Interview Question - Please help!!!

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Aquilles79

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Hello There,
for the second round of the interview for a "High Yield Trading Desk Analyst" job I've been given a company's issue to analyze and come up with a buy, sell or hold recommendation.

The only clues I was given: Look at ratios (Operational and Financial)and compare the spread with peers' spreads and advise.

This is what I'm planning so far:

What are all the similarly rated bonds' spreads (what other factors do I include, duration, risk factor etc etc)?

What are all the similarly rated bonds in the sector spreads (Again how do I further refine this?)

Again, the problem I have is, how exactly does one find peers to relatively value a issue!!!
 
A similarly rated bond is one of a similar credit rating, maturity are two big ones, then you have the industry, which would be another major factor, liquidity, based upon size is another factor to look at.

Just look at bonds in the same sector basically.

They want you to see if A) the company ratios are decent enough, i.e. cashflow and liquidity are high enough to meet the bond rating. Look at other factors, i.e. financial leverage and operating leverage as well as CFO and liquidity ratings. Also pay attention to bond covenants as they will earn you "thoroughness" points and potentials for breaches of negative covenants. As well, look at things like as sinking fund provisions that will overall improve the overall borrowing capacity of the company. B) If the company is in good shape to sustain itself and pay off it's debt obligations, then a higher yield would be a buy and so on.
 
A similarly rated bond is one of a similar credit rating, maturity are two big ones, then you have the industry, which would be another major factor, liquidity, based upon size is another factor to look at.

Just look at bonds in the same sector basically.

They want you to see if A) the company ratios are decent enough, i.e. cashflow and liquidity are high enough to meet the bond rating. Look at other factors, i.e. financial leverage and operating leverage as well as CFO and liquidity ratings. Also pay attention to bond covenants as they will earn you "thoroughness" points and potentials for breaches of negative covenants. As well, look at things like as sinking fund provisions that will overall improve the overall borrowing capacity of the company. B) If the company is in good shape to sustain itself and pay off it's debt obligations, then a higher yield would be a buy and so on.
 
you can run a multiple regression like f(spread)=all sorts of ratios, bond characteristics; then estimate coeficients, remove irrelevant (step-wise regression?), plug your data into the model, determine relative value. You will have separate groups of analyzed bonds by: price, options, coupon, volume, anything else, that is, when you run regressions try to compare apples with apples.
 
Yes, a quantative approach, would be a good estimate of correlation with other major bond issues and a good measure of interest rate variance, which would also prove you know a thing or two.
 
Guys -
C'mon, for an interview question they don't want this guy to start regression modelling. That's a nutty approach to trading high-yield debt anyway.

What did they give you to analyze? Do you have access to Bloomberg?

If the place is any good, they don't care about buy/sell/hold in the interview, they care about how you think. That means that there is probably something special about the bond and you should find it. Look up the company on the Internet - have there been warnings of a downgrade (you would look really dumb comparing it to a bunch of similarly rated bonds and saying it's a buy because it is about to be downgraded or default)? Make sure you know the differences between secured vs unsecured, senior, subordinated, etc.. It's difficult to imagine any scenario in an interview in which I would answer 'Hold' - you would just look like another analyst who can't make up his mind.

Good luck.
 
They gave me a 7.75% semi-annual coupon bond from Smithfield foods. They gave me a description of the bond from Bloomberg, a bunch of equity research reports and a couple of reports that were on the company's bond.

Since this is for high yield, and from the first interview I gathered that my job would be supporting 4 senior analysts in the department, I don't think too much technical analysis would be required. Also, from what I understood ratio, business prospects and peer comparisons are looked upon before making a decision. But he told me the bond is trading at a 285bp spread is that right, more or less...lemme know!!

This is what I am thinking I should do. Take the last 3 years performance and forecast to years hence. Make CFA level 2 type adjustments and get 20 most looked at ratios and do a trend analysis to show whether the companies has been getting riskier or otherwise.

Also compare this to Financial convenants to see cushion. Then take two competitors most ly Hormel and Premium. Ratio analysis on them based on LTM data and see how SFD compares to them.

Now for the spread analysis I figured I could get a friend from BB look the following data up for me. Average spread for all B rated, similar duration (Should cover differences between coupons and maturities), Sr. Unsecured bonds. Average spread for all bonds in the Food/ Food services sector. Add the two spreads, and compare with existing spread. Depending on how the company compares to peers and yahoo published industry median statistics I should be able to take a stand.

I completely agree with decision does not matter but methodolgy does. Can you guyz tell me if the methodology sounds ok. The stuff is due Monday. Also maybe I could speak with you guyz to get better guidance if thats ok with you. email: [email protected]
 
I would also use bankruptcy prediction models to estimate the spread, like Retail BPM - very good for such companies.
 
I wouldn't hire this guy if he was willing to work for free. Everytime something comes up at work are you going to ask analystforum to do it for you? This is close to unethical.
 
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