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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Editions
- Sprache: Englisch
Prepare for or enhance a career investing in the credit markets with this authoritative guide. The leveraged credit market is currently valued at over $4 trillion and is one of the fastest-growing asset classes, fueling demand for well-trained credit analysts. The Credit Investor's Handbook: Leveraged Loans, High Yield Bonds, and Distressed Debt is the definitive guide for young investment professionals embarking on a career investing in the leveraged credit markets - whether public, private, performing, or distressed. Experienced professionals will also immensely benefit from this guide as they refine their investment skills. Michael Gatto has twenty-five years of investing experience in the debt markets at Silver Point Capital (a $20 billion credit-focused fund) and Goldman Sachs' Special Situations Group. Furthermore, he is an adjunct professor at Columbia Business School and Fordham University's Gabelli School of Business. Michael brings these experiences together in this comprehensive manual, teaching the skills to succeed in the dynamic and complex credit markets. Michael brings highly complex case studies to life using decades of his first-hand war stories and combines them with reflections from leading industry professionals, often infused with humor, to make the book accessible, readable, and fun. Michael's seven-step credit analysis process will prepare you for a career in credit investing at the top buy-side and sell-side firms on Wall Street by teaching you the technical skills needed to invest in the debt markets. Whether you are analyzing a loan origination in the private debt market, a new issue of a broadly syndicated loan (BSL), a high-yield bond (HY), or a secondary trade, the comprehensive knowledge gained from this book will equip you to make well-founded investment recommendations. Additionally, an entire section devoted to distressed debt investing incorporates a practitioner's perspective on the nuances of bankruptcy and restructurings to develop strategies to profit from opportunities in this opaque market. In clear, straightforward terms accessible to the layperson, Michael explains strategies pursued by distressed companies such as J. Crew and Serta that have led to creditor-on-creditor violence, giving you an insider's perspective on some of the least understood transactions in the distressed arena. You will: * Gain In-Depth Knowledge: Understand the complexities of credit markets, from trading dynamics to historical credit cycles, allowing you to identify debt investment opportunities--and avoid pitfalls. * Master the Analytical Framework: Learn Michael's seven-step process for analyzing credit investments, including qualitative industry and business analysis, financial statement analysis, forecasting, corporate valuation, relative value analysis, and debt structuring. * Learn How to Write an Investment Recommendation: Review real-life credit memos to understand how analysts translate this framework into recommendations that drive investment decisions at the top credit funds. * Discover Key Concepts and Terminology: leveraged buyout financings (LBOs), trading levels (price, yields, and spreads), shorting, and credit default swaps. * Navigate Distressed Debt: Explore the strategies and nuances of distressed debt investing, including bankruptcy, subordination, creditor-on-creditor violence, and high-profile case studies from the past three decades of Chapter 11 restructurings. This book caters to finance majors pursuing investing careers, credit analysts seeking to enhance their skills, and seasoned professionals aiming to expand their expertise. Professors, researchers, lawyers, and advisors servicing the credit industry will also find immense value in this comprehensive guide.
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Dedication
Disclaimer
Foreword
Acknowledgments
About the Author
About the Editor
Preface
MY STORY
NOTE
Introduction: Structure of the Bookintroduction
BOOK STRUCTURE
NOTE
PART One: Building Blocks of the Leveraged Credit Markets
CHAPTER 1: Description and History of the Leveraged Finance Markets
FINANCING A COMPANY: WHY USE DEBT?
WHAT IS LEVERAGED CREDIT?
GROWTH IN THE LEVERAGED CREDIT MARKET
THE HIGH YIELD BOND MARKET
THE BROADLY SYNDICATED LOAN MARKET
THE PRIVATE CREDIT OR DIRECT LOAN MARKET
CHAPTER CONCLUSION
NOTES
CHAPTER 2: Credit Cycles
PAST CREDIT CYCLES
THE ASIAN FINANCIAL CRISIS AND CONTAGION EFFECT (1997–1998)
THE BURSTING OF THE DOT‐COM/TMT BUBBLE (2000–2002)
THE GLOBAL FINANCIAL CRISIS/GREAT RECESSION (2008–2009)
THE GLOBAL PANDEMIC (2020)
THE NEXT DOWNTURN? INFLATION, FED TIGHTENING, AND REGIONAL BANKING CRISIS
NOTES
CHAPTER 3: A Primer on Leveraged Credit Trading Terminology
NEW ISSUES VERSUS SECONDARY TRADES
COMPONENTS OF DEBT INVESTMENT RETURNS
IRR AND YIELDS
CALCULATING RETURN AND MULTIPLE OF MONEY
PRICING DYNAMICS—WHY A DEBT INSTRUMENT MIGHT TRADE BELOW/ABOVE ITS ISSUE PRICE
CALCULATING THE PRICE OF A BOND WHEN THE REQUIRED YIELD CHANGES
TRADING LEVELS: PRICE, YIELD, AND SPREAD
TRADING LINGO FOR SECONDARY TRADES
INVESTMENT CONCEPTS
CHAPTER CONCLUSION
NOTES
CHAPTER 4: A Primer on Leveraged Buyouts (LBOs)
WHAT IS AN LBO?
HOW DOES A PE FUND GENERATE RETURNS FOR ITS INVESTORS?
WHAT IS A SELL‐SIDE M&A PROCESS?
HOW DO PE SPONSORS MAKE MONEY?
HOW ARE LBOs FINANCED?
CHAPTER CONCLUSION
NOTES
PART Two: The Seven‐Step Process of Evaluating a Debt Investment
CHAPTER 5: Step 1 of the Credit Analysis Process: Sources and Uses
WHY IS THE COMPANY SEEKING FINANCING?
WHAT ARE THE PROPOSED SOURCES OF CAPITAL TO FUND THE FINANCING NEED?
REVOLVING CREDIT FACILITY
TERM LOANS
HIGH YIELD BONDS AND MEZZANINE (“MEZZ”) DEBT
SOURCES AND USES SECTION OF A CREDIT MEMO
CHAPTER CONCLUSION
NOTE
CHAPTER 6: Step 2 of the Credit Analysis Process: Qualitative Analysis
QUALITATIVE ANALYSIS—INDUSTRY AND BUSINESS RISK ANALYSIS
SECULARLY DECLINING INDUSTRY
ADVERSE COMPETITIVE DYNAMIC
CYCLICALITY
GOVERNMENT REGULATION
CUSTOMER CONCENTRATION RISK
PRODUCT CONCENTRATION RISK
FAD/FASHION RISK
COMMODITY RISK
QUALITATIVE ANALYSIS—SUMMARY OF INDUSTRY AND BUSINESS RISK ANALYSIS
QUALITATIVE ANALYSIS—BUSINESS STRATEGY ANALYSIS
QUALITATIVE ANALYSIS—MANAGEMENT ASSESSMENT
QUALITATIVE ANALYSIS—ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONCERNS
QUALITATIVE ANALYSIS SUMMARY
JCPENNEY CASE SETUP
END OF CHAPTER: QUALITATIVE ANALYSIS OF JCPENNEY
NOTES
CHAPTER 7: Step 3(a) of the Credit Analysis Process: Financial Statement Analysis—Profitability
PROFITABILITY ANALYSIS: SIX SUB‐STEPS
PROFITABILITY SUB‐STEP #1
PROFITABILITY SUB‐STEP #2
PROFITABILITY SUB‐STEP #3
PROFITABILITY SUB‐STEP #3 CONTINUED—WHEN REPORTED SALES ARE MISLEADING
PROFITABILITY SUB‐STEP #3 CONTINUED—WHEN REPORTED EXPENSES ARE MISLEADING
PROFITABILITY SUB‐STEP #3 CONTINUED—SUMMARY
PROFITABILITY SUB‐STEP #4
PROFITABILITY SUB‐STEP #5
PROFITABILITY SUB‐STEP #6
END OF CHAPTER: PROFITABILITY ANALYSIS OF JCPENNEY
CHAPTER CONCLUSION
NOTES
CHAPTER 8: Step 3(b) of the Credit Analysis Process: Financial Statement Analysis—Cash Flow and Liquidity
END‐OF‐CHAPTER CASH FLOW AND LIQUIDITY ANALYSIS FOR JCPENNEY
CHAPTER CONCLUSION: LAST WORD ON LIQUIDITY
NOTES
CHAPTER 9: Step 3(c) of the Credit Analysis Process: Financial Statement Analysis—Capital Structure
WHICH COMPANY IS MORE PROFITABLE?
