Q&A: 30 Year-Old Breaking In, Part II - From tiny M&A boutique to Distressed Debt
It’s been a few years since [my last post](https://www.wallstreetoasis.com/forums/30-year-ol…) and things have taken an interesting turn. I left the small advisory boutique after a year, moved to a HY/distressed trading desk where I worked as a desk analyst for 2 years, and then moved to a small HF, where I've been for the last year. Still based in London. Things have been busier than ever lately, and since the distressed debt space is becoming more visible again, I thought it'd be good timing to host a Q&A. Happy to answer any questions relating to career path, investment process, market views, lifestyle, etc, to the extent that I can.
How would you say your idea generation or pitch process is different at a distressed debt fund than a typical l/s fund, if any? Is the diligence different?
Sorry if a basic question, just trying to learn more.
delete
delete
delete
delete
delete
It would be great if you could provide more insight into the desk analyst position. It's a gateway role used by a lot of guys to break into the credit HF space but doesn't get a lot of attention on these boards. I had a few questions on that side of things:
1) How many names did you cover and was it sector specific or driven more by what's in vogue?
2) How much time do you devote to a name? Is it a 1-day quick analysis where you throw together a cap structure, a few comps and a recovery analysis or do you actually build out a full model, dive into the covenants and talk to sell-side research and management?
3) How do the economics of the desk work? I'm guessing the bank allocates a certain amount of RWA to the desk and you guys have a P&L target for the year? How much of that target is flow vs. prop?
4) How do your economics work? I'm guessing the traders get all the upside as it's their book but do you get linkage to the P&L from your ideas or is it just base + bonus and a pat on the back?
5) How tolerate are the desks around mark-to-market losses? Let's say you pitch a bond at 80 that you think will recover to par. It prints a shitty quarter and falls 20 points to 60. Eventually, say 6 months later it recovers to par. Do you get a tap on the shoulder at 60 or are you judged on how your case actually plays out? I can see getting canned if you were long Thomas Cook/Debenhams at 90 and your case was wrong but getting canned over mark-to-market losses seems a lot harsher.
Thanks!
delete
Figuring out the Fulcrum security is largely the old days of distressed (pre 2008) given the enormous growth in loan only cap structures and the amount of secured debt, particularly for sponsor owned companies. The DIP is the most strategic place in the cap structure in BK and is since the 2008 GFR is almost exclusively done by 1L lenders since no DIP loan that impairs their collateral can be approved over the objection of existing secured lenders who are entitled to adequate protection (Section 364(d)(1)(b)).
Most companies do not one a priming fight on day 1 of the BK and will take the 1L lenders DIP rather than fight in most cases. Junior creditors can try to offer cheaper terms, but rarely win a priming fight. The best they can to is get some of the more onerous terms removed from between the interim DIP order and final order. Finally most companies file with a Restructuring Support Agreement with the majority of the senior lenders laying out the terms of the restructuring prior to filing (pre arranged BK). In a prepack, voting on the Plan or Reorganization is solicited prior to filing, often as an alternative to a failed out of court consent solicitation.
IF you want to do distressed/BK, right, learn BK law and understand credit docs. The buyside doesnt really train guys and so unless you were at restructuring firm you wont know how BK works or how to read a doc. Even then,unless you were a more senior associate or above you were mostly down int he weeds modelling, not learning BK law and process.
It is an outdated concept for two reasons, One, most capital structures are loan only and two, the 1L creditors are generally in control the process as explained in my previous post unless the junior creditors are going to buy them out or can effect a "cram up" and treat them as unimpaired. However, that still will require the ability to prevent them from being the DIP lender and winning a priming fight which is not easy.
If you are interviewing for distressed jobs asking about how a firm identifies the Fulcrum security is a canned question that signals a lack of understanding of the BK process. I would ask about something more nuanced about cram ups or cram downs, or roll-up DIPs that demonstrate a better understanding of BK. But read up on it first, do not get over your skis and try and sound more knowledgeable than you are.