Customized for: Audrey Chen ([email protected]) University of Wisconsin - Madison MBA Career Services Online Career Library The media’s watching Vault! Here’s a sampling of our coverage. “For those hoping to climb the ladder of success, [Vault’s] insights are priceless.” – Money magazine “The best place on the web to prepare for a job search.” – Fortune “[Vault guides] make for excellent starting points for job hunters and should be purchased by academic libraries for their career sections [and] university career centers.” – Library Journal “The granddaddy of worker sites.” – US News and World Report “A killer app.” – New York Times One of Forbes’ 33 “Favorite Sites” – Forbes “To get the unvarnished scoop, check out Vault.” – Smart Money Magazine “Vault has a wealth of information about major employers and job- searching strategies as well as comments from workers about their experiences at specific companies.” – The Washington Post “A key reference for those who want to know what it takes to get hired by a law firm and what to expect once they get there.” – New York Law Journal “Vault [provides] the skinny on working conditions at all kinds of companies from current and former employees.” – USA Today
Transcript
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The media’s watching Vault! Here’s a sampling of our coverage.
“For those hoping to climb the ladder of success, [Vault’s] insightsare priceless.”– Money magazine
“The best place on the web to prepare for a job search.” – Fortune
“[Vault guides] make for excellent starting points for job huntersand should be purchased by academic libraries for their careersections [and] university career centers.”– Library Journal
“The granddaddy of worker sites.”– US News and World Report
“A killer app.”– New York Times
One of Forbes’ 33 “Favorite Sites” – Forbes
“To get the unvarnished scoop, check out Vault.” – Smart Money Magazine
“Vault has a wealth of information about major employers and job-searching strategies as well as comments from workers about theirexperiences at specific companies.”– The Washington Post
“A key reference for those who want to know what it takes to gethired by a law firm and what to expect once they get there.”– New York Law Journal
“Vault [provides] the skinny on working conditions at all kinds ofcompanies from current and former employees.”– USA Today
All information in this book is subject to change without notice. Vault makes no claims as tothe accuracy and reliability of the information contained within and disclaims all warranties.No part of this book may be reproduced or transmitted in any form or by any means,electronic or mechanical, for any purpose, without the express written permission of Vault Inc.
Vault, the Vault logo, and “the most trusted name in career informationTM” are trademarks ofVault Inc.
For information about permission to reproduce selections from this book, contact Vault Inc.,150 West 22nd St, New York, New York 10011, (212) 366-4212.
Library of Congress CIP Data is available.
ISBN 1-58131-502-3
Printed in the United States of America
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ACKNOWLEDGMENTS
We are extremely grateful to Vault’s entire staff for all their help in theeditorial, production and marketing processes. Vault also would like toacknowledge the support of our investors, clients, employees, family andfriends. Thank you!
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INTRODUCTION 1
THE SCOOP 3
Chapter 1: The Background of Leveraged Finance 5
Leveraged vs. Investment Grade: An Important Distinction . . . . .6
The History of Leveraged Finance . . . . . . . . . . . . . . . . . . . . . . . .10
Leveraged Finance vs. Corporate Finance/Investment Banking .13
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Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more. 1C A R E E R
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Right now, it seems like every other headline in The Wall Street Journal is ablockbuster M&A event, a multi-billion dollar LBO, or a rise frombankruptcy by a fallen corporate angel. Much as they did in the late 1990s,both investors and corporations have cash burning holes in their pocketsbecause of positive economic conditions, and are subsequently pushing thefinancial markets near new heights. Like the late 90s, the result is recordM&A activity, a boom in hedge fund activity, a rise in venture capitalspending, a return to the buyout activity of the late 1980s, and a generalfeeling of excitement on Wall Street. But unlike the late 1990s, this flurry offinancial activity is somewhat tempered, as today bankers distinctlyremember the subsequent massive economic downturn of only a few yearsago and its effects on global financial markets. Nevertheless, the major forcesthat have spurred this investment activity, such as historically low interestrates, low credit default rates, and healthy cash balances are making WallStreet an exciting place to be.
Because of low interest rates, relatively few bankruptcies, and investors’hesitation to invest in the equity markets, no area has seen more activity thandebt markets. This activity has manifested itself into record globalborrowings, as global credit issuance is expected to exceed $7 trillion in2006, dwarfing its $2 trillion level in 1995 and far surpassing its $4.5 trillionlevel in 2005.
A vast majority of this activity has been spurred by the field of leveragedfinance. With financial institutions eager to lend money and borrowersexcited to capitalize on market conditions, the effects in just the past fewyears are easily identified: the second, third, and fourth largest LBOs of alltime, record fundraising by hedge funds and private equity shops, M&Aactivity levels reaching the highs of 1999/2000, all-time-low borrowing costsfor companies, and off-the-charts volume in the high-yield bond andsyndicated loan markets. For all of these reasons and many more that we willdiscuss in this Vault Guide, leveraged finance is a good place to be.
Introduction
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CHAPTER 1
LEVERAGEDFINAN
THE SCOOP
Chapter 1: The Background of Leveraged Finance
Chapter 2: Major Industry Players
Chapter 3: The Products
Chapter 4: Leveraged Finance Groups
Chapter 5: The Transactions
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The Background ofLeveraged Finance
The financial markets can be divided into two major sections: debt and equity.Under this overarching organization structure, think of leveraged finance asthe intersection of investment banking, commercial banking, hedge funds,private equity, and sales & trading on the debt side of the financial markets.
Generally speaking, leveraged finance is a platform in all major investmentand commercial banks. It is a function that taps into two major financialmarkets (the high-yield bond market and the leveraged loan market—more onthose later), is accessed by nearly all private equity shops and hedge funds ona regular basis, and has been one of the booming profit centers of Wall Streetfor the past two decades. For analysts and associates, it has become a primetraining ground for the most elite private equity shops and hedge funds.Subsequently, for careers on Wall Street, leveraged finance is one of the mostsought-after fields.
Why leveraged finance?
Along with its role as a potential springboard to careers in private equity andhedge funds, leveraged finance is also unique from a career perspectivebecause it provides a vantage point into most of the other areas of investmentbanking, as well as sales & trading. For analysts and associates, working inleveraged finance allows one to see what else is out there career-wise in thefinancial markets, without ever having to leave the field.
Another advantage of working in leveraged finance is that in general, it is anarea of investment banking that is focused on closing transactions. In acorporate finance role within a coverage team in an investment bank (a teamthat covers a specific industry and pitches deals to companies in thatindustry), one analyst might close one or two deals a year in an investmentbank. By contrast, in leveraged finance, it’s feasible to close five to 10transactions a year. Leveraged finance affords analysts and associates acontinually busy pace and good deal and client exposure along the way.
