Credit Analyst Interview

Hi guys,

I have an upcoming interview for a credit research position at a private placement (and mezzanine) fund - Pricoa Capital - European arm of Prudential Capital. There is not really a lot of information available about credit investing and interviews on the forum and what little is there is mostly about distressed debt (something I understand Pricoa does not do at all), so maybe someone could shine a light on what I could expect at such an interview and perhaps some good materials to prepare from?

For what it's worth, I already had a quick 20 minute first round phone interview where they asked a couple of simple questions on whether I understood what they are doing, what type of companies they like to invest, etc.

Any help will be appreciated - I have some tasty silver bananas to share!

 

I would recommend taking a look at the fundamentals of credit analysis section of the CFA l1 schweser notes, as well as looking at the Handbook of Credit Risk Management which are both available for free online via torrent. If you have the time, you could also take a look at S&P's fundamentals of corporate credit analysis depending on how much time you have. Best of luck!

 

Hey man, on my phone in busy mode so can't reply to your PM. Ignore the CFA (I'm a CFA level 3 candidate) What you'll want to focus on is ratios for interest cover, ev / EBITDA to evaluate your equity cushion (ie implied equity below the mezz), cost structure of businesses and their cash flow generating ability. You have to focus on the business a lot more than for usual MM style credit due to small size of these private placement deals and need to understand the equity story when you're taking equity like risk.

A lot of the small private lenders like to get a comprehensive structure / control. These small companies are risky and so getting the right structure is very important. E.g., balancing restrictive covenants and the requisite flexibility for the business.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

Struggling with the equity cushion concept, how does it really work? Is it the leftover equity if the company had to service the debt with equity for some reason, i.e. if company goes bankrupt and has no operational cash flows (thought that really doesn't make sense to be valued by ev/ebitda)?

About the cost structure - more variable costs are better as they protect better against downside, which is what a debt investor looks for, right?

Why is there equity like risk? Because the debt payments from private placement deals will have priority almost as low as equity?

 
Best Response

It relies on multiples valuation. You have debt of 5x and the business is valued at 8x you have 3 turns of leverage under you before you debt should theoretically be impaired. So a lot more EBITDA has to vanish than let's say if the business was worth 6 times and you only had one turn below you. In numbers: EBITDA of 10. You have 50mn debt and the company is worth 80, there's 30mn of value in the equity below you which has to be eroded before your debt gets hurt, i.e., if you could sell the business today, equity would be worth 30mn. It's the equivalent of a market cap for private deals, you're trying to value to equity, and if there's value in the equity which is below you, your debt should be fine.

Generally yes. But you need to look into the concept of operational leverage - high fixed cost = greater operational leverage. The effect being, once revenues service your large fixes cost, each incremental unit of revenue goes straight to the bottom line. It results in lumpy cash flows but is helpful in a turnaround stoy.

In mezz deals you'll be subordinated to some other debt and so may be levering the business to 6x on a valuation of 8x rather than the senior debt which is at 5x. Also these companies are smaller and riskier. The debt will have priority over the equity, but you're leveraging the business to levels where the equity would normally be.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

I would say that if you don't have a lot of credit related work experience, the things you mentioned will likely be sufficient for a long or long/short credit fund. If this is a Mezz fund or something, you might get LBO questions or something of the sort. That being said, its hard to tell as you didn't provide a ton of info regarding the fund's strategy/reputation.

I imagine you are familiar with cap structure and things of that nature as well?

Definitely have a viewpoint on the credit markets (IG vs HY vs Leveraged Loans etc).

Fixed Income by Fabozzi is generally considered to be the bible of fixed income investing. Might be worth trying to get your hands on that ASAP if you haven't already, although I wouldn't freak out if you can't the whole thing in 5 days.

“Success means having the courage, the determination, and the will to become the person you believe you were meant to be”
 

They manage money for institution and some hnw clients. I don't think they invest in high yield or credit or mezz though. They basically just invest in investment grade corporate debt and government bonds.

Yes I do have a basic understanding of cap structure and effects of it. what I worry much is that everything I have learned from accounting analysis, corporate finance to investment is based on equity market. I'm not sure if you would interpret financial statement differently when you do credit analysis? I have wso and biws interview guide, are those answers such as if you have 1 financial statement, which one would you have still valid in fixed income world?

 

If you are doing fundamental analysis, the way you interpret the financials won't be too much different. The only thing is that you'll need to consider different aspects of the financials than if you were looking at equity.

Balance sheet is a major consideration in fixed income. Leverage and ability to make interest payments as well. I'm sure that there is a section on investopedia that would be worth glossing over to get the general idea.

http://www.investopedia.com/tags/bonds-and-fixed-income/article/

People demand freedom of speech as a compensation for freedom of thought which they seldom use.
 

Thanks for suggestions guys. I am very excited about this opportunity so I try to prepare well for the interview (this is also the first interview I have since graduation so I'm trying to land a job!!!)

Please let me know if you have any other suggestions. They are much appreciated!!!

 

Three most popular technical questions:

If you had one financial statement to look at it what would it be and why? (obviously cater the answer to credit worthiness) What are some of the key ratios to look at when analyzing a company? (from a credit standpoint) What happens to each financial statement when a company purchases a piece of equipment? (or depreciation increases, or anything really just as long as you know how the statements link)

 

If this is a third and final round, I would be expecting more fit questions than technical. They probably already know you can do the job, they just to make sure they can stand working with you. I would still be prepared for a few technical questions, and all the ones posted by Gulf Coast are good to know.

I am a credit analyst going into my second year, PM me if you have other questions.

 

Know key terms related to credit, as well as the different types of risk that need to be looked at (interest rate, market, etc). Expect some regular questions about yourself. Make sure to highlight what you've learned in your finance classes, and most importantly, be likeable.

 

No problem! I hope you did well and I am looking for a job as a credit analyst as well, which is why I am asking. I would much appreciate what kind of questions they asked. Thanks a lot OverCompensatedTeller :).

 

The job is going great so far. I just finished my second week. The interview was all about a case study they gave me prior to the first interview. They asked about the working capital position of the said company. They asked why I thought the business was failing, and why or why not I would lend to them.

I would make sure to have 3 or 4 things that you want to convey to the interviewer and intertwine those ideas somehow into the interview. Also have 3 good questions to ask the interviewer at the end. I would stay away from questions like where do you see the company in 10 years? I would ask more questions like how will I be evaluated? What is the training like? etc.

I gotta run, but feel free to ask more questions!

 

Be honest and have a good attitude. Be upfront with your lack of experience in finance/banking, but emphasize your aptitude and willingness to learn quickly. Just be open, and don't try to bullshit them. They'll see through it quickly. Be confident about your strengths, shrewd with your weaknesses (and mitigate or spin them, if you can), and "put it together"--you may not be their dream candidate in every way, but you're the guy on the phone with them. Show them why they should hire you.

I was in a similar situation as you a few years ago. No formal finance background in education and no finance-related work on my resume.

 

Thanks! Interview is set for 9:30 AM tomorrow. I definitely have a strong interest and willingness to lear. I grew up around and worked in commercial construction as an estimator and I want to transition to the finance side of real estate.

"There are only two opinions in this world: Mine and the wrong one." -Jeremy Clarkson
 

Bumping to see if anyone else has any insight on their interview process. Should I expect any technical questions in this initial phone interview?

"There are only two opinions in this world: Mine and the wrong one." -Jeremy Clarkson
 

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"There are only two opinions in this world: Mine and the wrong one." -Jeremy Clarkson

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