Hey guys. Kenny F'in Powers, Chartered F'in Analyst, here. I've been away for a while getting my sh*t straight in Mexico/starting a new job. I missed a lot of PMs and forum discussions while I was busy, and I apologize for anyone who never heard back from me in the last few months. But now I'm here, and I'm ready to teach you all how to love a woman and scold a child.
To summarize:
I've been a credit analyst for about 3 years now, first at a small fund and now at a large multi-strat fund. I've focused mostly on high-yield and distressed with some mezz and structured experience as well.
I'm open to questions about whatever people want to ask about but will prioritize stuff that's not been asked and answered a million times in other Q&As. I will do my best to get back in
Giving you one banana just to get things rolling and because these threads are always incredibly helpful.
what's the difference between high yield and distressed?
I play real sports, not try to be the best at exercising
what firm did yours lose money to the most?
Good to have you back. I'm sure it was a great honor for all of those Mexican baseball players to play with a Real American hero like you.
BTW, what do you think of New York?
I thought you were dead!?
Good to have you back.
For credit analyst interviews that you've taken or given, what were they like in terms of kinds of questions, etc? For any credit analyst interviews that you've given, what qualities or skills were you looking for?
With regards to distressed, how much involved did you get as a credit analyst on the bankruptcy details, or is that left to the more lawyery types at your fund?
Btw, your SB to MS ratio is straight up ridiculous - well done, sir.
Do you guys have a London office?
what are the top 5 ways to "love a woman" ?
Welcome back, seen your posts around and they're always money.
My only question is, can I wear the Scream mask when I'm doing you from behind?
Can you discuss how exit ops compare to that of a banker? Specifically, how do PE firms and l/s hedge funds view credit analysis?
Is credit analysis at a commercial bank an acceptable way to break into credit analysis on the investments side? Currently a graduate looking to break into credit analysis. Also, would taking a credit risk analyst position look favorable???
Appreciate the reply in advance.
-Khatar
Kenny, you used to be a big4 guy, right? How feasible is the move from big4 restructuring directly to a credit fund? I've also got a year of corporate credit under my belt.
Realistically, would this require Bschool?
I'm also interested in answers to Going Concern's questions.
Same question as Cries. And why did you chose distressed debt instead of L/S equity or event driven ?
How much of your time is spent reading indentures, facility agreements, term sheets and looking at covenants and how much of your time is spent on modelling the actual companies you look at? Do you guys use credit ratings from the agencies or use your own internal rating system? Also, how do you guys determine recoveries, just use a distressed leveal of EBITDA and a multiple to arrive at an EV value and spread it across the capital strcuture?
Thanks for this.
First slug:
The strictest definition of high yield (aka junk, aka speculative grade) is debt rated below BBB-/Baa3. Distressed is a little more nebulous but broadly means companies that have filed for bankruptcy or have a near-term risk of doing so.Credit interviews in my experience have more focus on the structural issues that make debt different from equity-things like covenants and structural subordination, etc. There are also always plenty of discussions of businesses. Quick broad summary: Tell me about a business you like Tell me about a time you liked a business but not a security Tell me about a time you liked a security but not the business Case studies are also popular.
I'll try to elaborate on this more at some point in the future.
We get fairly involved in the legal matters in the sense that you need to read the docket filings etc. At the same time you/your creditor class generally have counsel who do the real "lawyering."
Yes. 1) Doggy-style (Scream mask) 2) Doggy-style (no Scream mask) 3) Reverse Doggy-style (Scream Mask) 4) Wheelbarrow 5) Flowers sent to her office "just because" Frankly being a credit analyst at a large hedge fund IS the exit op (everyone in my group has prior buyside and non-buyside experience), but it's possible to move up and down the capital structure/across the liquidity spectrum (ie from debt to equity, from liquid to illiquid debt to PE). However it's not all that common because each tribe has its own skillsets, etc and once you're down a path people often just stick with what they know. Commercial bank credit analysis may translate to a mid-market debt fund (for example BDCs or the various mid-market/mezz specialty lenders). It's not a very common path to larger-cap/liquid credit funds. Credit risk analysis generally leads to more risk analysis (not that that's a bad thing; you can do a lot worse than being on the risk team at a big fund.)Thanks a lot.
From your experience, do you mostly use relative valuation techniques (vs peers/market/historical) to determine if a HY bond is rich or cheap, or do you also use absolute valuation to get fair intrinsic prices/spreads? If you do use absolute valuation, what kind of methods do you use? For equities it's widely discussed on how to derive a fair share price (multiples, DCF, DDM, etc) but curious what you've seen on the HY side.
What do you recommend to read to keep up with the HY market, including what's going on with specific industries (aside from the weeklies and monthlies that JPM / BC put out)?
Some say it's a price thing, below 70 / 65 => distressed.
I have been interested in FI investing for a few years, but have found it to be a far smaller industry than the equity side (i.e. fewer opportunities to break in). I've been reading that distressed debt investing blog for a few years, and the distressed space seems like a great long term goal.
