJ.com: Bankruptcy Beat

Jan 9, 2012

Moyer's book is pretty solid. First half is like an intro to the distressed space / bankruptcy, and the second half is more investment strategies... good primer

Jan 9, 2012

Yes, I would definitely recommend Moyer's book. There is also a primer on emerging market distressed securities by Gramercy out.

Jan 9, 2012
BankingRUs9:

Yes, I would definitely recommend Moyer's book.

Can also be found here: http://books.google.at/books?id=-PPDHicEq2cC&print...

Jan 9, 2012

I'm planning to get a PhD in Accounting. Wanted to focus on Corporate Restructuring & Distressed Debt Valuation as my thesis topic. I've read Moyer's book, and it is interesting. My academic career is far too dear to me to quit to make a move in this space permanently, but I'd love to do some work in this space (as a consultant, part time, whatever). Would it possible to join the right clubs, network with the right people to do that sort of a thing?

Jan 9, 2012

The Deal also has a bankruptcy section and a running wire that updates frequently throughout the day on cases.

Jan 9, 2012

know the different types of debt (bank debt, mezz, etc.) and the positives and negatives of each, know your capital structure in terms of seniority, YTM and CY, cash flows and yes, they can ask you about DCF and multiples

Jan 9, 2012
buysideguy:

know the different types of debt (bank debt, mezz, etc.) and the positives and negatives of each, know your capital structure in terms of seniority, YTM and CY, cash flows and yes, they can ask you about DCF and multiples

Is there an interview guide or .pdf that goes into the details? I haven't taken a class on this yet, and frankly, don't think they even offer a purist's version of capital debt structures.

Jan 9, 2012

buysideguy, just to elaborate on one of your points, is "the seniority of the capital structure" also known as the capital stack? Or am I confusing the two terms?

Caveat emptor I am by no means an expert, but I think it's an important concept to know if you're interviewing for distressed debt/SSG positions because you're going to be looking at companies that are flagged and in danger of losing too much capital too quickly. In the result of bankruptcy/liquidation, you have to know which obligation is paid off first, second, third, etc. Bank debt is lowest on the capital stack and gets paid off first, then mezz debt, then subordinated loans and at the very end is equity. Liquidators end up figuring into the equation as well (I think they get paid before senior debt?). Can anyone confirm if any of this is right? I'm still new to this, so I'd be learning too hah.

OP, also understand the exit strategy of yield to put and why put options are especially important for investors in distressed situations.

Jan 9, 2012

.

Jan 9, 2012

because there is a lot of risk analysis involved, they may ask statistics and calculus questions. I know one BB does that

Jan 9, 2012

MMmonkey, good point. My answer was in reference to buyside special situations.

Jan 9, 2012

I am interviewing for a Buyside shop

Jan 9, 2012

What sort of statistics questions would you expect in Destressed Debt/SSG interviews?

Jan 9, 2012

which banks beside goldman, deutsche, Merrill, and ms have special situations groups?

Jan 9, 2012

Citi and JPM have SSGs too. I don't think Citi SSG is a buyside group though; JPM has a Global Special Opportunities Group, which is one of their PE arms.

Jan 9, 2012

honestly, almost all the banks have a special situations group that does sell side research.

and most of the banks also have their own specialsits/relativevalue/riskarb desk that acts as a buyside group.

Jan 9, 2012

partyingtoohard - same difference in terms - just wanted to point that knowing which obligation is more "senior" vs. others so as you said, bank debt gets paid off first (1st, 2nd, sometimes 3rd lien debt) then any other secured debt, sr. notes, sub debt/mezz/unsecured notes and then equity.
also glad you pointed out put options, especially putable converts (busted converts are a good place to make money)

Also what is good to know is the returns that are expected for each part of the capital structure - i.e., you want higher returns the more junior you are in the cap structure.

Also, just know how to analyze a company - multiples, etc. and know about the current credit mkt environment, etc.

hope this helps

Jan 9, 2012

Thanks a lot!

Jan 9, 2012

Thanks buyside

Jan 9, 2012

Can you move to SSG from S&T credit?

Jan 9, 2012

does CS UBS have ssg?

Jan 9, 2012

Not an interview guide but one of the best books is moyer's distessed debt and if you want a better overview of the legal implications get Branch's bankruptcy investing

Jan 9, 2012

Do you have a fundamental credit background?

Jan 9, 2012

delete

Jan 9, 2012

brief (just over 1 year) but yes

Jan 9, 2012

Kenny_Powers,

I am currently an MSF student and I want to go into distressed debt/bankruptcy investing (Think Avenue Capital or Oak tree) but in emerging/frontier markets. I have some equity research experience (doing some very basic DCF/NAV/DDM modeling) but I am not sure how to leverage that into where I want to be. I don't have any credit modeling experience or knowledge so I know I would need to get that from somewhere. My MSF program doesn't really have any classes on credit or debt securities except for a fixed income class. What material can I pick up to read that will walk me through the basics of credit analysis? I would like something to read that when done would allow me to pick a company I am interested in and be able to model it on a basic level and as I learn I can add more complexity to the model.