CAPITAL STRUCTURE ANALYSIS
SUB‐STEP #1: CAPITAL STRUCTURE ANALYSIS—CAPITAL STRUCTURE TABLE
SUB‐STEP #2: CAPITAL STRUCTURE ANALYSIS—RATIOS
SUB‐STEP #3: CAPITAL STRUCTURE ANALYSIS—OFF–BALANCE SHEET OR DEBT‐LIKE INSTRUMENTS
SUB‐STEP #4: CAPITAL STRUCTURE ANALYSIS—UNDERSTAND THE COMPANY'S CREDIT RATING
SUB‐STEP #5: CAPITAL STRUCTURE ANALYSIS—DRAW CONCLUSIONS
END‐OF‐CHAPTER CAPITAL STRUCTURE ANALYSIS OF JCPENNEY
CHAPTER CONCLUSION
NOTES
CHAPTER 10: Step 4 of the Credit Analysis Process: Forecasting
FORECASTING
PREPARING A FORECAST
PREPARING A FORECAST—STEP ONE
PREPARING A FORECAST—STEP TWO
PREPARING A FORECAST—STEP THREE
PREPARING A FORECAST—STEP FOUR
PREPARING A FORECAST—STEP FIVE
PREPARING A FORECAST—STEP SIX
PREPARING A FORECAST—STEP SIX CONTINUED: BASE CASE SUMMARY AND CONCLUSIONS
PREPARING A FORECAST—STEP SIX CONTINUED: DOWNSIDE SUMMARY AND CONCLUSIONS
PREPARING A FORECASTING—STEP SEVEN
END‐OF‐CHAPTER FORECAST FOR JCP
CHAPTER CONCLUSION
NOTES
CHAPTER 11: Step 5 of the Credit Analysis Process: Corporate Valuation
CALCULATING TEV
VALUATION TECHNIQUE #1: COMPARABLE COMPANY ANALYSIS
EXAMPLE OF COMPARABLE COMPANY ANALYSIS—VCC
VALUATION TECHNIQUE #2: PRECEDENT TRANSACTION ANALYSIS
EXAMPLE OF PRECEDENT TRANSACTION ANALYSIS—VCC
VALUATION TECHNIQUE #3: DISCOUNTED CASH FLOW (DCF) ANALYSIS
EXAMPLE OF DCF ANALYSIS—VCC
VALUATION TECHNIQUE #4: LIQUIDATION ANALYSIS (ASSET OR COLLATERAL VALUATION)
EXAMPLE OF LIQUIDATION ANALYSIS—VCC
SUMMARY OF VCC VALUATION ANALYSIS
END‐OF‐CHAPTER VALUATION ANALYSIS FOR JCPENNEY
CHAPTER CONCLUSION
NOTES
CHAPTER 12: Step 6 of the Credit Analysis Process: Structuring and Documentation
STRUCTURE AND DOCUMENTATION—GENERAL TERMS
STRUCTURE AND DOCUMENTATION—COLLATERAL
STRUCTURE AND DOCUMENTATION—COVENANTS
STRUCTURE AND DOCUMENTATION—AMENDMENTS
END‐OF‐CHAPTER STRUCTURE AND DOCUMENTATION ANALYSIS OF JCPENNEY
CHAPTER CONCLUSION
THE SEVEN‐STEP PROCESS: SUMMARY OF STEPS TWO THROUGH SIX
NOTES
CHAPTER 13: Step 7 of the Credit Analysis Process: Preparing an Investment Recommendation and Credit Committee Memo
Sample Teaser/Screening Memo #1 Private Loan Origination Valves Controls Company, LLC
Valves Controls Company, LLC (“VCC” or the “Company”)
DEAL SUMMARY
DEAL TERMS
COMPANY SUMMARY
INVESTMENT HIGHLIGHTS
INVESTMENT RISKS
DEAL TEAM RECOMMENDATION
NOTES
Sample Full Credit Memo #1 Private Loan Origination Valves Controls Company, LLC
Valves Controls Company, LLC (“VCC” or the “Company”)
EXECUTIVE SUMMARY
DIRECT PRIVATE LOAN ORIGINATION OPPORTUNITY
CREDIT INVESTMENT THESIS AND RECOMMENDATION
INDUSTRY OVERVIEW
COMPANY OVERVIEW
MANAGEMENT
FINANCIAL STATEMENT ANALYSIS
KEY RISKS AND MITIGANTS
RELATIVE VALUE ANALYSIS
NOTES
Sample Teaser/Screening Memo #2 Public Bond Deal HCA Leveraged Buyout Financing
HCA Inc. (“HCA” or the “Company”)
DEAL SUMMARY
DEAL TERMS
COMPANY SUMMARY
INVESTMENT HIGHLIGHTS
INVESTMENT RISKS
DEAL TEAM RECOMMENDATION
PRO FORMA CAPITAL STRUCTURE
NOTE
Sample Full Credit Memo #2 Public Bond Deal HCA Leveraged Buyout Financing
HCA Inc. (“HCA” or the “Company”)
EXECUTIVE SUMMARY
PRO FORMA CAPITAL STRUCTURE
CREDIT INVESTMENT THESIS AND RECOMMENDATION
INDUSTRY OVERVIEW
COMPANY OVERVIEW
MANAGEMENT
FINANCIAL STATEMENT ANALYSIS
KEY RISKS AND MITIGANTS
FORECAST
STRUCTURE AND DOCUMENTATION ANALYSIS
RETURN PROFILE / RELATIVE VALUE ANALYSIS
COMMENTARY ON RELATIVE VALUE ANALYSIS
APPENDIX 1: PEER GROUP ANALYSIS (2005)
THE FOLLOWING IS A POSTMORTEM ON THE HCA BOND DEAL
NOTES
PART Three: Distressed Debt Investing
CHAPTER 14: Introduction to Distressed Debt Investing
WHAT IS DISTRESSED DEBT INVESTING?
HOW DO DISTRESSED DEBT INVESTORS DIFFER FROM PRIVATE EQUITY AND VALUE EQUITY INVESTORS?
WHAT ARE OTHER DISTRESSED DEBT INVESTING STRATEGIES?
PART III—DISTRESSED DEBT INVESTING ROAD MAP
NOTE
CHAPTER 15: Bankruptcy 101
WHY DO COMPANIES FILE FOR BANKRUPTCY?
WHAT ARE THE TYPES OF BANKRUPTCY FILINGS?
WHAT IS THE CHAPTER 11 BANKRUPTCY PROCESS?