How difficult is it to transition from equity research to credit research (for me, this would also be sellside to buyside)? And what can you do to demonstrate aptitude/interest in the industry?
*doubleposted.
How did you make the move from the small fund to the large fund? Was it an easy move or did you have to network your *ss off?
Also, how is your son-child?
What did you do before moving into your roles at the funds? Can you talk about this transition? (was it hard?)
Welcome back, man.
Good to see you around again La Flama Blanca
Who are the must read authorities in the distressed debt / high yield space? I know Moyer's book is considered the bible to some, and Howard Marks' memos are widely read.
What are some sources that people at your fund really respect and always make sure to read?
Thanks for doing this, I generally don't see a lot of information on this corner of the market with most people focused on equities.
Are you able to break into a credit analyst role right out of undergrad? If so which type of roles/firms would you suggest? What are the different paths to get into credit analyst at a fund from what you have seen? What would you recommend a candidate to do in order to prepare for credit interviews and skills in general?
how does comp compare to PE for lower level guys? Are you more markets focused or fundamental credit analysis?
Next batch:
Reasons I'm not a fan of that: a) Doesn't account for capital structure: the senior secured debt of a distressed company can trade well all the way through bankruptcy in some cases. b) Doesn't account for yield: a low-coupon fallen angel bond can trade at a low dollar-price in order to get an appropriate yield but not be truly distressed c) Doesn't account for broader market conditions: In 2008 lots of 1st lien, covered-all-day paper traded below that threshold due to technical market dynamics rather than true imminent-default credit risk It's always tough to compare Big 4 experiences because every group is different and every employee gets a different slate of projects. Frankly though the odds are against you (from a numbers standpoint)-I very rarely meet a Big 4 restructuring/valuation/etc employee under 30 who wouldn't rather be doing buyside work or even banking and most of them do not make the jump. Networking and finding someone who will listen to your story/understand your experience is key.In the current environment I would be very cautious about trying to use b-school to switch into front-office finance from a "less prestigious" field, especially if it's not from a truly elite school. I know smart people at HSW b-schools who couldn't even get banking internships this summer.
I kind of fell into it because of the options that were in front of me, but it's funny how fast I've become a "credit guy" in terms of mindset and I can't really imagine doing equities. Also many people would put distressed under the event-driven banner.Ballpark, 75 modeling and business issues/25 legal and structural issues but it varies on the situation. A company with a simple capital structure requires a lot less work but a messy distressed name you'd better know every indenture like the back of your hand. They really go hand in hand much of the time. For example in a company that has a stressed capital structure but a generally healthy business you need to get a feel for both the business AND the docs to get an idea how long the company can kick the can down the road and what the company's prospects are at that point.
We get rating agency reports and we follow them because they can create technical trading situations but we absolutely do not view them as a reflection of actual creditworthiness.
Valuation CAN be that simple but usually isn't. You need to really dig into how the company's operations and earnings may be impacted (positively or negatively) by bankruptcy, consider various off-balance sheet or other claims, etc. Other valuation techniques besides an EV multiple come into play depending on the industry-breakup or asset sale value for example. Figuring out cash needs, chances of a priming dip, etc is important as well.
Yeah the critical AUM mass necessary to do credit is larger than equities in my mind which means there are fewer small funds; that said, the fixed income world is actually objectively LARGER than the bond world in terms of market cap (due largely to sovereign and other non-corporate debt-there's no equivalent stock market for my personal equity value for example) though I don't know any statistics about the number of bond managers vs equities.I haven't seen many people switch from equities to credit, however if you're good it may be possible. I'd start by reading bond indentures (not just OMs but actual indentures) and credit agreements to make sure a) you're familiar with the technology and b) you actually like it.
Third batch:
Headhunter approached me. However once you're in the space, your network can really expand if you're good about building relationships. Had I decided to start looking a lot of my first moves would have been to contact analysts at other funds I'd talked to on names before. I worked in the Big 4 in valuation. I was very lucky/networked a lot/taught myself a lot about credit to make the move. At both funds I have been the only analyst who didn't either start in banking or go straight to the buyside (insurance company, mutual fund, etc). For general high-yield Acciavatti puts out great market summaries and I find that most of the big banks have good data-dump style reports on HY and distressed. Distressed gets a lot less coverage from sell-side analysts than performing credit, in part because anyone involved had better know the name as well as possible anyway so the marginal utility to an analyst of getting a sell-side report is lower.Bankruptcy Review and Debtwire are great though if it's a name you're involved in you better not be hearing about new developments from those sources.
Only a handful of hedge funds systematically recruit undergrads. Certain asset managers, in particular insurers, do though. Anything else would probably be network/relationship based.100% of the analysts in my group had prior buyside experience and other than myself (as mentioned above) they all started out in investment banking.
Know your financial modeling and valuation techniques (not just DCF/multiples/comps-distressed is one of the rare areas where other replacement cost, scrap value, etc become more relevant) and read the Moyer book on distressed. Learn to think about a business and articulate your thoughts on every facet (sector trends, company specific business issues, strengths and weaknesses, and capital structure to name a few).
