I was just wondering what's a good equity sector to specialize in with an eventual goal to land in distressed debt? I'm a junior right now and have been toying around forever with my PA and mock portfolio. I decided I wanted to have a little bit more structure than just picking 5 companies randomly from a list I created after some arbitrary screens and digging into the 10k's, I haven't gone so far as to call management (it's a paper portfolio and a tiny PA...).
My idea was probably heavily capital based industries like construction, manufacturing, recreation (Six Flags anyone?), and etc. But even with a mock portfolio, it's been hard for me to nail down fixed income assets as most simulators only offer equities.
On the flip side am I doing it all wrong? I eventually want to work in a distressed fund in the far off future (post mba, I think pretty nigh impossible post undergrad) Should I just pick up a bankruptcy law textbook instead of just playing around with equities and securities?
If it helps in any case,I picked up Moyer's book in Distressed Debt and slowly going through it as well. I might be a junior but I got lucky with AP's so I'm pretty ahead in coursework if that matters as well. What do you guys think?
Southern European countries would be a great start to looking at distressed debt. :)
Read Moyer, S&P's Fundamentals of Corporate Credit Analysis, and as many of Oaktree's memos as you can find, starting with this: http://oaktreecapital.com/MemoTree/It's%20All%20a%20Big%20Mistake_06_20…
I don't think any equity experience will prep you for work in distressed debt. Equity is almost always wiped out in restructuring. A better use of your time would be reading and taking any course you can (online lectures or on your campus) on asset valuation and capital structures. Remember that in the distressed space, bonds trade to recovery - not par - so asset valuation is essential.
Similarly, reading 10ks is a good start, but a better use of your time would probably be reading about corporate structure. Learn the difference between operating and holding companies: pick a corporation, and try to determine what motivates it having x many operating companies, why y amount of debt is issued from OpCo A instead of the HoldCo, etc. This will be hard to do without Bloomberg but you can find material out there.
Most importantly, take a course on game theory. The first thing you need to consider in a distressed scenario is who's playing, and what everyone's motives are. Who profits where, and who has the most influence? Imagine a company whose 2 main creditors are a fixed income mutual fund who bought bonds at par and a PE firm who's been scooping up debt at deep discounts. The mutual fund just wants more bonds or some recovery in cash. They don't want any changes to the business or management. What does the PE firm want? They want control. They want all current equity and convertible bond holders to get wiped out, and they want the remaining debt to be equitized so that, after restructuring, they own the majority of equity and therefore control the management of the company. If you're a distressed debt investor, you want to know who's going to win that struggle.
Awesome, yeah I keep a stash of Howard Mark's letters. It's funny you mention him because aside from Moyer's book, my professor gave me a copy of his book and this just boosted my spirits because I finally found what I want to do in finance.
And I have access to a Bloomberg, I'll give your suggestion a try.
Interesting suggestion on the game theory part, I think it's only for econ majors at my school and I'll have to audit it if I got the time in fall semester. Regardless this gave me plenty of stuff to work on, I appreciate it.
Also for post-undergrad, the ratings agencies seem to get a lot of flack and of course 2008 didn't help their reputation either, but would working in the credit analyst roles in those agencies but looked on the same level as a credit analyst at other firms such as BB?
Not sure about the view on ratings agency experience but understanding businesses as well would be important. When you buy distressed debt the greatest risk is that the bonds go from below par to 0. You should understand how to analyze a business and it's future prospects. Can the business successful execute it's business plan?
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