THE BANKRUPTCY PROCESS, DISTILLED
FIRST DAY MOTIONS
FORMATION OF COMMITTEES
FIXING OPERATIONAL PROBLEMS, INCLUDING COST‐CUTTING
FORMULATION OF A PLAN OF REORGANIZATION (POR)
NEGOTIATIONS/VOTE ON POR
CONFIRMATION
EMERGENCE
SUMMARY OF BENEFITS AND COSTS OF CHAPTER 11
CHAPTER CONCLUSION
NOTES
CHAPTER 16: Bankruptcy Fights
BANKRUPTCY FIGHTS
VALUATION FIGHTS
CREDIT BIDS AND 363 ASSET SALE PROCESS
AVOIDANCE ACTIONS
EQUITABLE SUBORDINATION
LENDER LIABILITY
CHAPTER CONCLUSION
NOTES
CHAPTER 17: How Subordination Works in Bankruptcy
TIME SUBORDINATION
CONTRACTUAL SUBORDINATION
STRUCTURAL SUBORDINATION
SUBSTANTIVE CONSOLIDATION
DOUBLE DIP CLAIMS
CHAPTER CONCLUSION
NOTES
CHAPTER 18: Liability Management and Creditor‐on‐Creditor Violence
ASSET‐STRIPPING, OR GETTING “J. SCREWED”
UPTIERING, OR GETTING “SERTA'D”
CREDIT DEFAULT SWAPS (CDS)—MANUFACTURED DEFAULTS
CHAPTER CONCLUSION
NOTE
CHAPTER 19: Making Money in Distressed Situations
NEW FINANCING FOR COMPANIES THAT CAN'T ACCESS THE TRADITIONAL CREDIT MARKETS
SPREAD TIGHTENING TRADES
DISTRESSED FOR CONTROL TRADES
FUNDAMENTAL VALUE PLAYS
CAPITAL STRUCTURE ARBITRAGE
TRADE CLAIMS AND VENDOR PUTS
LIQUIDATIONS
UNIQUE SPECIAL SITUATIONS TRADES
END OF CHAPTER: JCPENNEY TRADE IDEAS—TRADE #1
END OF CHAPTER: JCPENNEY TRADE IDEAS—TRADE #2
END OF CHAPTER: JCPENNEY TRADE IDEAS—TRADE #3
CHAPTER CONCLUSION
NOTES
Closing Comment
CHAPTER 20: My Closing Comment
Appendix
Appendix: The Quinn Case Study
FRAMING QUESTIONS
CASE
Index
End User License Agreement
List of Illustrations
Introduction
FIGURE I.1 The Seven‐Step Process of Evaluating a Debt Instrument
Chapter 1
FIGURE 1.1 Risk Categories of Corporate Debt
FIGURE 1.2 Bond Rating Scale
FIGURE 1.3 Leveraged Credit Sub‐Markets
FIGURE 1.4 Total High Yield and Leveraged Loan Market Size
FIGURE 1.5 Global Corporate Average Cumulative Default Rates (1981–2021)
FIGURE 1.6 Benefits of the High Yield Market
FIGURE 1.7 CLO Transaction Summary
FIGURE 1.8 Private Credit as a Share of Leveraged Finance
Chapter 2
FIGURE 2.1 Phases of the Credit Cycle
FIGURE 2.2 Past Credit Cycles
FIGURE 2.3 Largest Bankruptcies of the 2000–2002 Credit Cycle
FIGURE 2.4 Largest Corporate Bankruptcies in History
Chapter 3
FIGURE 3.1 Primer on Leveraged Credit Terminology and Concepts
FIGURE 3.2 Components of Return
FIGURE 3.3 Relationship between Price and Yield
FIGURE 3.4 Price and Yield Dynamics
FIGURE 3.5 Calculating Return Using “Yield” and “IRR” Functions in Excel
FIGURE 3.6 Reasons for Debt to Trade Down in Price
FIGURE 3.7 Calculating Price Using “Price” and “PV” Functions in Excel
FIGURE 3.8 Measures Used to Describe Bond Valuation
FIGURE 3.9 Terminology for Secondary Trades
FIGURE 3.10 Short Selling Process
Chapter 4
FIGURE 4.1 Key Terminology
FIGURE 4.2 Traditional Characteristics of a Strong LBO Candidate
FIGURE 4.3 PE Goals during the Investment Period
FIGURE 4.4 PE Goals during Harvest Period
FIGURE 4.5 The M&A Process
FIGURE 4.6 PE Fund Structure
FIGURE 4.7 General Partner's Profits
FIGURE 4.8 Types of Financing Used in LBO Transactions
FIGURE 4.9 Private Credit as a Share of Leveraged Finance
Chapter 5
FIGURE 5.1 The Seven‐Step Process of Evaluating a Debt Instrument
FIGURE 5.2 Seven Primary Reasons a Company Issues Debt
FIGURE 5.3 Common Types of Debt Instruments
FIGURE 5.4 Three Primary Purposes of a Revolver
FIGURE 5.5 Sources and Uses for VCC Loan Origination (in $ millions)
FIGURE 5.6 Sources and Uses for HCA LBO (in $ millions)
Chapter 6
FIGURE 6.1 The Seven‐Step Process of Evaluating a Debt Instrument
FIGURE 6.2 Common Qualitative Risks
FIGURE 6.3 Industry Classification by Level of Competition and Risk
FIGURE 6.4 Types of Cyclicality
FIGURE 6.5 License Due Diligence in the Gaming Sector
FIGURE 6.6 Government‐Related Due Diligence in the Healthcare Sector
FIGURE 6.7 Follow‐Up Analysis for Customer Concentration
FIGURE 6.8 Product Concentration Questions
FIGURE 6.9 Fad/Fashion Risk Questions
FIGURE 6.10 Commodity Risk Questions
FIGURE 6.11 Michael Porter's Three Strategies
FIGURE 6.12 Michael Porter's Three Strategies (Descriptions)
FIGURE 6.13 SWOT Analysis
FIGURE 6.14 SWOT Analysis (Descriptions)
FIGURE 6.15 Key Members of Management Team
FIGURE 6.16 Qualitative Analysis Summary
Chapter 7
FIGURE 7.1 The Seven‐Step Process of Evaluating a Debt Instrument
FIGURE 7.2 Sub‐Steps to Analyze Profitability
FIGURE 7.3 Nonrecurring Items
FIGURE 7.4 MGEC Corp Income Statement
FIGURE 7.5 Worksheet for Year 3 Adjustments to Remove Nonrecurring Charges
FIGURE 7.6 Summary Adjusted Income Statement Template
FIGURE 7.7 MGEC Corp Cash Flow Statement
FIGURE 7.8 Worksheet to Calculate Adjusted EBITDA
FIGURE 7.9 MGEC Corp Quarterly Income Statement in $000s
FIGURE 7.10 Worksheet to Calculate LTM Financials
FIGURE 7.11 Summary Adjusted Income Statement for MGEC Corp
FIGURE 7.12 Key Accounting Concerns
FIGURE 7.13 Sales Red Flags
FIGURE 7.14 MGEC Corp Backlog
FIGURE 7.15 MGEC Corp Sales Growth
FIGURE 7.16 MGEC Corp Order Growth
FIGURE 7.17 MGEC Corp Book‐to‐Bill Ratio
FIGURE 7.18 Summary of Orders, Sales, and Book‐to‐Bill Ratio for TI
FIGURE 7.19 MGEC Corp Sales by Region (US and Foreign)
FIGURE 7.20 MGEC Corp Sales on a Constant Currency Basis
FIGURE 7.21 MGEC Corp Organic Sales Growth
FIGURE 7.22 Coca‐Cola Disclosure on Year‐over‐Year Changes in Revenue
FIGURE 7.23 Summary of Sales Red Flags
