Is HY bond/leveraged loan research more technical/quantitative than equity research?
TLDR:
I enjoy quantitative/technical/fact-based research. Hence, I think I would be a better fit for a FO role requiring more emphasis on analyses based on more quantitative/fact-based topics, e.g., contractual cash flows, spreads, covenants, relative to more qualitatitve/guess work topics, e.g., will this technology be the new thing, will the company fall behind competitor's due to poor management. Current impression is that HY/leveraged loan research has a bit more of the former relative to equity research, hence why I imagine a role in HY bonds/leveraged loans investing would be a better fit for me. What do you think?
I currently work as a market risk analyst in S&T, and I am considering changing career paths to a role in the FO.
Due to my interest in analyzing numbers and working with IT tools such as Excel, VBA, SQL, Python etc., I am inclined to think that a FO role requiring analysis on more "technical things" would suit me well (I know this sounds a bit fluffy but I guess what I mean is analysis based on numbers and facts and less on qualitative things).
My impression is that HY bond/leveraged loan research has some similarities with equity research, while at the same time not being completely similar. Some of the things that makes me think the former perhaps has a bit more of a technical twist to it includes:
1) Bonds and loans are based on contractual agreements, e.g.., everything from notional, term, interest rate, covenants etc. is agreed upon. This, to me, makes credit more "technical" because it is based on facts and tangible things.
2) While both equity and credit research involves an analysis of the operations of the company as well as the industry (which I generally view as slightly less exciting), I imagine that an equity researcher would spend relatively more time on this, since they are more involved with the upside than a credit researcher is (an oversimplification: a credit researcher stops his research when he/she believes that the company will be able to pay back the debt, while an equity researcher must also evaluate just how much upside there may be and hence, must form an opinion on, e.g., how much a technology may impact the industry).
3) Debt also invites for things like looking at spreads to Treasuries, CDS spreads, general level of interest rates, measuring BPV etc.
Do you think HY bonds/leveraged loans research is somewhat more quantitative in nature than equity research?
Based on the most helpful WSO content, it does seem that high-yield (HY) bond and leveraged loan research could be more quantitative and technical compared to equity research. Here's a breakdown of why this might be the case:
Contractual Cash Flows: HY bonds and leveraged loans are based on contractual agreements that define notional amounts, terms, interest rates, and covenants. This contractual nature lends itself to a more quantitative analysis as you are dealing with specific numbers and legal agreements.
Covenants Analysis: The analysis of covenants, which are protective measures for lenders in debt agreements, is a technical aspect unique to credit research. It requires a detailed understanding of the terms and conditions that govern the debt issuance.
Creditworthiness Assessment: Credit research focuses on the borrower's ability to meet debt obligations, which involves analyzing financial metrics and ratios that are inherently quantitative, such as interest coverage ratios, leverage ratios, and liquidity ratios.
Market Metrics: Credit research often involves looking at spreads to Treasuries, credit default swap (CDS) spreads, and the general level of interest rates. These market-driven metrics are quantitatively measured and require a technical understanding of the debt markets.
Upside Potential vs. Default Risk: Equity research often involves assessing the potential upside of a company's stock, which can include more qualitative factors like management quality and market trends. In contrast, credit research typically focuses on assessing the risk of default, which is more about ensuring the return of principal and interest, thus leaning more on quantitative analysis.
Valuation Models: While both equity and credit research use valuation models, credit models are more focused on the ability to pay back debt, which is a more straightforward, numbers-driven analysis compared to equity valuation models that may include more assumptions and projections about future growth.
Given your interest in quantitative and technical research, and your background in market risk analysis with proficiency in tools like Excel, VBA, SQL, and Python, a role in HY bond/leveraged loan research could indeed be a good fit for you. It aligns with your preference for analysis based on numbers and facts, and it leverages your technical skills.