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CHAPTER 1
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Major deals
One of the great advantages to working in leveraged finance is that you willtypically work on notable transactions. As an analyst or associate in a majorleveraged finance firm, you may even see at least one of your deals make thecover of The Wall Street Journal. Notable brands like RJR Nabisco, BurgerKing, United Airlines, Domino’s Pizza, and Sony MGM have all accessed theleveraged finance markets. From multi-billion dollar leveraged buyouts tomajor corporate restructurings, there are plenty of headline transactionsacross the field.
Leveraged vs. Investment Grade: AnImportant Distinction
The difference between leveraged and investment grade debt is an extremelyimportant concept to understand. By definition, “Leveraged finance” is debtissued for clients that are considered “leveraged,” not “investment grade” bythe two major rating agencies, Standard & Poors and Moody’s. In otherwords, it is debt for clients considered a higher credit risk by the ratingagencies.
A typical rating agency grid appears on the next page. The solid bold linesdenote the “investment grade” vs. “leveraged” threshold.
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Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
Standard & Poors (S&P)
AAA
Moody’s
Aaa
AA+AA AA-
Aa1Aa2Aa3
A+A A-
A1A2A3
BBB+BBBBBB-
Baa1Baa2Baa3
BB+BBBB-
Ba1Ba2Ba3
CCC+CCCCCC-
B1B2B3
B+BB-
Caa1Caa2Caa3
CCC Ca
C D/C
D C
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How’s your credit?
How are these ratings assigned? A company is analyzed by the ratingagencies and is assigned a rating(s) based on these agencies’ assessment ofthe company’s credit risk. The rating agencies assess the quality of thecompany’s operations, its future potential, past track record, and financialhealth. Once this analysis is completed, the agencies assign ratings to thecompany and monitor the company going forward. Anything under a certainrating threshold is considered “leveraged.” A company that chooses not to getrated is considered “not rated.” Also, companies that are rated “investmentgrade” by one agency and “leveraged” by another are considered “crossovercredits.”
The words “leveraged” and “debt” normally have negative connotations. Butthis shouldn’t necessarily be the case. Millions of people have loans for theirhomes. In this sense, they are borrowing money and are “leveraged,” as mostof them do not have the cash on hand to pay off their loans immediately. Justbecause someone has a home loan or a car loan, or does not have much cashon hand, does not mean they are not worth lending to. If that were the case,no college student would have a credit card. The more debt someone has inrelation to their cash or future earnings potential, the more “leveraged” theyare.”Investment grade” companies are the least risky of those in the debtmarkets. They are typically your long-standing, exceptionally stablecompanies, such as General Electric, Pfizer, John Deere, and ExxonMobil.Their credit history is outstanding and they have the ability to borrow largeamounts of debt at any time, since they typically have the cash on hand to payback those loans at any given time. Of these thousands of companies, only ahandful have the highest debt rating (“Triple A”).
To illustrate the difference between investment grade and leveraged, considerthe following example. Suppose you have a rich friend who asks to borrowmoney from you for lunch. You’d probably not hesitate to give him $10 orso, because you know you’re likely to be paid back immediately (andprobably without having to hound him for the money). That friend would beconsidered “investment grade.” Now consider the college buddy who alwaysasks to borrow money for beer runs, yet amazingly can never “remember” topay you back. That college buddy would be considered “leveraged.”
Of course, there are advantages to being investment grade. Since investmentgrade companies are consider much less risky, they have the ability to accessa number of other financial markets, including the commercial paper market.Furthermore, these investment grade companies are typically able to getmuch larger amounts of debt than their leveraged counterparts. For example,as a triple-A rated company, General Electric has syndicated loan facilities ofover $20 billion, not to mention any other debt, such as bonds or commercialpaper. In contrast, the largest syndicated loan package for a leveragedcompany is probably somewhere near $6 to 8 billion.
It is important to note that entire financial markets exist for companies in bothof these buckets (investment grade and leveraged). When it comes to bonds,there is a high grade market for investment grade companies, and a high-yieldmarket (also known as junk bonds) for leveraged companies. For loans, thereis a high grade syndicated loan market (also known as the investment gradesyndicated loan market) for investment grade issuers and a leveraged loanmarket for those companies that are considered leveraged.
For companies that are not rated, their access to either market is determinedby their financial ratios, while crossover companies typically access themarket that plays to the better of their ratings.
The field of leveraged finance is concerned with riskier companies thattypically seek funded debt as a necessary piece of their capital structures.Because syndicated loans and high-yield bonds are necessary for thesecompanies’ operations, leveraged finance can be a little more exciting andadventurous. In the leveraged finance world, you will encounter companiesthat put together comprehensive financing packages to exit bankruptcy justhours before a federal court would have forced them to liquidate, privateequity shops that push the limits of corporate finance by strapping nearlyincomprehensible amounts of debt on companies, multinational corporationsavoiding hostile takeovers by issuing large amounts of debt in order toexecute share repurchase plans, and well-known organizations that needevery single dollar available to them in order to keep their lights on andfactories working. These types of complex transactions are part of the day-to-day life of those working in leveraged finance.
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Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
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The History of Leveraged Finance
Loans for companies
Leveraged finance originated from what would historically be thought of ascommercial banking. As companies needed money, they would typically goto the loan officer of their local bank to obtain financing. Much like youmight need a loan to buy a house or car, companies have always needed loansto buy properties or even fleets of cars. Lending institutions generallydistributed these loans in certain sizes and interest rates to companies, basedon the company’s risk and size. Very similar to how a JPMorgan Chase,Wachovia, Bank of America, or Citigroup would give a home loan with acertain interest rate to someone based on their personal credit score, theseinstitutions structured loans for corporate clients. Typically, the less creditrisk a company presented, the more money these banks would lend.
This type of lender-client relationship has existed for centuries. But in thepast few years these lending institutions have evolved, as have the needs oftheir clients. In the late 1990s investment banks and commercial banks wereable to once again legally merge due to the repeal of the Glass-Steagall Act.This means that investment banks are now not only able to provide financialadvice to clients, but also utilize the know-how of their commercial bankingdivision to deliver that financial solution. Together, this has allowedcompanies to access the financial markets even more readily and hasfundamentally changed the investment banking relationships on Wall Street.
During the past few decades, the fundamental loan product has also changed.The original loan between two parties, referred to as a bilateral loan, wasbecoming obsolete. Clients were becoming larger and their financing needswere growing. Subsequently, lending institutions started finding others toprovide the loans alongside them. Instead of bearing the risk of an entire $1billion loan, they found they could significantly diminish their risk by“syndicating” this loan exposure to others. With institutional investors alsoseeking new ways to place money into the financial markets, the syndicatedloan became a prime source of investment. Subsequently, the syndicated loanmarket exploded in volume, so much in fact that a secondary loan tradingmarket was created out of it. Today, as opposed to a bilateral relationshipwith a single lending institution, a company that “issues” a loan can havehundreds of investors in its syndicated loan. This investor interest not only
opened up the syndicated loan market, but it also made other financialmarkets more transparent, due to the emergence of the relative value ofproducts across asset classes. Although still issued in a very small number ofsituations, the bilateral loan for the multi-billion corporation is nowessentially obsolete.
