High yield/Leveraged Loan/Distressed Debt

TommyGunn's picture
TommyGunn - Certified Professional
Rank: King Kong | banana points 1,193

Hi,

Looking for someone with experience trading leveraged loans/high yield/distressed debt that could give some insight in to the role. Specifically-

  • What a typical day looks like on the desk
  • Strategies (Total noob here)
  • Best books to help learn
  • Outlook for the industry
  • Exits

Thanks,
T

Investment Banking Interview Course

  • 7,548 questions across 469 investment banks. Crowdsourced from over 500,000 members.
  • Technical, behavioral, networking, case videos, templates. All included.
  • Most comprehensive IB interview course in the world.

Comments (36)

Feb 27, 2017

As an incoming summer S&T analyst, I am interested in knowing as well.

And to add to the list: Is this a wise choice as a summer rotation? How many summer interns does this desk typically hire?

Feb 27, 2017

bump also interested

Mar 14, 2017

Bump

Mar 14, 2017

A good read that you should try to skim through is A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers. The writer was a distressed debt trader with Lehman.

Most chapters cover his time on Wall Street and the issues Lehman had, but you'll find some chapters covering distressed specifics, along with his trading success during the Delta Airlines restructuring.

    • 1
Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Mar 14, 2017

Thanks. Anyone else?

I'm also confused as to whether this desk, since it is at a BB within S&T, will operate like a special situations desk where a lot of obscure investment opportunities are considered or whether they are simply a market maker for bonds with a huge spread over the comparable risk-free security (like a higher High Yield desk).

Mar 14, 2017

Depends on how it's set up at your shop. For example GS has SSG, and then it has a distressed market making desk. Other reputable groups on the street are DB's Distressed Products Group (DPG), and BAML's Global Loans and Special Situations Group (GLSSG). I am not sure if those are ALSO the distressed market making desks at DB and BAML respectively, or if they are separated like at GS; maybe someone more familiar can provide that color.

Even if it's a "vanilla" (i.e. not SSG) distressed market making desk, the product is one of the most illiquid out there so it is going to function in large part like a prop desk anyway. I have also heard of distressed market making desks participate in workouts and restructurings (by choice, not because they got stuck with paper that defaulted).

They will probably start you out as a desk analyst (i.e. non-publishing research) where you learn how to analyze securities across the cap structure and generate trade ideas for the desk and selected clients.

    • 1
Mar 14, 2017

Sounds like it could be a combination of both depending on the client and the liquidity if the bond.

    • 1
Mar 14, 2017

So what would a trading intern be doing on a day to day basis?

Mar 14, 2017
  1. Technically, yes. But that's not what people call it. And one would be hard-pressed to argue that current leverage loans are "high yield."
  2. Bonds can be secured, senior unsecured, senior subordinated, junior subordinated, senior holdco...it just depends. Historically, bonds have been typically secured, but there's no reason this has to be the case. Similarly, loans are typically senior secured but there are instances of unsecured or holdco loans as well.
  3. Yes.
  4. Yes. Distribution companies are frequently acquired using an ABL / Senior Secured bond structure with "crossing" liens on different collateral. Often, sponsors will prefer to use a degree of subordinated debt in order to keep collateral free for future acquisitions (easier to sell secured debt down the road than unsecured/subordinated, etc)
  5. Depends on the liens. If both the bond and the loan have a 2nd lien on the same collateral, then they are ranked pari passu and will be paid out ratably on the collateral in a liquidation. The two could theoretically have a different guarantee structure which would affect payouts, though.
Mar 14, 2017

Anyone know why a company or sponsor would prefer Cov-Lite Loans vs. Senior Secured Bonds? Seems to be very similar in security, covenants, and etc.?

Mar 14, 2017
James07:

Anyone know why a company or sponsor would prefer Cov-Lite Loans vs. Senior Secured Bonds? Seems to be very similar in security, covenants, and etc.?

Usually loans are senior to bonds = cheaper.

Mar 14, 2017
James07:

Anyone know why a company or sponsor would prefer Cov-Lite Loans vs. Senior Secured Bonds? Seems to be very similar in security, covenants, and etc.?

Bonds often have several years of call protection, meaning it can be very expensive to break them, limiting ability to prepay debt or sell the company.

Mar 14, 2017
Sterling Archer:
James07:

Anyone know why a company or sponsor would prefer Cov-Lite Loans vs. Senior Secured Bonds? Seems to be very similar in security, covenants, and etc.?