Sources: Credit Hedge Fund opportunities, Overview of Leveraged Finance, https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, How to Prepare for Restructuring Technical Questions, Restructuring technicals and their difficulty
* I am pretty new to this space so defer to those with more experience *
Having never worked in equity research, I cannot comment on which is more quantitative. With that said, FI analysts evaluate the same fundamentals as the equities guys (business characteristics, competitive positioning, etc.), although we may come to different conclusions (super high growth business segment / opportunity may be interesting from an equity perspective, but from a credit perspective may signal an erosion in EBITDA margins and FCF in the short term). The research process is identical to equities for the most part, but you also tack on relative value (pricing risk across the capital structure of similar companies) and covenant analysis (checking for any egregious definitions or add-backs, calculating incremental debt capacity, is the company getting credit for results it has not achieved, etc.).
While you cannot divorce yourself from some of the technical considerations you listed above, those are for the most part left to traders and PMs. Technicals are certainly important, and I would argue that the best research analysts act like junior PMs by taking them into account while forming a thesis, but they are by no means the core part of the job. Your job will be to analyze companies.
With regards to, "requiring more emphasis on analyses based on more quantitative/fact-based topics, e.g., contractual cash flows, spreads, covenants, relative to more qualitative/guess work topics, e.g., will this technology be the new thing, will the company fall behind competitor's due to poor management", you will do both. It is not one or the other. The fundamentals determine whether you would invest, and the technicals determine whether you do invest. No different than with fundamental equities where the degree of mispricing matters only after business quality is established.
Based on what you described above, it seems like a trading or portfolio analysis role might be worth exploring. At least at my firm, these guys are the ones who use non-Excel "IT tools" and spend their time checking the temperature of the market.
Thanks for the insight.
I always find myself interested in the "finance" aspect of things, e.g., analyzing numbers in a financial statement, assessing how much leverage is too much for a company etc. At the same time, the idea of trying to understand what the competitive position of a steel company is in its industry, whether they are running their operations efficiently etc. just sounds so boring to me. It might be fun to do once or twice or perhaps for a company I am familiar with but other than that, I dont think it would suit me to do this kind of analyses. Do you reckon this would make me a poor match for both equity and HY/LL research related roles? What about IB?
Also, what would a trading or portfolio analysis role entail? And what would the exit opps be?
Yes, poor match for anything front office in the realm of corporate finance.
You can't "calculate" how much leverage is appropriate, there is a feel component based on your fundamental analysis based on things discussed above.
Maybe look at trading/quant roles if this is what you are interested in.
Yea, sounds like any fundamental research role is going to be a slog for you. I would imagine that IB is the same. You cannot value a company without having a view on its prospects, which do depend on the industry it is in and its positioning relative to peers. I would say the same is true of determining what a company's debt capacity is.
There is a trading forum on here so I would probably look there for a higher quality answer. I have only spent a limited amount of time with non-RAs. At my company, traders send out morning and evening updates on technicals, like inflows and outflows, spreads by rating, default rates, where buying/selling volume are coming from, new issuances, etc. Following credit reviews, they are responsible for sourcing investments and buying and selling (which involves dealing with counterparties at investment banks). This job is much faster paced than anything research or M&A professionals do. For portfolio analysis, it is managing different client mandates, assisting in portfolio construction, overseeing allocation across portfolios, handling client requests for information, and putting on relative value trades.
Depending on the firm, research, trading, and portfolio analysis can be paths to a PM role. At other shops, like PIMCO I believe, these are all separate tracks.
If your interest lies more on the technical/quantitative side of credit you could always focus on macro credit. That side of the biz is more focused on for example playing bond-CDS basis, playing skew in CDX, having a view on credit vol (either using ETF or CDX options), playing cross geography relative value (i.e. Euro IG cheap to US IG), or even more systematic credit type shops
This does sound interesting, although I haven't seen too many funds run this type of strategy (macro credit).
I guess one would be looking at macro variables like GDP growth, unemployment rates, inflation rates etc. in this type of role?
Structured credit (ABS, MBS, etc) might be a better fit. Less qualitative inputs and more math-heavy
I thought about structured credit actually. However, what I get from reading these forums is also that it is quite a niche area to be in, i.e., exit opps are limited.
What type of analysis would someone in structured credit do? What kind of input would they need?
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