FIGURE 7.24 Gross Profit Margins for Three Hypothetical Jewelers
FIGURE 7.25 Cisco Inventory Days
FIGURE 7.26 Earnings Quality Questions
FIGURE 7.27 Profitability‐Related Questions
FIGURE 7.28 Gross Profit Adjustments for JCPenney
FIGURE 7.29 SG&A Adjustments for JCPenney
FIGURE 7.30 EBITDA Adjustments for JCPenney
FIGURE 7.31 JCPenney Historical Income Statement
FIGURE 7.32 JCPenney Peer Group/Comp Analysis
FIGURE 7.33 Summary Adjusted Income Statement for JCPenney
Chapter 8
FIGURE 8.1 The Seven‐Step Process of Evaluating a Debt Instrument
FIGURE 8.2 Sub‐Steps to Analyzing Cash Flow and Liquidity
FIGURE 8.3 Static Analysis
FIGURE 8.4 Debt Maturity Schedule
FIGURE 8.5 Free Cash Flow Calculation
FIGURE 8.6 Cash Cycle and Changes in Working Capital
FIGURE 8.7 Static Analysis
FIGURE 8.8 Debt Maturity Schedule
FIGURE 8.9 FCF Calculation
FIGURE 8.10 Impact of Changes in Operating Working Capital on Cash Flow
FIGURE 8.11 Cash Conversion Cycle
FIGURE 8.12 Components of Cash Cycle
FIGURE 8.13 Calculation of JCP's Inventory Days
FIGURE 8.14 Calculation of JCP's Receivable Days
FIGURE 8.15 Calculation of JCP's Payable Days
FIGURE 8.16 Comparison of JCP and Kohl's Cash Cycles
FIGURE 8.17 Walmart's 10‐K Capex Disclosure
FIGURE 8.18 Information on Capex Disclosed in JCP's 10‐K
FIGURE 8.19 2012 Current Ratio for Walmart and JCPenney
Chapter 9
FIGURE 9.1 The Seven‐Step Process of Evaluating a Debt Instrument
FIGURE 9.2 Profitability Analysis for Two Hypothetical Companies
FIGURE 9.3 ROE for Two Hypothetical Companies
FIGURE 9.4 Operating and Financial Risk Considerations
FIGURE 9.5 Sub‐steps to Analyze a Company's Capital Structure
FIGURE 9.6 Capital Structure Table – MGEC Corp
FIGURE 9.7 Order of Priority
FIGURE 9.8 Calculation of Market‐Based Debt/EBITDA for the Unsecured Bonds
FIGURE 9.9 Calculation of Market‐Based Debt/EBITDA for the Subordinated Debt...
FIGURE 9.10 Criteria for Capital Leases
FIGURE 9.11 Safeway Lease Disclosure
FIGURE 9.12 Calculation of Safeway Leverage Ratio (with/without lease adjust...
FIGURE 9.13 Target Lease Footnote
FIGURE 9.14 Target Leverage Calculation Using 8x Methodology
FIGURE 9.15 Target Leverage Calculation Using Operating Lease Liability
FIGURE 9.16 Safeway Pension Footnote ($000,000)
FIGURE 9.17 Safeway Leverage Calculation (with/without pension adjustment)
FIGURE 9.18 Corporate Debt Rating Scale
FIGURE 9.19 Global Corporate Average Cumulative Default Rates (1981–2021)...
FIGURE 9.20 Range of Leverage Ratios
FIGURE 9.21 JCPenney's 2012 Capital Structure Table
FIGURE 9.22 JCP Coverage Ratio
FIGURE 9.23 JCP Lease Adjustment
FIGURE 9.24 JCP Pension Adjustment
FIGURE 9.25 JCP Peer Group Analysis
Chapter 10
FIGURE 10.1 The Seven‐Step Process of Evaluating a Debt Instrument
FIGURE 10.2 Sub‐Steps to Preparing a Forecast
FIGURE 10.3 TM Corp Summary Historical Financial Statements
FIGURE 10.4 Base Case Assumptions
FIGURE 10.5 Base Case Sales Assumptions for TM Corp
FIGURE 10.6 Historical and Projected COGS for TM Corp (constant percent of s...
FIGURE 10.7 Fixed versus Variable Component of COGS for TM Corp
FIGURE 10.8 Base Case Fixed and Variable COGS Projections for TM Corp
FIGURE 10.9 Fixed versus Variable Component of SG&A for TM Corp
FIGURE 10.10 Base Case Fixed and Variable SG&A Projections for TM Corp
FIGURE 10.11 Base Case Interest Projections for TM Corp
FIGURE 10.12 The Cash Cycle
FIGURE 10.13 Historical and Projected Base Case Cash Cycle for TM Corp
FIGURE 10.14 Historical and Projected Base Case PP&E for TM Corp
FIGURE 10.15 Base Case I/S and B/S Forecast for TM Corp
FIGURE 10.16 Base Case Cash Flow Forecast for TM Corp (year one)
FIGURE 10.17 Base Case Forecast for TM Corp
FIGURE 10.18 Base versus Downside Case Assumptions for TM Corp
FIGURE 10.19 Projected Ratios for TM Corp (Base Case)
FIGURE 10.20 Projected Ratios for TM Corp (Downside Case)
FIGURE 10.21 JCP Base Case Cash Flow Forecast
FIGURE 10.22 JCP Base Case Revolver Draw Forecast
FIGURE 10.23 JCP Downside Case Cash Flow Forecast
FIGURE 10.24 JCP Downside Case Revolver Draw Forecast
Chapter 11
FIGURE 11.1 The Seven‐Step Process of Evaluating a Debt Instrument
FIGURE 11.2 TEV Calculation
FIGURE 11.3 Multiples Used for Comp Analysis
FIGURE 11.4 Comp Table
FIGURE 11.5 Pros and Cons of Comparable Company Analysis
FIGURE 11.6 Comp Table for VCC
FIGURE 11.7 Pros and Cons of Precedent Transaction Analysis
FIGURE 11.8 Precedent Transaction Table
FIGURE 11.9 Precedent Transactions for VCC
FIGURE 11.10 Cash Flow Forecast Template
FIGURE 11.11 WACC Calculation
FIGURE 11.12 Present Value Calculation
FIGURE 11.13 Pros and Cons of DCF Analysis
FIGURE 11.14 VCC DCF Analysis
FIGURE 11.15 VCC Base Case Valuation Model
FIGURE 11.16 Liquidation Analysis Template
FIGURE 11.17 Pros and Cons of Liquidation Analysis
FIGURE 11.18 VCC Liquidation Analysis
FIGURE 11.19 Valuation Summary of VCC
FIGURE 11.20 JCP Observable Enterprise Value
FIGURE 11.21 JCP Valuation for Various Turnaround Scenarios
FIGURE 11.22 Comp Analysis for JCP
Source: Adapted from Capital IQ
FIGURE 11.23 WACC Calculation for JCP
Chapter 12
FIGURE 12.1 The Seven‐Step Process of Evaluating a Debt Instrument
FIGURE 12.2 General Terms of Credit Instruments
FIGURE 12.3 Types of Debt by Seniority
FIGURE 12.4 Lender Protection against Prepayment Risk
FIGURE 12.5 Most Common Covenants
FIGURE 12.6 Comparison of Structural Features of Bank Debt and High Yield Bo...