The bond market
In addition to being able to take out loans from banks, companies that arelarge and stable enough have historically also had access to public bondmarkets. To do this, companies enlist investment banks to issue bonds toinvestors that promise a set interest rate of return on investment. Investorsindependently analyze the company issuing a bond and determine the interestrate that makes it worthwhile for them to take on the risk of the company notmaking its scheduled payments. If acceptable to enough investors, the bondis issued; these investors have essentially lent the company money throughthis bond issuance.
Being able to issue bonds has made it possible for companies to raise moneyfor acquisitions, to invest in capital projects, or to refinance existing debt.Together, the bond and loan represent the major financial instruments in theworld of leveraged finance.
The expanding market of debt
The bond and the syndicated loan markets have also evolved and expandedover the past few decades. In 2005, the U.S. syndicated loan market reachedissuance volumes near $1.6 trillion, nearly doubling its $800 billion volumein 1995. In 2005, the high-yield bond market also more than doubled involume in the past 10 years, reaching approximately $100 billion, versus $40billion in 1995. A vast majority of this evolution is due to exceptional creditconditions, fewer bankruptcies, record low issuance rates, and the relativevalue of the asset classes as investment areas for institutional investors.
This relative attractiveness of the debt markets is especially strong in light ofthe equity market downturn in the early 2000s. With security and near-guaranteed returns, the debt markets have seemed exceptionally moreattractive from an investment standpoint. If you knew that you could get 7 to10 percent annual return investing in the loan of a relatively stable company,wouldn’t you put your money there, as opposed to buying shares in the equity
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Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
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markets, which present greater risk? Furthermore, if a company defaults onthe loans, they are typically secured by the assets of the company, whetherthose be airplanes, property, or even hamburgers. In contrast, if the stock ofa company loses all of its value, there is little to no recourse. As for high-yieldbonds, although not typically as secure as investment grade bonds, they’lltypically offer investors a return of 8 to 12%. Also, just like investment gradebonds, high-yield bonds are “senior” to the equity of a company, and thus arepaid off first in the event of a bankruptcy liquidation.
Good news for the banks
Also, it is important to note that these lending transactions are very profitablefor institutions that arrange them, not just the institutional investors. For thelargest deals, this can mean tens of millions of dollars in arrangement andsyndication fees. For example, it was estimated that the fees for the financingof the famed 1989 leveraged buyout of RJR Nabisco by Kohlberg KravisRoberts (immortalized in the book Barbarians at the Gate) were somewherein the hundreds of millions of dollars. Thus, armed with large balance sheetsand subsequently the ability to lend money to numerous companies, the bulgebracket investment banks with historically strong commercial banking arms(JPMorgan, Bank of America, Citigroup) have become the dominant playersof the leveraged finance industry. Not only do these banks have the moneyto lend and the historical know-how to do so, but they also have the pricelessinvestment banking relationships which they can use to propose financings.
Increasingly, leveraged finance is attracting new and different players to theindustry. Competition for providing large financing solutions to companieshas become intense, with many companies even conducting “auctions” to seewho brings the best financing package to the table. Realizing that they mightbe late to the game, large banks are rapidly bulking up their leveraged financeplatforms in order to take advantage of the abundance of fees for arrangingthese transactions. Although the big firms continue to dominate the industryissuance in loans and bonds, smaller firms have realized they can make anexceptional return on their money and time by providing financing to middle-market companies (middle market is generally defined as a company withless than $500 million in annual revenues and/or less than $50 million inannual EBITDA). For example, by raising $25 million for a company byassembling a syndicate of lending institutions hungry to put idle cash to work,
small lending shops are finding themselves with a few million dollars in feesand profitable new relationships.
In the future, this trend is expected to continue. Although interest rates havebeen rising over time, this will not deter companies from continuing to seeksyndicated loans and high-yield bonds, which have become a necessary partof a firm’s capital structure. Although it will be unlikely that firms will wantto refinance their existing debt with more expensive (higher interest) debt,many issuers will still turn to these financing sources for general corporateneeds or to acquire other companies. Also, with the rise of interest rates hascome a rise in M&A volume, which fuels the issuance of debt to make thosemergers and acquisitions happen. Finally, to quote a tenet of basic corporatefinance, the cost of debt is often substantially less than the cost of equity. Soit seems likely that these leveraged finance shops will remain in business andprofitable for many, many years to come.
The leveraged finance markets are quite complex, but the underlyingprinciple and motivation—providing financing for companies—is simple.Whether this financing involves a loan to refinance existing debt, or theissuance of a complex loan and high-yield bond package in order to executethe largest LBO of all time, these markets are quite often at the center of theaction on Wall Street. Companies still call their banks and loan officers foradvice on syndicated loans, but at the same time are now speaking tomanaging directors at investment banks that can provide a number ofcomplex financing alternatives, tapping a variety of financial markets. Withnearly $1 trillion of combined annual global volume in the U.S. in theleveraged loan and high-yield bond markets, these leveraged finance marketsprovide ample access for investors to put money to work.
Leveraged Finance vs. CorporateFinance/Investment Banking
Are the leveraged finance and investment banking the same animal? Sort of.As leveraged finance was originally a commercial banking function, most ofthe premier leveraged finance shops can be found within the investmentbanks of the largest finance institutions, such as JPMorgan Chase, Bank ofAmerica, and Citigroup. Because of the sheer amount of leveraged financedeal volume at these institutions, there will typically be entire floors and
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Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
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groups dedicated to “originating deals” (proposing deals to existing or newclients), following the capital markets, trading in and out of loan/bondpositions, selling these products to investors, and monitoring the firm’sexposure to loans and bonds of issuers. Naturally, at pure investment bankssuch as Goldman Sachs or Lehman Brothers that do not originate as many ofthese types of debt transactions, there will typically be smaller groupsdedicated to following the markets, in more of a debt capital marketsgeneralist role. However, in both types of institutions, the leveraged financeplatform is typically part of a debt capital markets group—it just depends onthe volume of deals to determine how specific and/or large the groups will be.
A common misperception is that traditional investment banking only involvesproviding solutions and advice to companies (such as mergers andacquisitions advice). In this regard, leveraged finance is different frominvestment banking, since a leveraged finance bank is not only offeringadvice for a financial problem, but also a product as a solution. However,most people these days broaden their definition of investment banking toinclude both offering advice to companies, as well as executing a financialtransaction, such as an initial public offering (IPO). In this sense, leveragedfinance is identical—just as an investment bank covers a company in anindustry coverage group and works with its equity capital markets team tostructure an IPO, so does it provide the same service for leveraged financetransactions. In the case of a leveraged finance transaction, the investmentbank also covers the company and works with people from its debt capitalmarkets team to structure a syndicated loan and/or high yield bond.