Both sides of the comp question can vary but comparing like to like (megacap HF to megacap PE), base is comparable and bonus is TBD but likely slightly lower. Hours are FAR less though at least in my case.I'm not really sure how to answer that question but we're both fundamentally focused in terms of valuation and bottoms-up analysis and market focused in terms of looking for the opportunities that come to us/waiting for the right prices to buy assets.
Bond valuation is a little different than equities because you're looking for a margin of error to the downside, not trying to handicap the upside. We do a lot of absolute valuation about creditworthiness especially in stressed or distressed situations (will the company generate the cash to make the coupon payment? is probably the most absolute form of credit analysis there is) but as you probably know very few high yield companies actually retire all their debt via cash flow.
Most of the time you need to make some amount of relative value judgement versus other assets in the market (either I am comfortable taking more risk as measured by yield because I think the market is wide, or I am comfortable taking more risk on this name because I think it's a better credit than other assets yielding x, etc)
The HY monitors you mentioned are the main ones I read, and then industry stuff depends on the industry in question. Everyone has their favorite sell-side guys as well; I have a few I know who are machines about going to conferences etc in their space and talking to them after is always insightful.
Where can you find a debt pitch? Are there even any floating around?
A lot of fund managers (Berkowitz, Einhorn, Tilson) will distribute an equity slide deck once in a while...but I have never seen a bond presentation.
I'd check out the Distressed Debt Investor Club-you can sign up for guest access and see ideas on a lagging basis.
Also, plans of reorganization posted to a bankruptcy docket often advisor's presentations that are basically pitches on an ex-post-facto basis.
He's in a very different part of the fixed income space, but Gundlach from Doubleline makes awesome macro-focused presentations.
How do you scan for potential investments? Find a company you fundamentally like and wait for the price to be "right", see something trading low and investigate it?
Obviously every company is different but what primary indictors do you use to see if it's going south?
Do you guys do loan-to-own?
One of the advantages to not being a pure-distressed shop is that we look at healthy companies too. That said, we certainly screen for securities that are trading at wide yields. Certain big levered capital structures we always keep an eye on. Having relationships with bankers and advisors is important too because they will come to you with potential transactions involving smaller/mid-market companies.
In terms of finding shorts, we like to look for cyclical companies whose cap structures were created assuming that "this time is different." Also companies that have divergent trends from their comps in any number of ways (both market-derived signals and financial performance).
We're open to it but usually look to buy controlling stakes in the fulcrum rather than issue new debt to a stressed company.
I agree being multi-strat fixed income allows you to move the investments arround essentially. for example one of the big fund i talk to aims primarily to loan-to-own, if they didn't pick the fulcrum, well they get par, if they did, their strat worked (they only go in in senior so never going to get wiped out). win win.
by loan-to-own, i didn't necessarily mean DIP loans, more as you said, pick where the value breaks. is the general strat. to build up a large position in the fulcrum and take charge of the reorg, or to piggyback off bigger funds (don't know how big you guys are) who you trust?
cheers for taking your time.
How does idea generation work at your fund? Is it primarily top-down (PM gives analysts sectors and specific credits to monitor) or is it bottoms-up (analysts pitch ideas to PMs)? If it's the latter, how long did it take for you to get comfortable before you started pitching ideas at investment committee meetings?
Curious as well
curious as well
Hey guys sorry to drop the ball on this. It's generally bottoms-up with a few exceptions.
For starters, we (the analysts) have some broadly-defined and sometimes overlapping industry coverage. We are expected to be researching and sourcing new ideas in that spectrum all the time. In addition, primary issuance is a big driver of the credit markets so we're expected to be keeping on top of that. There are a few ways we start researching an idea: 1) On-going research in our sectors-names that are out there and we're watching for something to happen be it an earnings stumble, signs of an industry cycle turning, changes in relative value between competitors or within a company's cap structure, etc. I'd also include new research on seasoned non-distressed issuers here as well.
2) Capital markets opportunities (basically calls from bankers)-companies that are coming to market with an LBO, a refi, etc. Often we will get a call from bankers ahead of the road show to look at a bridge opportunity or to provide some feedback for the book. This can also include special situations such as small-to-mid-cap companies looking for a rescue loan or mezz piece (can be large cap too for example CHK's drive-by unsecured loan but that's less common), or a bank that's trying to move a large position in a stressed/distressed company (for themselves or a client) where there had previously not been enough liquidity to make it worth our work.
3) New distressed situations-companies that have finally had a straw that broke the camel's back and have seen their capital structure trade off massively. These are generally fairly easy to find/widely followed; it's easy to look at the daily/monthly losers from any of the various market reports. Occasionally we'll hear about smaller distressed situations from bankers and sales coverage; this falls somewhere between this and #2 above.
Occasionally the PM will ask someone (usually but not always the person with sector coverage) to look into an idea that they heard from a friend/peer/sell-side etc and in particular on larger distressed situations we keep an eye on what's happening even if we're not currently involved.
Hope this helps. Am happy to keep answering questions though obviously I haven't done a great job of keeping up with responses.
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