FIGURE 12.7 Summary of Key Terms of JCP Debt
Chapter 13
FIGURE 13.1 The Seven‐Step Process of Evaluating a Debt Instrument
Chapter 14
FIGURE 14.1 Distressed Debt Investing Strategies
FIGURE 14.2 Distressed Debt Investing Road Map
Chapter 15
FIGURE 15.1 Why Companies File for Bankruptcy
FIGURE 15.2 Chapter 7 and 11 Comparison
FIGURE 15.3 Types of Chapter 11 Cases
FIGURE 15.4 Chapter 11 Bankruptcy Steps
FIGURE 15.5 Key Aspects of the Bankruptcy Process
FIGURE 15.6 Examples of First‐Day Motions
FIGURE 15.7 Voting Classes in Order of Priority
FIGURE 15.8 Two Conditions for a Class of Creditors to Accept the POR
FIGURE 15.9 Two Conditions for a Class of Creditors to Accept the POR
FIGURE 15.10 Benefits of Chapter 11
Chapter 16
FIGURE 16.1 Bankruptcy Fights
FIGURE 16.2 Creditor Claims
FIGURE 16.3 Recoveries Based on a $300MM Enterprise Value
FIGURE 16.4 Recoveries Based on a $675MM Enterprise Value
FIGURE 16.5 True Economic Recoveries at a $400MM TEV but a $300MM Plan Value...
FIGURE 16.6 True Economic Recoveries at a $400MM TEV but a $675MM Plan Value...
FIGURE 16.7 Zero‐Sum Game of Bankruptcy Fights
FIGURE 16.8 Capital Structure and Trading Levels
FIGURE 16.9 Affirmative Defenses to Preference Claims
FIGURE 16.10 Fraudulent Conveyance Criteria
FIGURE 16.11 Conditions for Equitable Subordination
Chapter 17
FIGURE 17.1 Types of Subordination
FIGURE 17.2 Hypothetical Post‐Petition Capital Structure
FIGURE 17.3 Allocation of Value Among Claims (Scenario 1)
FIGURE 17.4 Allocation of Value Among Claims (Scenario 2)
FIGURE 17.5 Ara Lovin Industries' Organizational Structure
FIGURE 17.6 Ara Lovin Industries Recovery Scenarios
FIGURE 17.7 Ara Lovin Industries Recovery Scenarios with Upstream Guarantees...
FIGURE 17.8 TA Wang Company's Organizational Structure
FIGURE 17.9 TA Wang Company OpCo Liabilities
FIGURE 17.10 TA Wang Company OpCo Recoveries
FIGURE 17.11 TA Wang Company HoldCo Recovery
FIGURE 17.12 TA Wang Creditor Recoveries
FIGURE 17.13 Substantive Consolidation Recoveries
FIGURE 17.14 TA Wang Company Recovery Comparison
FIGURE 17.15 Sub Con Conditions
FIGURE 17.16 Owens Corning Capital Structure
FIGURE 17.17 Owens Corning Debt Trading Levels
FIGURE 17.18 Teich Inc. Legal Structure
FIGURE 17.19 Teich Inc. Recoveries
FIGURE 17.20 Teich Inc. Double Dip Claim Recoveries
Chapter 18
FIGURE 18.1 SU Corp Capital Structure
FIGURE 18.2 Hypothetical Corporate Structure—J. Crew Example
FIGURE 18.3 Recovery Analysis for PU Corp
FIGURE 18.4 PU Corp Recovery Analysis after Uptiering Transaction
FIGURE 18.5 Overview of CDS Transaction
FIGURE 18.6 CDS Economics and Return
FIGURE 18.7 Physical Settlement
FIGURE 18.8 Cash Settlement
FIGURE 18.9 Revised CDS Economics and Returns
FIGURE 18.10 Revised CDS Economics and Returns Taking into Account Off‐Marke...
Chapter 19
FIGURE 19.1 Distressed Debt Investing Strategies
FIGURE 19.2 Spread Tightening Trade IRR
FIGURE 19.3 Macy's Bond Spread and Spread Retracement versus Indices
FIGURE 19.4 Macy's Spread Retracement versus Other Department Stores
FIGURE 19.5 Change in Trading Levels
FIGURE 19.6 Profits and IRR on a $1 Million Trade
FIGURE 19.7 Tailored Brands Summary Performance (fiscal year end February)
FIGURE 19.8 Tailored Brands Summary Capital Structure
FIGURE 19.9 Investment Scenario Analysis
FIGURE 19.10 Hypothetical Capital Structure
FIGURE 19.11 Scenario #1 – No Recession in the Next Two Years
FIGURE 19.12 Scenario #2 – Modest Recession in the Next Two Years
FIGURE 19.13 Scenario #3 – Severe Recession in the Next Two Years
FIGURE 19.14 Recession Probability
FIGURE 19.15 Probability Weighted P&L
FIGURE 19.16 Aleris Trade Cost of Carry
FIGURE 19.17 Vendor Put Up‐Front Cost
FIGURE 19.18 Effective Cost of Trade Claims in Bankruptcy
FIGURE 19.19 Trade Claim P&L—Bankruptcy Scenario
FIGURE 19.20 Kmart Trade Claim P&L
FIGURE 19.21 Liquidation Analysis of KHA Corp
FIGURE 19.22 Recovery/Waterfall Analysis of KHA Corp
FIGURE 19.23 Real Estate Valuation of KHA Corp
FIGURE 19.24 Value of In‐the‐Money Leases of KHA Corp
FIGURE 19.25 Liquidation Cost Scenarios for KHA Corp
FIGURE 19.26 Lease Rejection Claim Scenarios for KHA Corp
FIGURE 19.27 Cost to Carry JCP Trade
FIGURE 19.28 Upside Scenarios for JCP Trade
FIGURE 19.29 JCP Trade P&L
FIGURE 19.30 One‐Year Upside IRR
FIGURE 19.31 Two‐Year Upside IRR
FIGURE 19.32 One‐Year IRR in Bankruptcy Scenario
FIGURE 19.33 Two‐Year IRR in Bankruptcy Scenario
FIGURE 19.34 Upside/Downside Analysis for JCP Stock
FIGURE 19.35 Share Price Chart
FIGURE 19.36 JCP Stock Short P&L
FIGURE 19.37 Probability‐Weighted Share Price
Guide
Cover Page
Series Page
Title Page
Copyright
Dedication
Disclaimer
Foreword
Acknowledgments
About the Author
About the Editor
Preface
Introduction: Structure of the Book
Table of Contents
Begin Reading
Appendix: The Quinn Case Study
Index
Wiley End User License Agreement
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The Credit Investor's Handbook
Leveraged Loans, High Yield Bonds, and Distressed Debt
MICHAEL A. GATTO
Copyright © 2024 by Michael Gatto. All rights reserved.
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To my wife, Mary Kay, thank you for all your support during the past 25 years. I could not have done any of this without you.
To my children, Gabriella and Matthew, it has been my greatest joy watching you grow into kind and caring young adults. You inspire me to be a better person.
To my dad, I miss your guidance and wish you were still here.
To my mom, I love you for how you raised me, Carolyn, Laura, and Julia. You taught us by example how to deal with the curve balls life throws our way. You are the best mom ever!
To my sisters, to be clear, this makes me unambiguously mom's favorite until one of you writes a book and dedicates it to her.