Unlike investment banking, however, there exist a number of other financialinstitutions, such as General Electric or CIT Group, that arrange these similarfinancing packages for companies, but do so without a coverage group or anindustry platform (which an investment bank would have). These financialinstitutions still have relationships with companies, but they don’t typicallyprovide M&A or IPO advice like an investment bank. The loan market is aprivate market, and as such is not limited in terms of what type of firm canprovide lending solutions. If you’re a treasurer of a multi-billion dollarcompany and you need a large loan for an acquisition, you’ll go to the firmwith the best interest rate, regardless of whether it’s an investment bank ornot. In this regard, leveraged finance is more similar to commercial lending(i.e., lending to a company so that they can buy copiers, printers, etc.) than itis similar to investment banking.
Different experiences: working in the coveragegroup of an investment bank vs. leveragedfinance
Working in a coverage group or M&A at an investment bank differs greatlyfrom working in a debt capital markets (DCM) or equity capital markets(ECM). As mentioned earlier (and will be discussed in more detail later),there is more execution of deals in a DCM or ECM role. Whereas someonein this role may not be as familiar with every facet of an industry like theircounterpart in a coverage group, they will generally have more breadth offinancial market knowledge.
This breadth vs. depth tradeoff is directly related to the amount of transactionexperience offered in leveraged finance. For example, the day-to-day grindmight be a little more hectic in a leveraged finance role, as a deal team couldpotentially be closing two multi-billion dollar transactions on the same day—something that would be quite unlikely in a coverage role. However, thistransaction-oriented environment involves substantially less idea generationand pitching of ideas to clients than one would find in an investment bankingindustry coverage group. That is not to say that someone in leveraged financewill not do any pitching—quite the contrary. While the industry coveragegroup might come up with and pitch the idea of a syndicated loan or high-yield bond to finance an M&A deal, they will surely bring along theappropriate people from the leveraged finance platform to comment on themarkets, comparable transactions, and provide other relevant advice.
If you are beginning your career in finance, it is important to think about yourlong-term career goals when considering a role in investment bankingcoverage versus leveraged finance. If your goal is to work in a specificindustry—let’s say running a health care company—you would probably bebetter served in a health care coverage group at an investment bank.However, if you are interested in working at a hedge fund or private equityshop, working in leveraged finance will give you the opportunity to interactwith many of these firms, as you close numerous deals of theirs.Furthermore, you will be trained in certain debt metrics (what’s typicallycalled “credit” training), which are useful in understanding the industry andare not typically emphasized in the coverage side of the bank. This is not tosay that moving from a coverage group to a private equity shop or hedge fundcan’t happen—it certainly does, and even the top tier PE shops and hedgefunds seek people with very specific industry knowledge. However, it’s
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Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
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definitely the case that your exposure (most likely in late-night financialmodeling revisions) to the private equity shops will be higher in leveragedfinance groups when compared to your exposure working in an industrycoverage group. In an industry where relationships are everything, thisexposure will definitely matter.
Types of Leveraged Finance Deals
There are a wide variety of deals executed within leveraged finance. Mostcommon are syndicated loans and high-yield bonds for working capital orgeneral corporate purposes (day-to-day financing needs). However, inleveraged finance you’ll also find leveraged buyouts, when private equityshops and financial sponsors use borrowed money to purchase companies.There are also corporate restructurings and DIP (Debtor-in-Possession)facilities, where companies are entering/exiting bankruptcy and are trying toavoid Chapter 7 bankruptcy (liquidation). In this case, the companies willwork with both the financial institutions’ leveraged finance groups and thefederal bankruptcy court to get financing packages in order to stay inbusiness. Leveraged finance also covers dividend transactions, whereloans/bonds are used to pay out the owners of a business, recapitalizations,where a company’s financial structure is changed, IPO/spin-off financings,where the proceeds of a loan/bond are in tandem with an IPO or a spin-off ofa business unit, and even general debt refinancings, where an existingloan/bond is taken out with a new loan/bond. Examples of each of these typesof deals is discussed in more detail in Chapter 5.
Opportunities In Leveraged Finance
There are so many different areas within leveraged finance and so manyrelated to the field that there is place for almost everyone. For example, thereis deal origination, for the person who enjoys managing numerous processessuch as putting together presentations, financial modeling, and pitching.There is also capital markets work (for both syndicated loans and high yieldbonds) for the person who enjoys understanding the flow of the markets andconducting research about the market’s trends. For the person who enjoys theasset management aspect of managing a firm’s exposure to the syndicatedloan/high yield bond markets, there are positions in internal credit/portfolio
management work. Finally, there is a sales & trading function for bothsyndicated loans and high yield bonds.
However, very generally speaking, leveraged finance refers to the dealorigination function—when a team goes out to pitch a client, wins themandate, structures the loan/bond, markets it to investors, sells it, and thencloses and funds the transaction. This role as an analyst or associate caters tothe individual who enjoys managing numerous deals throughout this process,who is a jack-of-all-trades from financial modeling to talking to investmentfirms, and who thrives in the pace of a seemingly never-ending day.Furthermore, when considering if leveraged finance is/is not the field for you,it is important to realize that some firms are organized in a typical investmentbanking “cubicle/office” atmosphere, whereas some are organized liketrading floors. Some people feed off the energy from a football field-sizedarea crammed with people chatting all day long, while others would prefer thequieter nature of a cube or an office, where personal phone calls are not heardby your neighbors and neighbor’s neighbors. This type of setup can make asubstantial difference in the day-to-day enjoyment of someone’s role inleveraged finance.
The culture of leveraged finance depends almost entirely on the culture of thefirm in general. At a pure investment bank such as Goldman Sachs, youmight find the culture to be almost entirely opposite from that of thecommercial lending arm of a larger financial institution, such as GeneralElectric Commercial Finance. Whereas one might be very rigid andhierarchical, the other might be golf-shirt and khakis on Fridays, where ananalyst can chat it up with any managing director at any time. This kind ofspecific nuance is covered in the next chapter.
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The Background of Leveraged Finance
EBITDA
In leveraged finance, there are some common terms and phrases, from“revolving credit facility” to “senior debt,” that you will learn as you readthis guide and learn more about the world of leveraged finance.However, no term is more important than the word EBITDA. Companieslive and die by it. The leveraged finance markets are built around it.
Basically, EBITDA is a relative measure of a company’s financial health.It can be compared across industries and company sizes. Even you, asan individual, can calculate your own EBITDA. Called EBITDA, becauseit represents Earnings Before Interest, Taxes, Depreciation, and
Amortization, it measures a company’s earnings from its operations.What gets paid right after the costs of operating a company? Theinterest on debt—which is precisely why leveraged finance bankers anddebt players care. EBITDA is a proxy of how much debt any onecompany, or individual, can afford.
