A summer “under distress” as a fixed-income analyst in London
By Rodrigo Martinez Redondo, Two-Year MBA ’19
Working as a distressed debt analyst has been one of the most rewarding yet challenging experiences of my career. Pair that with a gorgeous summer in one of the greatest, culturally diverse cities in the world and the outcome is clear: one of the most hectic, dynamic, and satisfying periods of my life.
My professional and personal objectives lie in Europe, so I was committed to finding an internship opportunity back in the old continent. Given the fact that I am studying in the United States, this is not the easiest task, especially considering that MBA programs in Europe are one year, without a summer internship period. Therefore, to find an internship opportunity, I had to take the road less traveled, make a lot of phone calls and try to leverage my connections.
I was lucky enough to receive an invitation from SC Lowy, an international banking group based in Hong Kong specialized in distressed fixed income investing. I would be part of the European distressed analysts’ desk, with a primary focus on exploring investment opportunities in the Spanish market. Thanks to the invaluable help of funding from Johnson’s Nixon International Internship Fund, which provides funding to MBA students doing an international internship, I was prepared to embark myself on this adventure and travel from the United States to London to work in Mayfair, the epicenter of the hedge fund industry in Europe, near the Thames river. As The Clash would have said: “I have no fear, ‘cause London is drowning, and I live by the river.”
Distressed and special situation investing: A familiar approach, a totally different perspective
In general, the process of analyzing a distressed investment is very similar to equities, but the mindset is totally different. First, you need to look at the business, you need to understand what drives profits, and you need to look into management and forecast revenues and future earnings. So far, nothing differs. However, distressed investing is mostly “event driven” and it is of utmost importance to consider a set of scenarios and the associated probabilities. A company under financial distress does not have a clear path forward. Will the company default on its financial obligations? If so, will a sponsor provide new money? Under which conditions? Will the company achieve a consensual agreement with creditors out of court to refinance its debt? Or it is inevitable that it files for Chapter 11? Will it be liquidated? If so, what is the asset value and the contractual and structural subordination of its different financial instruments? How long will the process take? What are the incentives of the different stakeholders? Are they organized? How much leverage do they have on the negotiating table? The number of scenarios is substantial, and it is critical to consider and evaluate all of them while looking at a distressed opportunity.
Don’t be afraid of being distressed: Interpipe Group
After I arrived and met the team, I jumped into action with no parachute: I had to research, analyze, and provide a tentative valuation on Interpipe, a Ukrainian pipe and train wheel producer which defaulted in 2015 after the Crimea crisis and subsequent Russian sanctions on Ukrainian products. The company had prepared a restructuring plan and was ready to present it to creditors for a consensual agreement. The firm had the option to buy some of its debt at a deep discount and it seemed like an interesting opportunity if the restructuring plan were to be approved. However, the company had been talking about a financial restructuring since 2015 and yet nothing had happened. Would this be another smoke signal? Would this time be for real? Timing was critical: if the plan does not go through, we could end up buying a piece of paper that does not trade in a situation that could languish for another three years. If we waited for too long and the plan gets approved, the market would reprice the paper and we would have missed the opportunity. What´s the right move? Due to confidentiality issues, I cannot dive in further, but I would finish with an important lesson I learned: as a desk analyst, you should be willing to make mistakes. There´s nothing more dangerous than an analyst afraid of being wrong who does not produce investment ideas. As long as your “batting average” is good enough, every firm would prefer an analyst that feeds the traders with ten ideas a month than one that gives none.
The retail onslaught: Finding value in the battered European brick-and-mortar space
My second major project over the summer was trying to find hidden gems in the most hated sector of 2018: retail stores, and more specifically, fashion retailers. We looked into several names: New Look, House of Fraser, Ikks, Douglas GmbH & Debenhams. They all share the same narrative and the numbers tell a similar story: A shift in consumer´s shopping habits to e-commerce, a decrease in foot traffic, an unsustainable cost structure with enormous rent expenses and a deteriorating consumer confidence in the U.K since the Brexit. All these have impacted sales, and, given the inflexible cost structure, operating profits have plummeted. Most of these companies are loaded with debt, and some of them have already defaulted on their obligations or are about to do so. We dug deep into the numbers, the restructuring plans and CVAs (company voluntary agreements, a device in U.K bankruptcy law to help companies in distress to ease their pains) to find places where we could find asymmetries into the risk-reward payoff matrixes. We visited stores, met with management and finally found a couple of very interesting opportunities to put the fund’s money to work. The future is anything but rosy for these companies, however, at the right price, the upside potential in some debt instruments is more than adequate.
Going back to Metropolitan Life
I am from Madrid and, after a year in Ithaca, I almost forgot how great it is to live in a big European city, from cultural opportunities to simply buying groceries. I had to do some serious walking and underground commuting, but that was nothing compared with the joy of finding fresh fruits and veggies in every corner. I am a music guy as well, and I had the chance to go to the Ealing Jazz Festival, Brighton Reggae Festival and several techno gigs in some of the greatest clubs in Europe (XoYo, Barbican, Moth, Jazz Café). I had the chance to reconnect and hang out with old friends who live now in London, I skated South Bank and House of Vans and I ate every imaginable food. And, contrary to what I expected, it did not rain even for a day!
I can only say good things about this summer, which was made possible by the Nixon International Internship Fund. Hopefully next year more people benefit from this opportunity.
About Rodrigo Martinez Redondo, Two-Year MBA ‘19
Rodrigo Martinez is a second-year student at Johnson under the Fulbright Program. After working as an engineer and project manager, he accidentally stumbled across “The Intelligent Investor” and decided that he wanted to develop a career in investment management. He interned in London as an analyst during the summer at SC Lowy Asset Management, an international, distressed fixed-income management firm headquartered in Hong Kong.