Finally, to all my students, you have been my inspiration to write this book.
Disclaimer
Views Expressed. All views expressed herein are those of Michael Gatto (the “Author”) as of the date set forth on the cover and do not represent the views of his current or former employers, or any entity with which the Author has ever been, is now, or will be affiliated, including without limitation, Silver Point Capital, L.P. and its affiliates (collectively, “Silver Point”).
Except as otherwise specified herein, the information contained herein is believed to be accurate as of the date set forth on the cover. No assurance is made as to its continued accuracy after such date and neither the Author nor John Wiley & Sons, Inc. (the “Publisher”) has any obligation to update any of the information provided herein. All information and views contained herein are subject to change without notice.
Informational Only; No Investment Advice; Not an Offer. The views expressed herein are for informational purposes only, and are not intended to be, and should not be, relied upon by you as an investment recommendation, in connection with any investment decision related to any investment, including investment in any investment fund or other product, or for any other purpose. This book is not intended to, and does not, constitute legal, tax, or accounting advice. This book is not an offer to sell, or a solicitation of an offer to buy, any security. Prior performance is not any form of guarantee as to future results.
References and Examples Illustrative Only. Any and all examples included herein are for illustrative and educational purposes only, and do not constitute recommendations of any kind, and are not intended to be reflective of results you can expect to achieve. Case studies of investments have been provided for discussion purposes only. As a result, any factual information, including price levels and company financial information, may be altered or changed, should not be relied upon, and is presented solely for informational and teaching purposes. These investments may be illustrative of potential investment strategies. The case studies do not discuss (and should not be interpreted to discuss) the amount of any profits or losses, realized or unrealized, in connection with the investments. There can be no assurance that the processes or analyses described can be successfully applied to other investments. None of these case studies are indicative of Silver Point's investment strategies, prior investment performance, or investment portfolios of the funds it manages. Such strategies, performance and portfolio do not reflect those of the select examples set forth herein. There can be no assurance that similar investment opportunities will be available in the future or, even if they were, that such investments would be successful. Differences in, among other things, the timing of transactions and market conditions prevailing at the time of investment may lead to different results. It should not be assumed that any of the investments discussed herein will be profitable or that other investments will have traits similar to the investments presented herein.
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Foreword
David Solomon, CEO Goldman Sachs
Long before I was the CEO of Goldman Sachs, I was a first‐year analyst in a credit training program, unaware of how important what I learned there would be to my career.
It wasn't part of the plan. When I graduated from college in May 1984, I was thinking of going to law school. But I was busy during my senior year, the idea of studying for the LSAT wasn't all that appealing to me, and once I saw my score, I decided it was time to get a job. I was rejected by most of the places I applied, including Goldman Sachs, but eventually I landed at a commercial bank called the Irving Trust Company, where for the first year my fellow recruits and I received extensive financial training.
Only later did I realize how fortunate we had been. When I first walked into Irving's New York offices in the ornate One Wall Street building, all I had was an undergraduate degree in political science. I had no formal business education to speak of, and I was more than a little intimidated. But luckily for me, we spent most of that first year taking classes taught by professors from the University of Virginia's Darden School of Business. We were essentially getting paid to get an MBA.
It was in that program that I learned how to perform credit analysis, a foundational skill for any finance professional, and I proceeded to use it at every stage of my career. After a little less than two years at Irving, I worked in high yield sales at Drexel Burnham, and later I went to Bear Stearns to lead a piece of its junk‐bond business. Then, in 1999, I joined Goldman Sachs to co‐head the Global High Yield Business Unit, leading the firm's high yield bond and bank‐loan underwriting, trading, and sales. That job put me on the path to becoming the co‐head of the Investment Banking Division.
Today, there's a huge demand among finance professionals for a do‐it‐yourself guide to credit analysis because many banks have scaled back or eliminated their training programs, and we all should be grateful that my friend Michael Gatto has answered the call. What I like about The Credit Markets Handbook is that it covers the fundamentals as well as more advanced topics such as bankruptcy and distressed debt investing, all while being easy to understand and fun to read.
You'd be hard‐pressed to find someone better qualified to write this book than Michael. I worked with him during my early years at Goldman, and I've always been impressed by his clear, analytical mind. He developed and taught credit training for several years before joining Goldman's leveraged finance division, first on the bank loan trading desk and then in the distressed debt proprietary trading business. In addition, he taught various credit courses to Goldman professionals in the US and Europe.
But perhaps his best recommendation is what he did next. In 2002, Michael left the firm to join two former Goldman partners, Ed Mule and Bob O'Shea, in launching one of the world's most successful credit investment funds, Silver Point Capital.
And now he's written a first‐rate textbook. After 39 years in finance, I can't stress enough the importance of a firm grounding in credit analysis, and if you're wondering whether this book has what you need, take it from me: you're in good hands.
David Solomon
Acknowledgments
For the last year and a half, every business call I had ended with some version of the following:
Hey, did I mention I'm writing a credit training textbook? I will send you a couple of chapters, and I would love to get your opinion.
For those with value‐added comments, it became a “no good deed goes unpunished” scenario in which I rewarded thoughtful readers with … more chapters to review. This continued until someone stopped responding to book‐related emails, which was fine because by then I had latched on to others.
In light of how many people I asked to contribute their time, feedback, and input to this book, it is inevitable that I will inadvertently leave someone out of these acknowledgements, and I apologize to any of you whose names should be here but are not.
My heartfelt thanks go out to the following people.
Ed Mulé and Bob O'Shea
, the founders of Silver Point.
Every concept covered in this book has been learned or refined during my 25 years working for you, first at Goldman Sachs and then at Silver Point. I can never thank you enough for all you have done for me, including supporting me in writing this book.
David Reganato
, Silver Point Partner and Global Head of Restructuring.
My kids joke that you are my third and favorite child, to which I respond that they are partially wrong. You took the brunt of the “Can u do me a favor?” inquiries for this book.
The other Silver Point partners:
John Abate,
Partner and Co‐Head of Trading;
J.T. Davis,
Partner and Head of Public Desk; and
Eve Teich,
Partner and Head of Investor Relations and Marketing.
Stefania Mazzuoccolo
, my amazing and wonderful assistant. Thank you for all your help, especially in designing all the graphics.
Paul Alzapiedi,
Co‐Head of Trading, Silver Point Capital
Ara Lovitt, Managing Director and Head of Research, Silver Point Capital
Steve Weiser, General Counsel, Silver Point Capital
I cannot thank each of you enough for your help throughout the process.
Ellen Carr
, my editor.
I thank you for all your hard work and contributions. Working with you was fun. I enjoyed debating how to explain complex concepts, and the only time you were wrong was your incorrect belief that my reference to Fight Club in Chapter 10 was not funny.
Josh Pearl
, coauthor of
Investment Banking
. Thank you for your guidance throughout the process.
Paul Johnson
, coauthor of
Pitch the Perfect Investment
. Thank you for convincing me to write a book.
The Wiley team:
Bill Fallon
, acquisition editor, who was a champion of this book.
Stacey Rivera, Purvi Patel, Lori Martinsek, Aldo Rosas, ArunRaj Arumugam, and Rahini Devi
. I appreciate your patience, guidance, and support throughout the process of publishing.