For example, let’s pretend you operate a lemonade stand. You probablybought lemons, water, cups, ice, a stand, and some poster board foradvertising. Let’s also say you paid someone to help you operate thestand. Finally, let’s say you sold all of your lemonade. If you were tohave paid these costs and come out positive, you would have made anoperating profit. But you still have not paid interest on your credit cardfor the stand, nor have you paid the taxes on your income. Ignoring thedepreciation on your lemonade stand (since you never factored that costin because it was not a real cost to you) the amount of profit you haveleft is your EBITDA—before you pay either interest or taxes. EBITDA isyour cash flow available for all sorts of things—buying another lemonadestand, paying off debt on your credit card, or even just paying your taxesand pocketing the rest.
When comparing companies and evaluating their operating health, mostleveraged finance bankers are concerned with a company’s adjustedEBITDA (the amount that can be considered “regular” EBITDA year-over-year, adjusted for abnormalities and one-time costs), as well as thecompany’s revenue. The EBITDA margin (EBITDA / Revenue) is a simplecalculation of how adept a company is at converting its revenues intowhat really matters—EBITDA. From EBITDA, one can determine howmuch debt a company can support (leverage ratios), as well as howmuch interest it can pay (interest coverage ratios). This, in turn,determines purchase prices for LBOs, the size of bond/loan offerings,and even the size of exit financings. In the world of leveraged finance,no other financial term is as significant.
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In order to understand the leveraged finance industry and determine whereyou would like to work within it, it is important to understand the differentplayers in the industry and the markets they serve. As in investment banking,in leveraged finance there are typically three types of players: those thatoriginate and structure deals (called the “sell-side”), those that invest intothose deals (called the “buy-side”), and the clients that receive the financing.The sell-side is comprised of investment banks and commercial financecompanies, the buy-side is comprised of investment firms such as hedgefunds and insurance companies, and the clients include both largecorporations and private equity shops. It is important to note that even thoughone firm might be a particularly large player (buyer, seller or client) in theleveraged loan market, it might not so be in the high-yield bond market.
In this chapter, we’ll review some of the major players on both the sell-sideand the buy-side. The specific firms we mention are chosen based on theleague tables of the sell-side firms and on reputation for the buy-side firmsand private equity shops. Although a good starting point for consideringpotential employers, these lists should be considered in light of a particularfirm’s culture and the emphasis it places on its leveraged finance group versusits other operations.
As this book is more focused on sell-side firms than those on the buy-side, inChapter 4 you will find a more detailed discussion of the sell-side-anoverview of the typical groups/departments within those organizations. Fora more comprehensive overview of buy-side firms and private equity shops,check out the Vault Career Guide to Hedge Funds and the Vault Guide to theTop Private Equity Employers.
Investment Banks
There are a few distinct types of investment banks in the world of leveragedfinance: first, the “bulge bracket” investment bank with a large commercialbanking operation; second, the standalone investment bank that typicallyprovides advisory solutions for clients; and third, the investment bank thatdoes have a commercial presence, but is considered boutique or regional.
Major Industry Players
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CHAPTER 2
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The bulge-bracket investment bank with asubstantial commercial banking operation
These are truly the dominant players in the industry. These are firms that havebeen lending to companies for years; therefore, their relationships withissuers—both on the investment banking side and the commercial bankingside—are very strong. In other words, they that not only have they been aclient’s commercial bank (lending institution) for many years, but they alsohave a history of providing financial and M&A type advice to thesecorporations. Therefore, when one of their clients needs a loan or bond, theseinvestment banks are typically called upon to provide their advice andexpertise-as they have been for many years. These investment/commercialbanks place a large amount of emphasis on their leveraged finance operationsbecause of the substantial amount of fees generated from these transactions.Most of these firms have dedicated leveraged finance professionals in all of themajor financial market locations: New York City, Chicago, Houston/Dallas,Los Angeles/San Francisco, London, and Hong Kong.
Typically, these firms will have an entire leveraged finance platform underthe “debt capital markets” heading within the corporate finance section of theinvestment bank. Some of these firms have entire teams dedicated solely tooriginating deals, while others will align this origination responsibility intotheir industry coverage groups. Regardless of how it chooses to structurethese operations within their organization, the bulge-bracket investment bankwith a substantial commercial banking operation will have resourcesspecifically dedicated to:
• Originating transactions• Following the capital markets• Monitoring the client portfolio and outstanding exposure to certain clients
and financial markets• Interacting with the rating agencies• Selling and trading both the syndicated loan and the high yield bond
Top firms• Bank of America• Citigroup• Deutsche Bank
• JPMorgan Chase• Wachovia
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Because of the vast expansion of the field of leveraged finance, as well as theincrease in size and scope of the financial markets, these types of firms areredefining stereotypical investment banking: they are becoming “one-stopshops” for clients. As the commercial banking operations of these firms havebecome more integrated with their investment banking operations, a clientcan rely on one banker to get nearly everything it needs, including M&Aadvice, a syndicated loan, a high-yield bond, an IPO, or even savings andchecking accounts. Furthermore, clients can now count on one banker toknow everything about their companies, which creates a very trustingrelationship. Since most of these clients started at one point or another witha small loan from one of these banks, it comes as little surprise that leveragedfinance contacts are very often the managers of these extremely valuablerelationships. Needless to say, this is very good exposure for a youngleveraged finance analyst or associate.
Also, generally speaking, because the leveraged finance operations of thesefirms started as part of their commercial banking operations, the leveragedfinance groups in these types of investment banks will typically have more ofa commercial banking feel: a little more laid-back and a little bit lesshierarchical than their M&A counterparts. However, they still all fall underthe same corporate finance umbrella within the investment bank and theyinteract with their corporate finance colleagues just about every minute ofevery day.
Typically, these firms will place analysts and associates directly from theircorporate finance investment banking programs into their leveraged financedivision, just as they would place analysts/associates into any other industrycoverage group. Furthermore, analysts and associates are treated exactly thesame as their other corporate finance peers in just about every aspect.However, unlike at a coverage group, where an analyst or associate mighthave a substantial amount of “down time” during the afternoons beforeworking through the night, there tends to be more of a fire-drill, non-stopnature to the leveraged finance work environment. Working on multiple dealsand managing numerous processes from pitch to close is a non-stop, full-timejob.
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Major Industry Players
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The standalone investment bank
Also players in the leveraged finance industry, albeit on a significantlysmaller scale, these firms have quite a different approach. Whereas aninvestment bank with a strong commercial banking presence (such asJPMorgan Chase and the other banks discussed in the previous section) seeksto maximize the number of companies it lends to in order to broaden itscommercial banking presence, a standalone investment bank such asGoldman Sachs seeks to use its balance sheet in order to drive other fee-related events. Without a commercial banking presence, these pureinvestment banks would rather allocate their balance sheets to larger fee-events for revenue generation, such as proprietary trading, rather thaninvesting and structuring syndicated loans or high-yield bonds for theirclients.
