I'm trying to prepare for an interview, does anyone have insight to the following?
When I'm looking at buying/selling exposure on an outstanding high yield bond and looking at relative value, I am assuming that I would look at yields on new issuances that have similar credit ratings and yields on other outstanding HY in the same industry with comparable credit ratings and then using those yields as a benchmark to derive my theoretical price. I would think that whatever price the market is quoting my bond will take precedence. Does anyone agree or disagree? Anything else I should look at from a relative value standpoint? Much appreciated.
Wtf are you talking about? Why would your bond "take precedence"? What is "buying exposure"? Why can't you articulate a question properly?
For a quick and dirty HY rel val:
Spread, credit rating, similar company/industry operations, duration/maturity (beware of call/non-call provisions). I would also throw in covenant quality, secured/unsecured. But that's digging slowly more into really deep credit val.
Finance_eh, I'll take a look and see if there's anything I could've missed. Thanks for your input. Mrb_87, if you were actually older than the age of 26 and had any real experience beyond turning comments for your associate (if you're lucky), you would've had an idea of my jargon without any rudimentary expalation.
I forgot size of bond issue. Matters a lot.
Looking back at this question, not completely sure if I agree though.
We are in this game of finance to find mispriced securities. Just because the market is telling you something doesn't necessarily mean the market is right.
It's super unscientific, but let me give you an example:
All else being equal, you have two comparable companies with nearly identical bond spreads. But take a fundamental view now...look forward...in a few months or years, will the companies still be comparable? I used to look at bonds straight up on yield and ability to repay back, damn the market movements. But these days, it's important to figure out
what might happen in the short-term.
I'm rambling - hope that helped in some way.
I have a HY credit analyst interview. Can you confirm if you look at Z-spread or spread over treasury for your relative value comparison?
No - first and most heinously of all you appear to be completely ignoring duration. You don't get to do that. Duration is like... The name of the game In many corporate credit trades.
Vanilla corporate bonds are pretty easy to price - generally they can't prepay and are just throwing off cash for x amount of days until they get taken out. Just take an IRR based on your capital charge against the security (depending on what kind of institution you are) and that's what you price to.
Just remember to price to yield to worst rather than yield to maturity because generally there's a prepay option like 6 months before maturity or whatever on corporates.
I mean... In the real world different traders trade for different institutions and therefore different reasons and care about different things, but it's very important that you keep duration in mind. The rating only matters insofar as the capital charge, which is important, sure, but the duration is integral to the bond. If you give a clue about what generic category of institution you're interviewing with I can help you think through what they'll care about.
I appreciate the sentiment, but I totally disagree, and I think you'd disagree with yourself if you thought it through.
You really think you can survive hunting for mispriced securities? Like... You're going to assume that you're just smarter than every other trader on the street and can pick up what they missed? Or maybe you don't need to be smarter, maybe you're just faster. Maybe the sell key on your Bloomberg is quicker than everybody else's. maybe it works for equities, but not fixed income.
As an institutional trader, we aren't looking for mispriced securities, those don't really exist on a large scale. We are looking for correctly priced trades that get me and my counterparty paid in the way we're supposed to get paid.
And as far as "doesn't mean the market is right" is concerned, this is actually a perfect example of what I was talking about - if there's some inherently mispriced security, sure long term investors can buy and hold, but guess what, plenty of traders are market makers at B/Ds. Do you know what happens to those guys in that case? They get run over in the middle. All the market makers try to protect themselves from that, and only a fool assumes he's smarter than everyone else, especially because corporates aren't really all that complex. The market price tends to be "right," because when it's not, the market makers get smoked, and they don't like getting smoked, so they'll re-rac their quotes, and we all have the capability to run simple IRR calcs or whatever, so we all pretty much know what something is worth.
So, yeah. If there actually were this magical tighter price that only you know about somehow, the broader "market price" would move as the market makers cover their positions.
I understand your point completely, but I think we come from different backgrounds.
I come from experience with a fund with longer-term horizon who would invest in distressed/private credit/junky illiquid credits with multi-year holding periods - the FM I worked for had enough of a track record to get investors to agree to lock-ups for his oversubscribed fund.
Yes "getting run over in the middle" sucks, but if you can get a three-bagger in a distressed credit when it gets re-org'd into equity because a lot of HY mangers have been forced to sell out of a defaulted name. Or being able to jump in and do a rescue loan for a company that you think will pay you back at par, because sentiment has shifted when you believe it's money good.