Various industry professionals who provided quotes, floated ideas, read chapters, and gave honest feedback. This book benefited greatly from the input of:
Daniel Aronson
, Senior Managing Director, Restructuring and Liability Management, Evercore
Carla Casella,
Managing Director, JP Morgan
Adam Cohen,
Managing Partner and Portfolio Manager, Caspian Capital
Paul Degen
, Global Head of Credit Sales, Barclay's
Phil Desantis
, Portfolio Manager, Soros Fund Management
Jack Devaney
, Partner and Head of Leveraged Finance Sales, Goldman Sachs
Rio Dhat
, Head EMEA of Leveraged Credit Trading, Citi
Dennis Dunne,
Partner and Head of Financial Restructuring, Milbank
James Ely III,
CEO, PriCap Advisors LLC
Fred Fogel
, Partner & General Counsel, The Baupost Group
Jeff Forlizzi,
Head of Corporate Credit, Security Benefit / Eldridge Industries LLC
Bob Franz,
Chief Investment Officer and Co‐Founder, Arbour Lane Capital Management
Avi Friedman,
former Co‐Head Credit Investing, Davidson Kempner Capital and Adjunct Professor, Columbia Business School
Nathaniel Furman,
Partner, Oak Hill Advisors, L.P.
Kumail Gangjee,
my first TA at Columbia Business School
Mitch Goldstein,
Partner and Co‐Head of Credit Group, Ares
RJ Grissinger
, Senior Managing Director, Centerbridge Partners
David R. Hility,
Managing Director & Co‐Head Global Restructuring, Houlihan Lokey
Donna M. Hitscherich,
Senior Lecturer and Director of the Private Equity Program, Columbia Business School
Mark Horowitz
, Managing Director, Distressed Sales, Jefferies
Matt Kahn,
former Founding Member of the Private Equity and Second Lien Lending Business, Gordon Brother Group
James Russell Kelly
, Director of the Gabelli Center for Global Security Analysis and Senior Lecturer, Fordham Gabelli School of Business
Alan Kornberg
, Of Counsel and former Co‐Chair of the Restructuring Department, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Michael Kramer
, CEO and Founding Partner, Ducera Partners
Matthew Kretzman
, Managing Director, Global Head of PE Capital Markets, H.I.G. Capital
Daniel Krueger
, Partner and Managing Director, Owl Creek Asset Management and Adjunct Professor of Business, Columbia Business School
Howard Levkowitz,
Founder and Managing Partner, Signal Hill Holdings
Richard Maybaum,
Managing Director and Co‐Head of Credit Strategies, Littlejohn & Co
Drew McKnight
, Co‐Chief Executive Officer, Fortress Investment Group
Bruce Mendelsohn,
Partner & Head of Restructuring, Perella Weinberg Partners
Michael Meyer
, Head of Global Sales and Trading, Seaport Global Holdings
Justin Murfin
, Associate Professor of Finance, Cornell University
Michael Patterson,
Governing Partner, HPS Investment Partners
Jacob Pollack
, Global Head of Credit Financing & Direct Lending, Credit Markets, J.P. Morgan
Bill Raine,
Senior Managing Director and Co‐Portfolio Manager, Contrarian Capital Management
JP Rorech
, Managing Director, Head of Distressed, Stifel Financial Corp.
Chris Santana,
Managing Principle, Co‐Founder, Monarch Alternative Capital
Damian Schaible
, Partner, Co‐Head Restructuring Group, Davis Polk
Roopesh Shah
, Senior Managing Director, Restructuring and Capital Markets Advisory, Evercore
Eric Siegert,
Senior Manager and Global Co‐Head of Financial Restructuring, Houlihan Lokey
Derron Slonecker,
Founding Partner, Ducera Partners
Steve Starker
, Co‐Founder, BTIG
Christine Victory,
my former assistant
Rob Thomas Symington,
Adjunct Professor Cornell University
Parag Vora
, Founder, HG Vora Capital Management LLC
Alan Waxman,
Co‐Founding Partner and CEO, Sixth Street
Harry Wilson
, Founder and CEO, MAEVA Group, LLC
Steven Zelin
, Partner, Global Head of Restructuring and Special Situations, PJT Partners
John Zito
, Senior Partner and Deputy CIO of Credit, Apollo Management
Silver Point employees who proofed chapters and provided significant input:
Nick Aynilian,
Director, Silver Point Capital
Matt Chilewich,
Managing Director, Consultant Relations, Silver Point Capital
Hayden Choi,
Associate, Silver Point Capital
Anthony DiNello
, Managing Director and Head of Private Credit Silver Point Capital
Joseph Fallon
, Managing Director, Silver Point Capital
Zane Feldman‐Isaksen
, Associate, Silver Point Capital
Nate Goodman,
Associate, Silver Point Capital
Carter Hass,
Director, Silver Point Capital
Kyle Hyland,
Associate, Silver Point Capital
Michael Jordan
, Managing Director, Silver Point Capital
Eric Karp,
Senior Advisor, Silver Point Capital
James Kasmarcik,
Chief Compliance Officer, Silver Point Capital
David Koziol
, Managing Director, Silver Point Capital
Matt Landry,
Vice President, Silver Point Capital
Sherman Lee
, Director, Silver Point Capital
Conor Mackie
, Director, Silver Point Capital
Alyssa Mehta,
Director, Silver Point Capital
Josh Milgrom
, Director, Silver Point Capital
Taylor Montague,
Managing Director and Head of Capital Markets, Silver Point Capital
Paul Morris
, Associate, Silver Point Capital
Jaclyn Mulé,
Associate and “grammatical genius,” Silver Point Capital
Parker O'Shea,
Associate, Silver Point Capital
Tom O'Connor,
Senior Trader, Silver Point Capital
Manjot Rana
, Managing Director, Silver Point Capital
Max Sahlins,
Associate, Silver Point Capital
Austin Saypol,
Chief Operating Officer, Silver Point Capital
Matt Sheahan
, Managing Director and Head of Underwriting, Silver Point Capital
Billal Sikander,
Managing Director, Silver Point Capital
Derek Staples,
Managing Director, Silver Point Capital
Anthony Van Dervort
, Associate, Silver Point Capital
Lu Wang,
Associate, Silver Point Capital
Jared, Weisman,
Managing Director, Silver Point Capital
Genna Zaiman
, Managing Director, Silver Point Capital
Jon Zinman,
Managing Director, Silver Point Capital
Finally, thank you to my spring 2023 Advanced Credit Class students at Fordham, who were my guinea pigs. You read my first drafts and spotted calculation errors. If there are any mistakes, it is your fault!
Olivia Bezzone
John Bollish
Grace L. Ciccone
Matthew F. Forlenza
Benjamin Goodrich
Ashley Hassell
Ricardo He
Tamar Hovsepian
Daniel Kelly
Natalia Kimmelshue
John Koutsonikolis
Richard Lazzaro
Aidan Lezynski
Matthew M. Mai
Diego MunozLedo
Henrik Murer
William Murphy
Emma Nance
Joe Nussbaum
Declan O'Donnell
Chris Owen
Patricio Pulla
Wynne Scheffler
Mitchel Selitsky
Emme Simning
Alex S. Simon
Bobby Singh
Elaine Sionov
David Smeriglio
Billy Smith III
Lois Van Weringh
Freddy von Knobelsdorff
Leo Wackerman
About the Author
Michael Gatto
Partner, Head of the Private Side Businesses
Silver Point Capital
Adjunct Professor
Columbia Business School
Fordham University's Gabelli School of Business
Michael Gatto was one of the first employees at Silver Point Capital, a credit‐focused hedge fund. After joining the firm in April 2002, he became the first non‐founding partner in January 2003 and helped grow the business from $120 million of investable capital in 2002 to approximately $23 billion. Today, he heads the firm's Private Side Businesses.
