High-yield is enjoying a comeback. Investors put a whopping $4.6 billion into high yield mutual funds year-to-date as of mid February-a figure which already surpasses 1/3 of all in-flows into high yield mutual funds in 2010, according to Marc Gross, a New York-based money manager with York at RS Investments, which oversees $3 billion in its fixed-income funds.
U.S. sales of below-investment grade bonds rated below Baa3 by Moody's and lower than BBB- by Standard & Poor's rose to $13.5 billion during the second week of this year compared with a $5.41 billion weekly average in 2010, Bloomberg reports. Last year was also a banner one for the sector: the $252.4 billion in high-yield debt issued last year topped 2009's record-setting total of $151.5 billion by 66%, according to Fitch Ratings.
As the economy improves, "there is less worry that below-investment grade borrowers will default, and investors are willing to go further out on the risk spectrum," Gross observes, adding that credits that "even six months ago, would have had trouble coming, are having no trouble" selling debt today. This has created a market ripe with opportunity for high-yield credit researchers who know how to shine in an interview. To do that, be sure you're ready to field questions like these:
How much experience do you have focusing on top-down issues?
Working with high-yield debt bears a lot of similarity to working with stock, a recruiter observes. "As an investment grade analyst, you don't need to understand the industry as much. Covering IBM, there's not much worry about default risk." With junk bonds, however, "a whole variety of ratios need to be analyzed."
So in some ways you'll need to think like an equity analyst, and be ready to discuss the macro issues impacting-such as business sectors and quality of management-impacting company performance and success. "Think top-down, as well as bottom up," says the recruiter.
How well versed are you in ratio analysis and coverage ratios?
Whereas every fixed income analyst will be able to compare the numbers on a financial statement, developing liquidity ratios, current ratios, and quick ratios, for instance, high-yield bankers will be most interested in how well you can calculate a company's ability to pay back their loans.
Such analysis critical, given the risks inherent in the high-yield market: "If rates stay low and additional "junky" covenant-lite high-yield debt is issued-and if stock prices fall-it won't be long before debt-to-earnings and debt-to-equity ratios ratchet back to disturbing levels," says a report published earlier this month.
How would you/how have you gone about creating relationships with rating agency analysts?
ING recently posted a job opportunity for a high-yield credit analyst able to assist its portfolio mangers in selecting appropriate new investments and monitoring the existing portfolio. Among the job requirements: establishing relationships with Wall Street and rating agency analysts.
Tell me about one or two of companies you've followed and why you liked them-or didn't.
Ideally, "have as many as three or four companies you know cold and can talk about all day long," says Gross, who hired his last researcher just a few months ago. "With a more senior analyst, I'd want to see their thought pattern more than anything else," he says.
"If you're [already] experienced in high yield-what companies have you followed? Why did you like those companies...did you get to the right buy and sell recommendations?" Be able to discuss management, coverage ratios, and leverage. Even better: Show that you've unearthed information others have missed. "Really sell me on the company," says Gross.
An interviewer at BlackRock recently presented a fixed-income research candidate with this brainteaser. "You have a birthday cake and have exactly 3 slices to cut into 8 equal pieces. How do you do it?" Don't underestimate the importance of this kind of question.
In addition to being able to discuss financial markets and favored companies, you need to be able to think creatively, too. You might be asked what you'd do if you had $100 million at your disposal-would you invest all or some of it? In what? BlackRock served up that question as well during an interview.
As for the birthday cake, you might think of a simple and innovative ways of carving it up -(i.e., slicing it across the center and then in half), or, if you want to come across as more imaginative you might propose consuming a slice before divvying it up. This is a chance to showcase your personality and ingenuity, so don't be afraid to think out of the box.
Finally, to examine high-yield credit trends in more detail, check out these sites LCDComps.com and Distressed-debt-investing.com.