The market may be quoting you a price based not on what the "true value" is, but what people are currently looking at. There's been a lot of talk in the HY market lately about funds looking for bonds that are trading at a YTC, but will take a fundamental view for obscure XYZ reason that the bond WON'T get called. In this case, the market is right...until it gets proven wrong when traders who were pricing the bond YTC are forced to change.
Buddy, I've spent 4 years in fixed income and distressed debt and have never heard anyone talk about the market the way you do. You're the one who doesn't understand how to value bonds.
And if you want real input, though I'm not sure you'd know what to do with it:
High-grade bonds. You determine relative value based on the issuer's credit curve and comps, first and foremost. For example, if AT&T is selling a new 5-year bond and they have an off-the-run 4-year trading at 5yrT+90, and the swap curve is 2bps from 4s to 5s and Verizon's 5s-10s credit curve is 10bps, I'd probably pay T+95 if I really want the new issue (essentially no concession) -- maybe they haven't brought a new 5-year in a long time. Maybe there's a lot of telco 5-year supply, though, or AT&T wants to do a big $3bn tranche and just did a 5-year a few months ago anyways, and recent deals generally have unperformed....in this case I'd need a healthy concession priced in to compensate for all those factors, so I might only be willing to pay T+105-115, depending on how extreme they are. But like NYCBandar said, this stuff is rarely really mispriced, it's more a question of do you want to give or take the 5bps.
High-yield bonds. Much like high-grade, but you'll be doing more credit work for your relative value -- leverage (total leverage and spread per turn), interest coverage (DSCR and EBITDA/Interest), cash flow, etc... If the bond is callable (most HY bonds have a schedule), you'll want to determine the likelihood of it being called early at a premium. Depending on the issuer and where they are on the HY---Distressed spectrum, you're going to do more work on covenants and corporate structure -- is this a holdco/opco bond? What is the security package? How are rights of each creditor defined in the intercreditor agreement? How can you enforce an event of default? What are your rights in an event of default? How much more debt can be layered on top? Who are the guarantors? Who are the restricted subs? Basically you want to make sure that your claim cannot be substantially diluted through value leakage, and if all goes to shit, what you can do about it. HY bond analysis is usually done under the assumption the company is a going concern and that the debt will be repaid at maturity/call, so your IRR is just based on that.
Distressed debt. You are doing a lot less issue-level relative value work, and a lot more company valuation work -- going concern analysis and liquidation analysis. You're trying to figure out what the business is worth and if that value covers your bond, so you'll need to really drill in on the covenants, corporate structure and any guarantees to figure out how that value will get distributed and who drives the bus in a Chapter 11 scenario. Your IRR is based on whether you think the company can remain current on its debt or, if it files, what you get in an insolvency scenario (how much cash? how much debt? how much new equity? You'll need to run IRRs on all the new pieces).
typed this quickly, sure I'm missing a lot.
Are you at a place like Fidelity/Blackrock/PIMCO?
First of all, Fidelity doesn't belong in the same category as Blackrock and PIMCO.
Second of all - no. A guy I came up with in my analyst class ended up going to PIMCO, he likes it. They're a very talented bunch. Bunch of pussy ass little bitches, but smart little bitches.
Anyways, I really can't give up my anonymity here, I already expose myself by speaking the way I speak, making it obvious that I'm Indian, and making it clear where my expertise lies. I really can't play the where do you work game. I work at a place that fucking pays me, and that's all anybody needs to know.
Holy shit, calm down. I was only curious about your perspective, and "Fidelity/Blackrock/PIMCO" was shorthand for "large debt fund that buys everything." I wasn't trying to get the name of your specific employer or expose you.
On a smartphone but sb'd the post on doing rel value post. I thought that was really well done. Agree that in IG land, bonds are rarely mispriced.
Would love to pm about the credit markets sometime. Always looking to learn more about credit across the spectrum .
Dolores non qui consequatur ex. Voluptatem repellendus eius laboriosam. Fuga repellendus expedita nesciunt vitae similique voluptatum itaque quia. Est est in quo odit vero. Ad molestiae quia a iste eos aliquam nihil. Tenetur dolorem consequatur ut ut quia.
Id distinctio quidem cumque molestiae ipsum omnis laboriosam. Perferendis ea iusto laudantium minima eos. Hic nobis libero fuga voluptate vel.
Omnis laudantium nobis et aut. Omnis illo quia quia tempora tempore omnis odio. Inventore nobis consequatur ea vel quisquam. Ullam ipsa vitae sint consequuntur vel modi est. Cupiditate et animi veniam sapiente provident.
Non cumque sit quia quis delectus et. Qui qui eos repellat aut similique expedita. Nesciunt sed nesciunt magni facilis aut quidem voluptatibus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...