Lastly, In a perfect world I would be be able to go straight to a DD firm but chances are that won't happen. So I am prepared for an alternative route like HY, restructuring or SME commercial credit. To your knowledge what are the typical DD routes? Thank you.

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Jan 9, 2012

Is a 2b-3b fund really considered small? Anyways, - there have been some great posts on credit within the past year in the HF forum, I would take a look. If you don't have a fundamental credit background, I would focus on the posts which discuss the credit mindset/what to look for.

Jan 9, 2012

I suppose this concerns an event-driven fund, their investment horizon is likely to be long. Are they buying debt from banks, too ?

Here's what Citadel Capital does, for example:" Citadel's Fundamental Credit strategy seeks to gain by combining research and quantitative analysis and invests in credit instruments in a beta-neutral and relative value framework. Fundamental Credit is organized by industry sector group and aims at maximizing alpha by tracking irregular credit movement based on the underlying's issuer specific credit movement and event catalysts."
https://www.citadel.com/investment-approach/

Jan 9, 2012
BatMasterson:

I suppose this concerns an event-driven fund, their investment horizon is likely to be long. Are they buying debt from banks, too ?

...Longer than what? I typically associate event-driven with a comparatively short time-line/near-term catalyst (in any case, sooner than maturity in the case of credit-in that sense debt always has a catalyst). On the other hand event-driven is a bit like value-oriented. No one likes to make a big point to talk about their strategy of buying EXPENSIVE assets, and everyone says they invest with catalysts.

BatMasterson:

Here's what Citadel Capital does, for example:" Citadel's Fundamental Credit strategy seeks to gain by combining research and quantitative analysis and invests in credit instruments in a beta-neutral and relative value framework. Fundamental Credit is organized by industry sector group and aims at maximizing alpha by tracking irregular credit movement based on the underlying's issuer specific credit movement and event catalysts."

https://www.citadel.com/investment-approach/

Unfortunately, that boiler plate like that is not really all that helpful in terms of learning about the structure, de facto strategy/style, or day-to-day analyst responsibilities.

Jan 9, 2012

When you say you have "I have some equity research experience (doing some very basic DCF/NAV/DDM modeling)" do you mean you've had a JOB in those fields or that you're familiar with the concepts?

Distressed Debt Investing by Moyer is a good place to start for general debt concepts but won't teach you to model. Frankly I've never seen a REALLY good free modeling resource; I know people who recommend the Midnight Manual series but have never used them.

I'd also say that the technique of distressed modeling is, for the most part, not that different than equity research modeling with the exception of recovery waterfall modeling.

Distressed hiring isn't really any different from any other buyside, except with slight differences in flavors/preferences. Generally new entrants come from top banking/research programs, there's a bit of direct hiring, and a bit of drift from adjacent roles (commercial banking workout groups, general HY/credit, PE, etc).

Jan 9, 2012

Search bar. Stephen g. Moyer.

Jan 9, 2012

I don't remember the Vault guide or WSO guides having any of those questions. Thanks.

http://www.passhairdrugtest.com

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Jan 9, 2012

I also find one Distressed Debt Interview with Jon Moulton. Hope this will work for you. Moulton has efficiently discussed the basics of Distressed Debt Distressed Debt. You can find the link here http://www.stockopedia.co.uk/content/distressed-de...

Jan 9, 2012

Here's a good introductory case study:
http://www.hl.com/library/bsttcacs.pdf

Jan 9, 2012

What type of distressed shop is it? Activist/control/passive?

In any case, understand capital structure, contractual and structural subordination, how to identify a fulcrum security, valuation (not so much "walk me through a DCF" but more thinking through how you would value a company fundamentally), common HY covenants, etc...

I will say in general my interviews focused MUCH more on thought process and less on having specific answers.

What is your background?

Jan 9, 2012

The firm is activist.

I spent some time working under a fixed income analyst creating narratives and prior to that at a bankruptcy law firm searching for liens.

My first interview was definitely more about the thought process, so I am preparing for this one as if it is going to be more technical.

Thank you for the reply mrb87, could you expand on the "etc...". Unfortunately the textbook I am using as reference does not have much information so I am relying primarily on the internet.

Jan 9, 2012

I like distressed because it's a pure application of value investing-you're buying because there's a disconnect between the fundamental/intrinsic value of an asset and the market value. Some other advantages:

1) Transaction/Event Driven: distressed debt usually often has a transaction or event (bankruptcy, exchange offer, distressed recap) that drives the investment. This can also mean negotiations with management, other debt holders, and equity holders, which is something I find interesting that isn't often a part of, for example, long/short equity investing or global macro.