Bonds often have several years of call protection, meaning it can be very expensive to break them, limiting ability to prepay debt or sell the company.

"Seriously Lana, call Kenny Loggins, cause you're in the danger zone...from Top Gun"

Mar 14, 2017

I agree with Sterling, but to expand on #2, a high yield obviously implies more risk. That risk could come from a number of factors including whether it is secured, lien status, borrower, etc. Blue-chip companies can often sell subordinated or unsecured debt without have to pay a huge price (in the form of higher yields) for it. However, a startup company with a low rating or no rating may have to sell debt at high yields even if it is senior secured.

Mar 14, 2017

Thanks Archer... so in theory if a Senior Secured Bond ranked Pari Passu with the Senior Secured Loan, assume Cove-Lite, (which I understand could happen), would it actually be cheaper to finance using Senior Secured Bonds since the creditors is trading call protection in exchange for a lower yield? I know bank debt is the cheapest form of financing, but would that ever not be the case?

Mar 14, 2017
James07:

Thanks Archer... so in theory if a Senior Secured Bond ranked Pari Passu with the Senior Secured Loan, assume Cove-Lite, (which I understand could happen), would it actually be cheaper to finance using Senior Secured Bonds since the creditors is trading call protection in exchange for a lower yield? I know bank debt is the cheapest form of financing, but would that ever not be the case?

It depends on a couple of things but typically loans will be cheaper than pari bonds.

Mar 14, 2017
Sterling Archer:
James07:

Thanks Archer... so in theory if a Senior Secured Bond ranked Pari Passu with the Senior Secured Loan, assume Cove-Lite, (which I understand could happen), would it actually be cheaper to finance using Senior Secured Bonds since the creditors is trading call protection in exchange for a lower yield? I know bank debt is the cheapest form of financing, but would that ever not be the case?

It depends on a couple of things but typically loans will be cheaper than pari bonds.

optional prepayability is valuable for the borrower. mandatory prepayments are valuable to the lender/lower risk for the lender.

a loan will usually require some mandatory prepayments which make it less risky and thus lower yielding (vs a bond).

if you had two fixed income securities that had exactly the same terms (covenants, security, mandatory prepayment, maturity, etc.) except one had call protection and the other did not, the security with the call protection would be issued at a lower interest/coupon rate regardless of whether it was called a loan or a bond

Mar 14, 2017
bankbank:
Sterling Archer:
James07:

Thanks Archer... so in theory if a Senior Secured Bond ranked Pari Passu with the Senior Secured Loan, assume Cove-Lite, (which I understand could happen), would it actually be cheaper to finance using Senior Secured Bonds since the creditors is trading call protection in exchange for a lower yield? I know bank debt is the cheapest form of financing, but would that ever not be the case?

It depends on a couple of things but typically loans will be cheaper than pari bonds.

optional prepayability is valuable for the borrower. mandatory prepayments are valuable to the lender/lower risk for the lender.

a loan will usually require some mandatory prepayments which make it less risky and thus lower yielding (vs a bond).

if you had two fixed income securities that had exactly the same terms (covenants, security, mandatory prepayment, maturity, etc.) except one had call protection and the other did not, the security with the call protection would be issued at a lower interest/coupon rate regardless of whether it was called a loan or a bond

Dude no one givs a f in secondaries because everything is going to be valued on an apples to apples basis @ yield to call, yield to worst ETC

Mar 14, 2017
DurbanDiMangus:
bankbank:
Sterling Archer:
James07:

Thanks Archer... so in theory if a Senior Secured Bond ranked Pari Passu with the Senior Secured Loan, assume Cove-Lite, (which I understand could happen), would it actually be cheaper to finance using Senior Secured Bonds since the creditors is trading call protection in exchange for a lower yield? I know bank debt is the cheapest form of financing, but would that ever not be the case?

It depends on a couple of things but typically loans will be cheaper than pari bonds.

optional prepayability is valuable for the borrower. mandatory prepayments are valuable to the lender/lower risk for the lender.

a loan will usually require some mandatory prepayments which make it less risky and thus lower yielding (vs a bond).

if you had two fixed income securities that had exactly the same terms (covenants, security, mandatory prepayment, maturity, etc.) except one had call protection and the other did not, the security with the call protection would be issued at a lower interest/coupon rate regardless of whether it was called a loan or a bond

Dude no one givs a f in secondaries because everything is going to be valued on an apples to apples basis @ yield to call, yield to worst ETC

sure. i never said anything about secondary mkt. i said the security "would be issued" meaning it's a new issue. most of the conversation has been focused on new issues so i was writing in that context.

in my quote, i made a mistake when i said "the security with the call protection would be issued at a lower interest/coupon rate." it should say "the security with the call protections would be issued at a lower yield to maturity." the cost of the debt at issue could also come in the form of OID.