This is not to say that these firms do not arrange syndicated loans and high-yield bonds. On the contrary, they do and they are quite good at it. As just apure matter of transaction volume, however, they just do not have the breadthof experience or leveraged finance market presence. However, they will seekto do this type of arranging of financing for firms where an obvious M&Arelationship, or other type of fee relationship, exists. For this reason, a muchlarger portion of the leveraged finance deals handled by a standaloneinvestment bank will be LBO, IPO, spin-off, or M&A-related. (The firms’bankers in other departments will be generating fees for work on these largerdeals that have a leveraged finance component.) In contrast, a firm such asJPMorgan Chase or Bank of America will arrange a syndicated loan or high-yield bond for just about any client of the investment or commercial bank forany reason, whether it be as part of an LBO, IPO (or other larger deal), orsomething simpler like a debt refinancing that is not related to another fee-related event.
Also, as a syndicated loan tends to require more of a capital commitment thana high-yield bond due to the sheer size of the loans, these standaloneinvestment banking firms tend to be more active in the high-yield bond
market than in the syndicated loan market. Furthermore, on average,syndicated loans tend to be less profitable than their high-yield bondcounterparts, especially those that are not event-driven. Where a firm mightearn $1 to $2 million for arranging a $100 million syndicated loan for an LBOfinancing, raising that same amount using high-yield bonds could earn thebank anywhere from $3 to $5 million, possibly more. In this situation, thestandalone investment bank has made a quantity vs. quality tradeoff, optingfor the market with substantially less volume but a high rate of return for itsown money and time. This is especially true in the event of a generalrefinancing, when these bonds and loans tend to earn substantially less.Every firm has internal metrics for the rate of return it must earn for its ownbalance sheet, for these firms, that rate is typically much lower than theinvestment banks with commercial banking divisions.
Organizationally, these firms typically place their leveraged finance platforminto the debt capital markets portion of the corporate finance division of theirinvestment banks. Unlike their counterparts with commercial bankingoperations, they typically do not have full teams dedicated to originatingtransactions. Most of the deal origination at standalone investment bankscomes from an investment bank client coverage team; the market commentarywill from a debt capital markets group. Although a profit center for theinvestment bank, the leveraged finance group at a standalone investment bankwill have substantially less transaction volume than the same groups at I-bankswith a commercial banking presence. Also, absent this presence, theseleveraged finance groups typically have a culture nearly identical to the rest ofthe investment bank.
At the standalone investment bank, the overall lifestyle will be similar to theinvestment bank with a large commercial banking presence. Analysts andassociates are also part of the investment banking corporate finance programand are expected to work long hours. The only difference between aleveraged finance group at a standalone I-bank and a similar group at aninvestment bank with commercial banking operations is the pace of the day,since teams at standalone firms are generally working with fewer leveragedfinance deals. However, the deals are also generally more complex, as theyare event-driven (as discussed earlier). Subsequently, the analyst/associate’sjob is less about managing a variety of processes and more about workingthrough the nuances of a particular deal. This often translates into morecomplex financial modeling, more intense due diligence, more complicated
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Major Industry Players
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presentations for lenders, and more intricate offering memorandums. Also,since this type of leveraged finance platform might span multiple debtmarkets, it is also possible that an analyst/associate here might see other typesof debt transactions, including high-grade bonds, private placements,investment grade syndicated loans, and even mezzanine debt tranches.
The regional or boutique investment bank witha commercial banking presence
These firms, which do have both investment and commercial bankingpresences, are also players in the leveraged finance market. However, theytypically arrange financings in the “large cap” space for clients where theyhave a distinct relationship, or they compete in the exceptionally profitablemiddle market space. Larger firms in this category (such as ABN AMRO,Barclays, and SunTrust) often have full-scale leveraged finance platforms,but they might find themselves investing in these loans and bonds more oftenthan actually arranging them. The same is somewhat true of the smallerlending operations, such as Jefferies, yet they generally compete forfinancings in the middle market space.
A substantial difference between the large investment banks with commercialbanking arms and the smaller investment and commercial banks is theseemingly limitless balance sheet ability the larger firms have to invest andseek to put to work. Although they still have tens or maybe even hundreds ofbillions of dollars to potentially lend, these large regional banks will arrangefinancing typically only for local companies where they can leverage thepower of their relationship for future ancillary business, such aschecking/savings accounts or other treasury business, such as hedging andforeign exchange. In this sense, their relationships, rather than the fees ofevent-financings, drive their lending rationale. Furthermore, they seek toplace their capital to work in other areas of the bank and opt not to enter thehighly competitive large cap leveraged finance space. At any rate, the
• ABN AMRO• Jefferies & Co• KeyBank• National City
• PNC• SunTrust • Wells Fargo
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financing packages are still comprised of leveraged loans and high-yieldbonds and are structured for the same clients and for the same purposes as arethe large investment and commercial banks.
Even further down the scale of size, many smaller boutique investment bankshave formed lending units by raising a specific amount of funds (typically $1 to$5 billion) for the sole purpose of arranging financing packages for clients. Likethe pure investment banks, they too are not chasing a quantity of transactions;instead, they are typically seeking event-driven deals. In order to distribute theircapital wisely, these firms tend to work with smaller companies in the middlemarket space. However, they still arrange financing for the same variety oftransactions that the larger players do and they tend to interact with the same top-tier private equity shops and hedge funds. On occasion, they will even workwith venture capital firms, which is something that the larger leveraged financeshops very rarely do. Also, these smaller lending institutions tend to own alarger piece of the financing package than their larger leveraged financecounterparts and they tend to syndicate to a much smaller investor universe.
At these firms, the workplace culture is typically more laid-back than at the pureinvestment banks and in general is more similar to a commercial bankingoperation. Also, with less deal volume than their larger counterparts, one cangenerally expect to close fewer transactions at these firms, yet be much moreacutely involved in every piece of the leveraged finance process. With much lesstransaction volume, analysts and associates at these shops typically become evenmore involved in every aspect of the process and this will add to the depth oftheir working experience. . Also, with generally fewer people in the leveragedfinance groups, analysts/associates have an opportunity to take on a substantialamount of responsibility and even truly develop client relationships.
Junior resources at these firms are also sometimes considered part ofcorporate finance programs as investment bankers, and sometimes they arenot. This distinction depends entirely on the firm, as do the culture and hours.Hours tend to fluctuate with the peak times of a deal, such as the closing andfunding of a transaction
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Commercial Finance Companies
If you were to take a brief look at the descriptions of commercial financecompanies on their web sites, you would find that these firms pridethemselves on providing lending, leasing, and other types of financialsolutions for clients. This is quite a different approach from a standaloneinvestment bank that provides advisory work and securities products to itsclients. Subsequently, for the leveraged finance platform of a commercialfinance company, everything from the client base to the product offerings isdifferent from the investment banking firms. In no specific order, majorplayers in this field include GE Commercial Finance, CIT Group, andCapitalSource.
These firms typically work very frequently with smaller mid-cap companies,providing everything from financing for heavy equipment to multi-milliondollar revolving lines of credit. Due to the nature of these product offeringsand the size of these clients, most of these firms’ leveraged finance teams playonly in the syndicated loan market, and stay out of the high yield bondmarket. Naturally, if a firm is already providing smaller loans for other typesof financing needs for a company, a syndicated loan makes sense to providefinancing for a company’s larger financing need. However, it is notuncommon to find some of the larger players, such as GE CommercialFinance and CIT Group, to be co-leading a multi-billion dollar transactionalongside a large investment bank. These leveraged finance deals would besourced from their large cap teams.