From 1999 to 2002, Michael worked at Goldman Sachs on the bank loan trading desk and then in the Special Situations Investing Business, where he focused on distressed credit.
Before joining Goldman, Michael designed and taught credit training programs for banks and investment banks. He taught at some of the world's leading financial institutions, including Citibank, CSFB, Union Bank of Switzerland (UBS), American Express Bank, Fleet, and Barclays in global financial centers such as New York, Boston, London, and Singapore, as well as more remote locations, including Bangladesh, Manila, and Cairo. Before becoming a professional credit instructor, he was a credit analyst and head of Global New Entry Training at Citibank.
Michael is also an adjunct professor at Columbia Business School and Fordham University's Gabelli School of Business, where he teaches courses on credit analysis, distressed value, and special situation investing.
Michael received an MBA from Columbia Business School and a BA in Economics from Cornell University.
To Contact the Author:
Please feel free to contact the author with any questions, comments, or suggestions at [email protected] or connect with him on LinkedIn.
About the Editor
Ellen Carr
Principal, Portfolio Manager
Barksdale Investment Management
Adjunct Professor
Columbia Business School
Ellen Carr is a principal and high yield bond portfolio manager at Barksdale Investment Management (BIM), a majority‐women‐owned investment management firm focused on investment grade and high yield fixed income. Prior to joining BIM in 2013, Ellen spent 11 years at The Capital Group as a leveraged credit analyst and portfolio manager.
Ellen is also an adjunct professor of finance at Columbia Business School, where she teaches courses on the credit cycle and cash flow forecasting. She is a regular contributor to the Financial Times and the coauthor of a book on women in investment management, Undiversified: The Big Gender Short in Investment Management.
Ellen received an MBA from the Kellogg Graduate School of Management at Northwestern University and a BA in literature from Harvard.
Preface
MY STORY
This book aims to prepare you for an investment career in the credit markets or, if you are already in the business, to enhance your skill base.
While there is a multitude of books on investing in equities, there are few books on investing in the credit markets, and to my knowledge, none as comprehensive as this one.
My unique background allows me to combine a teacher's approach with real‐world experience. For the past 25 years, I have invested in the credit markets through multiple economic cycles and global crises alongside some of the world's most successful credit investors. I have had the opportunity to learn from, mentor, teach, and manage dozens of Wall Street's brightest minds. Along the way, I developed a systematic methodology for analyzing credit.
After graduating from Columbia Business School in 1993, I started my career at Citibank, a global commercial bank just breaking into the more lucrative investment banking business that was then dominated by the likes of Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns. Citibank's main attraction was its well‐regarded credit training program: a six‐month course in the fundamentals of credit analysis that every new corporate finance hire was required to take.
In 1994, Citibank's senior management wanted to revamp its credit training program and set out to find a recent graduate of the program to spearhead the project. When asked to spend six months working on this assignment, I worried that it would set back my career. I believed the quickest path to success at the bank and on the Street was by working on deals. However, management assured me that if I did this assignment, I could choose my next rotation, so I agreed to focus on revamping Citibank's credit training program.
The project was a wonderful experience that piqued my interest in a career as a professional instructor. Once the revamp was completed, I was asked to run the training program, which I did for three years across Citibank's global footprint. I left Citibank to become an independent consultant, designing and teaching credit analysis for other financial institutions. I teamed up with Barry Frohlinger, a veteran in the bank training world whom I had previously worked with on revamping the Citibank program. Barry was a charismatic instructor, and I was fortunate to spend the next two years designing programs and teaching credit analysis with him. We taught at some of the world's leading financial institutions, including Citibank, CSFB, Union Bank of Switzerland, American Express Bank, Fleet, and Barclays. We ran courses in global financial centers such as New York, Boston, London, and Singapore, as well as more remote locations, including Bangladesh, Manila, and Cairo. Over time, I became a “credit expert,” despite having never done any actual deals.
Meanwhile, my former students were beginning to populate a growing number of credit investing seats across Wall Street, as the asset class grew rapidly, spurred by the burgeoning leveraged buyout (LBO) market. And then, in 1997, I received a call that would change my life.
A former student of mine was working for Bob O'Shea, a young partner at Goldman Sachs, and had mentioned to Bob that I was the best credit investor he had ever met, as evidenced by the multitude of banks that had hired me to teach their analysts (hilarious given my lack of real deal experience). On my former student's recommendation, Bob cold‐called me to interview for a job on Goldman's loan trading desk. I was intrigued; while I loved teaching credit analysis, I felt I would be better positioned professionally if I had real deal experience. He explained that while Goldman had always dominated in M&A and IPOs, the bank had only recently begun growing its credit business and developing a new market in trading illiquid bank loans. Bob had joined Goldman from Bear Stearns in 1990 to develop this business and had teamed up with Ed Mulé, another young partner, to build out Goldman's broader credit investing business.
Bob did not fit the typical Ivy League, white‐shoe, Goldman mold. He was a scrappy kid from New Jersey and, like me, came from a modest background. His grandmother was a maid at the Waldorf Astoria hotel, and his father was a New York City cop. After attending Fordham on a track scholarship, he joined Security Pacific Bank and later Bear Stearns. Bear was known to recruit young, aggressive professionals who were poor, hungry, and driven, referred to as “PHD” candidates. Bob became one of the pioneers of Bear's bank loan trading business. Before the loan trading market developed, loans sat on the balance sheets of the original syndicate of banks, meaning banks had no ability to monetize these loans or move them off their balance sheets if they needed access to liquidity or if their risk tolerance or the underlying credit quality of the borrower changed. Bob recognized an opportunity to develop a market to trade loans similar to the high‐flying “junk bond” market effectively created by Michael Milken.
In 1990, Goldman Sachs recruited Bob from Bear Stearns to build the firm's bank loan business. During the recruiting process, Bob pitched Goldman on a strategy to become the number one market maker in the secondary bank loan market before launching its corporate bank loan underwriting business. Goldman embraced Bob's plan, knowing that the global money center banks would fight to retain their leading market position in the profitable business of underwriting leveraged loans. Bob was hired as a vice president at the very young age of 24 and was the only employee in this new group until he could prove out the business model, which over time called for Goldman to commit billions of capital.
Bob's plan worked, as his group became the market leader in trading loans. Goldman used its number one market position in trading loans in the secondary market to become the first investment bank to penetrate the commercial banks’ dominance in the leveraged loan underwriting business. As Bob built the business in North America and Europe, he earned the reputation of being a visionary leader and business builder. In addition to partnering with Ed to build the firm's proprietary credit investing business, Bob also ran other groups at Goldman, including the global high yield bond business, which included managing all sales, trading, capital markets, research, and the firm's CLO business while also running the international bank loan business. Goldman made him a partner in 1994 at the age of 29—the second‐youngest partner in the firm's history.
Like Bob, Ed Mulé came from modest means (i.e., he was a “PHD” in Bear Stearns’ speak). Ed graduated from a public high school in a primarily rural, working‐class area of upstate New York. He was admitted to the University of Pennsylvania's Wharton School despite handwriting his application (he did not know that typing was the standard method). Ed funded his studies with financial aid and a government Pell Grant. While at Wharton, he was admitted into the selective Wharton joint BS/MBA program, which accepted only 4 of the 600 students in his class. Ed completed the BS/MBA program in four years instead of the usual five, graduating magna cum laude with both a BS and an MBA at the age of 21.
