I’ve got an interview coming up with a firm that does bottom-up value investing on corporate bonds. I don’t have experience in fixed income investment management. I’m trying to get a better handle what makes a corporate bond “cheap” and what types of quantitative screens people look at. Is it all just based on yield spreads on treasuries, like company X has a 5-year bond that’s trading at a spread of 4% on the treasury, typically it’s only 2%…etc.? Is there anything else people look at besides yield or some relative value analysis to find an attractive bond from a value-investor perspective? This would be focused specifically to investment grade only. Appreciate any insight or advice.
Z-spread across like credit qualities? Idk man, have you read any of the CFA cirriculum on fixed income?
You’ve got the right idea. You would look at the spread to treasuries for a bond and compare it to other bonds of similar credit quality and similar maturity. If BBB rated 5yr bonds are all trading at +300bps over treasuries and you find one trading at +400, then it is relatively cheap and you would expect (hope) that the market will eventually see this and it would move back in line with the rest. The tricky part is determining the true credit quality of a bond/company. As a credit analyst, you don’t rely on the rating agencies to tell you the credit quality of a bond. It’s your responsibility to determine that, and ideally you are out in front of the credit agencies, as they tend to move very slowly.
I deal with buyside HY credit analysis and trading. IG is a little different b/c most the time credit is pretty solid so I would think you are looking at corporate events that would trigger a downgrade, mainly acquisitions, leverage sellout, or large dividends to equity holders. For HY I evaluate the following: -Company Forward Leverage (EBITDA/Net Debt) - so I read a lot of sell side research on EBITDA estimates (next 12 months and beyond) -Capital Ex. Req. (Maintenance vs Expansion) -Companies need to raise addl capital via equity/bank loan/bonds -Company Cap. Structure to see where your bonds rank in default -Recovery Value in default -Bond Covenants -Price/Yield, Cpn, duration, OAS, Call Dates, Equity Clawback Clause, T/O Put, CDS if available, issue size, holders list, etc…
Thanks FIresearch and willsucceed - that’s helpful. As an anlyst, are you even concerned with how a company’s stock has performed? Is it even necessary to try and forecast the total enterprise value of a company to assess if it’s debt is attractive? Would you even be concerned about looking at total enterprise value relative to a company’s amount of debt? Or are the more important factors comparing a specific corporate maturity to a group of peers and trying to assess profitability, ability to paydown debt, future cash flow, etc - and than one would expect the companies with more attractive fundamentals would have lower yields - and if not, then this could be a buying opportunity? Is this the right way to think about things? I’ve completed all three levels of the CFA program and am trying to give myself a good refresher - looking at an old Fabozzi book I had from undergrad too…From what I’ve seen in texts - value investment strategies aren’t really covered in much detail. Just trying to get a sense as to how it’s actually done in practice. Thanks.
dude, are you even a candidate for the cfa? your questions sound like you didnt even go through level 1 yet.
Ok, ignore the z score someone mentioned. Noone uses that any more. Desk jockey and will Succeed are generally right. You were also right to mention equity an CDS is a pretty important indicator of market perception as well. Equity is somewhat important as an indicator as it is your first line of defense against losses. However, sometimes things like an additional public offering will lower existing equity prices but boost binds as you now have higher protection. Also get familiar with liquidity and solvency / coverage metrics. Job sounds sweet man. Keep us posted.
Black Swan Wrote: ------------------------------------------------------- > Ok, ignore the z score someone mentioned. Noone > uses that any more. Desk jockey and will > Succeed are generally right. You were also right > to mention equity an CDS is a pretty important > indicator of market perception as well. Equity is > somewhat important as an indicator as it is your > first line of defense against losses. However, > sometimes things like an additional public > offering will lower existing equity prices but > boost binds as you now have higher protection. > Also get familiar with liquidity and solvency / > coverage metrics. Job sounds sweet man. Keep us > posted. *ahem* z-SPREAD. z-score is for stats :)))))))). at least i remember something from level I
Steely Dan Wrote: > > > *ahem* z-SPREAD. z-score is for stats :)))))))). > at least i remember something from level I Altman Z-score is probably what he was referring to, also simply known as z-score.
if someone writing in this thread, with experience in credit analysis, would be so kind as to give a reference to a book which surveys the subject matter, i would be thankful
Yes, I thought Altman z-score is what you were referring to. My bad, let me rephrase: ignore the z-spread someone was referring to, noons uses that in the industry.