On the whole, the leveraged finance platform at a commercial financecompany would be smaller than that of an investment bank. Whereas thelargest investment banks might have a few hundred individuals in the U.S.dedicated solely to sourcing and structuring deals, even the largestcommercial finance companies might have fewer than 100. With somewhatless volume, these professionals typically have more all-encompassing roles,as compared to their investment banking counterparts. Where someone couldexpect to find both a capital markets team and a sales team at a largeleveraged finance shop, these functions are typically combined in thecommercial finance companies and the smaller investment banks.Furthermore, at the smallest commercial finance shops, the deal origination,structuring, credit, capital markets work, rating agency presentation, andclosing responsibilities might all fall on the shoulders of a three- or four-
person deal team. In contrast, at a large investment bank, there wouldundoubtedly be a team for each of the aforementioned responsibilities.
Culturally, these firms will be very different. Although generating millions ofdollars of fees, these teams are still treated somewhat differently from thoseof an investment bank. Armed with corporate cards, BlackBerrys andexpense accounts, the lifestyle is still more than adequate for those seekingcorporate perks. However the basic pay scale tends to be different. Forexample, while a first-year analyst in an investment bank in a good year couldexpect to clear $100k, the first-year counterpart at a commercial financecompany might expect $55-65k. A third-year analyst at an investment bankmight expect to near $200k in compensation in a hot market, while hiscommercial finance peer could expect $75-85k. This discrepancy onlybecomes larger as the market remains hot and investment banks continue topay accordingly. And at the upper ranks of managing director, wherecompensation is typically derived from the amount of revenues brought intothe firm, this pay discrepancy between the two types of firms is furtherexacerbated. However, remember that compensation at the junior levels isrelated to office hours—those investment banking analysts earning $100k aretypically earning about the same per hour as their counterparts at commercialfinance companies.
Most of the pay and lifestyle discrepancies tend to reflect the relative size ofthe firm and the atmosphere of the group. If you were working at acommercial finance company and every other division left at 5 p.m. sharp onFriday, you would have a tendency to do the same. With the 8 a.m. to 6 p.m.lifestyle somewhat more prevalent in greater Corporate America, it comes aslittle surprise that commercial finance shops do not expect all-nighters fromtheir analysts. Also, working every weekend is not usually expected ofanalysts and associates at commercial financial companies and juniorresources are certainly not “on call” on weekends the way their investmentbanking counterparts are. Still, while nobody will dispute that investmentbanking analysts and associates work completely insane hours, it should benoted that the hours in commercial finance are not a cakewalk either. Whenclosing a deal or in the middle of a long-due diligence process, a commercialfinance analyst can expect 80-hour workweeks.
Commercial finance companies also boast an overall more relaxedatmosphere. Many former investment bankers come to these commercialfinance shops to find a more relaxed collegial atmosphere, with khakis and
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golf shirts as opposed to Hermes ties and Gucci loafers. Lunch outside theoffice, as opposed to at one’s desk, is a more typical occurrence at acommercial finance company. For many, this lifestyle tradeoff of acommercial finance atmosphere versus I-banking is worth every singlepenny, and more.
Hedge Funds and Other InstitutionalInvestors
Hedge funds and institutional investors represent the buy-side of leveragedfinance. Responsible for a large amount of the growth in the leveraged loanand high-yield bond markets, these investors are now placing billions ofdollars in the markets. As investors have chased places to put idle funds towork, the markets have responded with more liquidity than ever, increasinglycomplex products, and more innovative financial structures. Subsequently,these investors have put the supply/demand equation into a seriousimbalance, thus making this an issuers’ market. Now, companies that wouldordinarily find themselves bankrupt in any other market are findingthemselves with multi-million dollar syndicated loans and high-yield bondsat all-time record low interest rates.
One of the primary reasons institutional investors are interested in thesyndicated loan market and high-yield bond market is the relative value theseproducts offer to other asset classes. Furthermore, the products in thesemarkets trade off the underlying value of the credit—this means that a firmtypically only has to do their due diligence on a firm once, with the ability toinvest in multiple places in the capital structure of a firm. No longer areinvestors limited to playing in either the equity of a company or the bonddebt; instead, they have a variety of options. Whereas one investor might beinterested in debt of a company, it might find the risk/reward tradeoff of thesecurity of a syndicated loan more appropriate to its risk appetite, as opposedto an unsecured, higher-interest-paying senior note.
These same investors also have the option to play in the increasingly growingbond and loan secondary markets, as these markets have also boomed due tothe rapid expansion of their primary markets. Investors tend towards theleveraged loan and high-yield bond markets since they typically movetogether. For example, if a company is downgraded by the rating agencies,
thus suggesting that its risk profile is greater than its peers offering debt at asimilar interest rate, the trading levels of its leveraged loan and high-yieldbond are likely to fall to reflect this negative change. Institutional investorsanticipating this change might seek to sell their positions in these firms and/orshort these markets. This type of credit prowess rewards the institutionalinvestor that has done its homework.
Reflecting the global financial markets, institutional investors tend to belocated all across the globe. It is not uncommon for an investor to be locatedin Miami Beach, FL, Los Angeles, CA, or Greenwich, CT. Organizationally,these firms tend to run fairly lean, only hiring individuals that can addimmediate value to their firm. As a growing number are playing in both theprimary and secondary leveraged loan and high-yield bond markets, they areseeking individuals with prior credit experience. Individuals working inleveraged finance have become a highly sought after commodity for hedgefunds. Some of these funds play entirely in the leveraged finance markets,while most of the large firms typically have a set amount of their assets undermanagement invested into the markets.
For these institutional investors, the gateway to entry into the leveraged loanand high-yield bond market comes from either the firm originating thetransactions, or the firm administrating the transactions. When a leveragedloan deal is structured, marketed, and syndicated many of these investors aregiven the chance to invest in the loan. Similarly, when the high-yield bond ismarketed, these institutional investors are given the opportunity to buy intothese bonds. On the secondary side, as a firm finds an interest in theoutstanding leveraged loan or high-yield bond of a firm, it would call itsrelationship manager at its investment bank to place a trade. When placingsuch a trade, it is not atypical for the order amount to be multiple millions ofdollars. So a one-point move in the trading level of a position can have amajor financial impact on a firm.
Without league tables to rank the buy-side firms, it should be noted that themajor institutional investors in the high-yield bond market are typicallyinsurance corporations, money managers, and investment corporations, suchas Fidelity, PIMCO, and AIG. Though hedge funds play in this financialmarket quite frequently, only the large ones are generally targeted in theroadshow offering process. In contrast, on the leveraged loan side,institutional investors tend to include all of the above players, as well as quitea few hedge funds, including large firms like Highland Capital, Eaton Vance,
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Van Kampen, and SAC Capital. All of these investors, and more, are targetedin the loan syndication process.