2) Flexible across capital structure: distressed funds can make their return a number of ways and often have a mandate to invest across the debt stack

3) Get to be part of a success story: If everything goes well, the company you invest in comes out of bankruptcy, reorganization or other financial distress stronger and with brighter prospects, and you get an attractive return.

This is a great distressed resource:
http://www.distressed-debt-investing.com/
and I recommend the Moyer Distressed Debt book if you haven't read it.

Jan 9, 2012

How did you set this up?

Jan 9, 2012

You really don't know much about finance? How much time have you got to prep?

As a corporate lawyer (who has a brother a bulge bracket Wall St. Firm where he's in the distressed debt trading group too) I can say that distressed debt is half finance and half legal. You really should asap learn something about bankruptcy law. Big part of distressed debt hedge funds is calculating what the company is worth but also the seniority of the debt. The more senior the debt, the better (speaking generally). At least show some knowledge about that. The goal is either: (1) a turnaround that makes those high yields on the distressed company's debt - which are trying to buy at "the low" in price (i.e. when market rumors of imminent insolvency drive down the trading price of the debt so low you'd be earning a 15, 20, 25% yield when it spikes down (so to make that trade you have to look at the company's finances and their ability to actually make the interest payments, plus profit if the company's financial health improves and the price of their debt rises, - like from 40 cents on the dollar wen you bought to 70 cents on the dollar if its financials improve);but #2) outcome is Ch. 11 bankruptcy where the debt holders end up owning the company. If the distressed debt is underpriced by the market, this is often a cheaper way to effectively buy equity in the company. But there are alot of moving parts and it's not for the faint hearted... you have to factor in other debt that may be senior to yours, whether your debt is secured, plus have to value the company in the event it goes Ch.11
and you end up as an equity holder. If so you have to make sure the price you're paying for the debt if converted into equity by a bankruptcy is worth far more than you paid for the debt. (The public stock will usually be worthless in this case.)

I think if you at least memorize (and hopefully have time to read up and understand the above and basic bankruptcy law and seniority of who gets the equity (ownership of the company) upon exit from the bankruptcy restructuring), and make clear you understand that the payoff can be from one of 2 options (1) debt price recovers if the company gets healthier, or (2) you ending owning stock at a cheaper price and with more safety if it's close to a Ch. 11 reorg. Then I think you'll be in good shape for a college jr. Good luck!

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Jan 9, 2012

jaime, great post. you seem very knowledgeable about the subject. distressed credit is something I'd love to get into. anyways, silver bananna

Jan 9, 2012

Read Distressed Debt Analysis by Moyer ASAP (has a kindle version now if you are time strapped). If you can internalize that book you will impress him. Maybe also skim a plan of reorganization of a recent bankruptcy.

Jan 9, 2012

I set that up through an alumni connection who works at a HF. His friends work for distressed debt funds and he referred me. Thanks guys I appreciate that a lot!

Jan 9, 2012

Second Moyer. Also check out a case study by Houlihan, I think it's called Buyijg and selling the troubled company.

Jan 9, 2012

That's badass. Just learn some basic finance and legal distress stuff from the mentioned resources and then maybe have 1-2 current distressed situations to cite. Best of luck

Jan 9, 2012

What would be the best source to find the latest distressed situations online?

Jan 9, 2012

Hard to beat Distressed Debt Investing blog

Jan 9, 2012

Also check out The Deal's online updates. Believe they have a Distressed/SS/Bankruptcy section.

Jan 9, 2012

Anyone else any insights? I would really appreciate any input!

Jan 9, 2012

.

Jan 9, 2012

I'm sort of stating the obvious here, but know how to value a company with debt, equity, warrants.

Understand different types of debt (bank debt, bonds, DIP financing) and seniority in the capital structure (1st/2nd/3rd lien, senior/subordinated, secured/unsecured).

I don't know your experience level, or if you've had any at all, but I would also recommend being able to walk through a restructuring.

Jan 9, 2012

I'd take a look at this post if you haven't seen it - I realize distressed isn't the same as restructuring, but I agree with Mon-k-ey Talks that the two would involved a somewhat similar thought process http://www.wallstreetoasis.co/ blog/how-to-prepare-for-restructuring-technical-questions. I had to split up the URL as WSO won't let me post the link since I'm a new-ish user, but you should be able to find it.

Jan 9, 2012

Yeah, because Rx is SS advisory. Distressed is BS investing. Same technical aspects for the most part

Jan 9, 2012
IB-Generalist-14:

See http://learndebt.com and http://distressed-debt-investing.com they're both solid free resources for what you'll need to know as preparation for any distressed debt HF, PE or advisory role

Is this your website that you keep plugging on multiple threads?

Jan 9, 2012

I doubt you need to know anything if the interview is through your friend.

Jan 9, 2012

but my friends father mite not be the one interviewing me. he had someone else at the fund interview a family friend of his when the guy was going for a FT job there.

Jan 9, 2012
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