High yield/Leveraged Loan/Distressed Debt

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

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Comments (36)

Mar 14, 2017 - 9:58pm

Distressed Debt Trading... Help?! (Originally Posted: 06/12/2014)

Hey guys, I got placed on a distressed trading desk for my S&T internship at a BB. I was gunning for something macro but this will be a good learning experience nonetheless. I was wondering if anyone could provide insight on what I'll be doing as an intern at such a desk? What will the hours be like? What should I brush up on/read over the weekend to make sure I hit the ground running?

Personally, my accounting isn't very strong at all as I come from an engineering background. I have read that these desks prefer people with IBD/restructuring experience so I'm not sure why I got placed here.

Mar 14, 2017 - 9:59pm

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.

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Mar 14, 2017 - 10:00pm

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 - 10:03pm

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.

Mar 14, 2017 - 10:04pm

Few questions regarding HY (Originally Posted: 03/30/2011)

  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.

  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?

  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?

  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?

  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.

Mar 14, 2017 - 10:05pm
  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 - 10:07pm

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 - 10:10pm

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 - 10:11pm
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 - 10:14pm
  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 - 10:16pm
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 - 10:19pm
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 - 10:23pm

High-Yield and Restructured Debt Career Question (Originally Posted: 03/07/2010)

Hello,

I have a B.S. Electrical Engineering , a Masters in Financial Engineering from a top school, and I am a CFA Level III candidate. My experience includes a stint at a mid-market private equity firm and I am currently at a Big-4 accounting firm in their Valuation division.

Currently I………..specialize in debt – mainly high-yield and preferred but also senior unsecured and liens. Because of my quant skill set and the poor economy, I value a lot of restructured debt with warrant kickers, convertible perpetual preferred with soft calls, debt with sliding calls, secured loans that are not fully covered, beneficial interest of financial guarantees, convertible preferred, convertible bonds etc. I've done normal DCF's and worked with risk-neutral pricing models.

I would like to continue working with these instruments and have noticed that companies often do not understand the structure of these instruments and their actual value.

In the Future….. I would like to go back to investment management, preferably with a long/short debt fund.

My question…….. Given that I do not want to work on fairness opinions, but instead on the structuring side of these instruments, what is a logical place to start looking? I am not interested in M&A or taking public companies at all. Would an investment bank's leveraged finance or restructuring group fit the bill? I have a gut feeling that they do not necessarily care/know about the quantitative skill set. Also, my path is not traditional by any means.

Also, ideally down the line I would like to go back to investment management in a long/short debt fund specializing in high-yield and restructured debt that has both fundamental and quant analysis. I was thinking it would really help to work on structuring the transactions, but I would like to know what people think of.

Current situation --> Hedge fund long/short debt
Current situation --> some i-bank function --> hedge fund.

I am talking long term here and not a two year horizon for exit ops for where the firm will place. Also, I'm not particularly interested in a BB. I just want to work with these instruments and whichever firm is reasonably positioned in this space is one that I would consider.

Thanks for any helpful advice.

Mar 14, 2017 - 10:25pm

High Yield Trading (Originally Posted: 05/21/2008)

I've noticed that High Yield Traders in both cash and derivatives tend to work pretty long hours compared to the rest of the floor. Why is that? Routinely I notice them there later past 7,8, and sometimes 9pm. Is High Yield that much more time intensive compared to say High Grade as a prodcut to trade? Is sales equally as time requisite?

Mar 14, 2017 - 10:26pm

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 - 10:28pm

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

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