Mar 14, 2017

Why do you ask these questions? SA in high yield DCM?

Mar 14, 2017
pivot1990:

Why do you ask these questions? SA in high yield DCM?

not a SA and not in DCM. just trying to familiarize myself with all debt things related...

Mar 14, 2017
  1. When people refer to HY debt they refer to bonds. But isn't a leveraged loan, HY debt as well, since both instruments are non-investment grade.
    A: HY is a category primarily referencing ratings/leverage. Under BBB-, at BB+ or equiv @ the other agencies. Various instruments in a company's capital structure can carry different ratings due to structure/seniority. For example you could have a HY co with Investment Grade ("IG") securities in its cap structure due to valuable assets/collateral and or subco guarantees putting structural support (downside protection) on THAT specific security. You can have a post-LOB HY co w/ IG/XO "lev" loans (BBB-/BB) etc.
  2. I thought HY bonds are subordinated (unsecured) and leveraged loans are senior (secured) , but now I've seen some deals in the market with HY bonds being SENIOR SECURED? Since when are HY bonds senior secured?
    A: Most often yes. However in the recent credit crisis many co's issues sr. sec. bonds to attract capital. Often times, in a benign economic environment, companies do not "need" to pledge away collateral to attract capital. Sign of the times. When the S&P is @ 700 and cos like GE CAP having trouble refi'ing, unfortunately they do. Also relevant if the company is UNIQUELY shty, like a 10x asset-light LBO gone bad, plenty of those that need to refi by providing security, you can do so thru bonds vs. loans because the mkt is deeper and syndication/execution and consequently the $ raise will be easier.
  3. Most of the HY senior secured bond issuance is used for refinancing to replace loans but can it also be used for acquisition purposes?
    A: sure, can comprise many LBO cap structures.
  4. This relates to 3 but can you have a PE acquisition with ALL the senior debt being in the form of HY senior secured bonds, instead of term loans a,b,c etc?
    A: Atypical, but sure..remember TLs are securities w/ repayment profile structurally similar to bonds (aside from the floating rate aspect, generically mandatory gradual paydown/amort vs. bullet payment @ maturity) and are a deep, tradable market that's funded (unlike many revolvers), and hence attracting capital w relative ease.
  5. What is the difference between a 2nd lien loan and HY senior secured bond? they are both senior and both have a 2nd lien security. obv one is a loan and the other is a bond but apart from that they seem very similar similar.
    A: They are similar but could differ in coupon, seniority, collateral, and amount out$ which affects how liquid the instrument is in the mkt. Remember most TLs are floating rate and most HY bonds are fixed rate, so they will trade differently and therefore attract different sorts and amounts of buyers/capital depending on exogenous factors.
Mar 14, 2017
fomc:
  1. What is the difference between a 2nd lien loan and HY senior secured bond? they are both senior and both have a 2nd lien security. obv one is a loan and the other is a bond but apart from that they seem very similar similar.

secured HY can be 1st lien as well.

Mar 14, 2017
bankbank:
fomc:
  1. What is the difference between a 2nd lien loan and HY senior secured bond? they are both senior and both have a 2nd lien security. obv one is a loan and the other is a bond but apart from that they seem very similar similar.

secured HY can be 1st lien as well.

And 3rd lien !

Mar 14, 2017

and 7th liens and 5th priority guarantees LOL

Mar 14, 2017

great thread

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Mar 14, 2017

good luck getting a job in Lev Fin, but that sounds like where you want to be...

Mar 14, 2017

salemen dont stay as long

HY traders need to stay longer bc they dont have time during the day to read thru 10-ks etc to keep up on companies and yes HY is a lot more complex due to issues related to covenants, default, recoveries, etc.

Mar 14, 2017

Most (all?) major banks have high-yield syndicated loan desks separate from bonds.

Mar 14, 2017
Oct 2, 2018

At least conversationally fluent in English, Spanish, Portuguese, French, and Russian