Culturally, it is tough to stereotype the institutional investor universe, as thesize and investment nature of the firm can have a dramatic impact on theirorganization. (The Vault Career Guide to Hedge Funds is a good resource foranyone seeking to understand more about these firms.) However, becausehedge funds generally represent an improvement in hours and, in some cases,also represent a step up in pay, many former leveraged finance analysts andassociates seek careers at hedge funds. With a firm understanding of credit,interaction with the leveraged finance markets, a wide arsenal ofrelationships, and an understanding of a variety of transactions, the juniorresources at top-tier leveraged finance shops are frequently contacted byheadhunters and other placement professionals for positions at top-tier buy-side shops. In these positions, these junior resources now become clients oftheir former leveraged finance peers, investing in transactions they very wellmight have structured when on the other side of the fence.
Private Equity and Financial Sponsors
Private equity firms are the final major player in the leveraged financemarkets (aside from the companies that actually issue the high-yield bonds orleveraged loans). Typically using money from lending transactions in orderto buy firms, private equity shops are clients of those arranging leveragedfinance transactions. Often, their funds are also investors in their own andothers’ transactions, further illustrating their dependence on the leveragedloan and high-yield bond markets.
When a private equity shop seeks to purchase a company through a leveragedbuyout, it typically attains a syndicated loan and/or a high yield bond from aleveraged finance firm. Like individual homeowners who will pay 25% ofthe purchase price from his or her own pocket and borrow the remaining 75%,private equity shops also borrow money when executing an LBO (thisprocess is covered in greater detail in Chapter 5). With these borrowed funds,private equity shops are able to leverage their own money and executemarket-changing transactions. At the center of this execution is the leveragedfinance firm, lining up this necessary financing.
Whether large or small, leveraged finance firms typically line up in droves toprovide this financing, as it is generally a very large fee event for a firm. Theapproximately $25 billion LBO of RJR Nabisco by KKR in 1989 (still themost notable private equity transaction in the leveraged finance markethistorically), generated hundreds of millions of dollars of fees for the lendinginstitutions. Since those early LBO days, with the rapid expansion of theleveraged loan and high-yield bond market, there has been a flurry of buyoutactivity. Numerous private equity firms have raised multi-billion dollarinvestment funds in the past few years in order to continue to executemultibillion dollar LBOs, such as the $15 billion purchase of Hertz, or the$11.3 billion purchase of SunGard. With LBO volume nearly $150 billionannually, up from $40 billion in 2000, and private equity fundraising volumenearing $500 billion, up from approximately $200 billion in 2000, LBOactivity is only expected to continue long into the near future. Needless tosay, the field of leveraged finance is eagerly anticipating this activity.
No target is off-limits for private equity firms armed with such financing.These firms will even enlist the bank accounts of rival firms in order toexecute mega-LBOs. Recent corporate divestitures and secondary buyoutactivity, where a firm is bought by one private equity shop and later sold toanother, have also become a rapid source of expansion in the private equitymarkets. Cross-border transactions have also boomed in the past few years.Finally, “auctions,” where multiple private equity firms compete to win a“property” have become a market standard for corporations seeking to findthe highest bidder. Needless to say, as the cash balances of these firms remainrobust, buyout activity will only continue to become more innovative andaggressive.
Leveraged finance firms execute many other types of transactions forfinancial-sponsor owned companies other than LBOs. Very common instrong financial markets, many private equity shops will seek to take some oftheir money “off the table” though leveraged loans or high-yield bonddividend transactions. Financial sponsors also will execute the sameleveraged finance transactions for their portfolio companies as any othercorporation would, including debt refinancings, recapitalizations, IPO/spin-off financings, and M&A transactions.
Career-wise, private equity shops tend to be another major career alternativefor those in the leveraged finance field. An investment banking professionalwho has completed the analyst program at a top-tier leveraged finance group
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seeking a slight career transition might seek out a two-year program with thebig names in private equity, including KKR, Blackstone, Bain Capital,Madison Dearborn, Carlyle, Texas Pacific Group, Hicks Muse, JPMorganPartners, and Thomas H Lee. With financial-sponsor transaction experience,a firm understanding of the lucrative buyout process, and interaction with theleveraged finance markets, a career in private equity can be a comfortablecareer fit for a former leveraged finance banker. Although the hours mightnot be drastically better than the in investment banking, private equity firmsgenerally pay at the top end of the Wall Street scale, assist with MBAapplications to top-tier programs such as Wharton and Harvard BusinessSchool, and many even allow “carry” in the firm’s funds (a share of the firm’sprofits). These are the typical reasons why some seek a change of pace intothe private equity field.
The leveraged finance players providing the bulk of the financing money forprivate equity transactions also happen to be the firms with the largest balancesheets and top-notch financial sponsor coverage teams. At the top of this listare familiar leveraged finance names, such as JPMorgan, Deutsche Bank,Bank of America, Citigroup, Credit Suisse, Goldman Sachs, and LehmanBrothers. As the nature of LBO transactions tends to favor purchasing stablecompanies (whose earnings can be used to pay of the loans used to purchasethe company), there tends to be more activity in the large cap space when itcomes to LBOs. The major leveraged finance players in the industry alsohave the ability to offer their financial sponsor clients a wide variety offinancing solutions across both debt and equity markets, which is not typicalof a large commercial finance operation.
Still, though they do not generally compete in the large cap LBO spacebecause they place less emphasis on serving private equity shops, commercialfinance companies are active in the middle market LBO arena. Examples ofthese include GE Antares, CIT Group, CapitalSource, Ableco-Dymas, andMadison Capital.
As discussed earlier, there are two major financial products that drive theleveraged finance industry: the leveraged loan and the high-yield bond. Inthis chapter, we take a detailed look at the key characteristics and the issuingprocess for the leveraged loan, and compare it to the high-yield bond.
It should also be noted that mezzanine capital also plays a part in theleveraged finance industry, yet they are not typical of 99% of the industry’stransactions.
The Leveraged Loan
What it is
A leveraged loan is a loan arranged by a financial institution for an issuer,which is syndicated to a broader set of investors. Leveraged loans range insize from $1 million to $5-$7 billion and are generally arranged as part of afinancing package for an issuer. This instrument is almost always consideredsenior secured debt (secured by the assets of the company), but on rareoccasions can be senior unsecured debt. Due to the need for material non-public information (such as forward-looking company financials) in order tostructure and complete a deal, the syndicated loan market is a private market.Exceptionally large, the U.S. leveraged loan sees nearly half a trillion dollarsin annual new issuance volume, representing thousands of transactions.
Key characteristics
Underwritten vs. arranged: Leveraged loans are either arranged by afinancial institution on a “best-efforts” basis, where there is no guarantee thata certain amount of financing will be raised, or they are arranged on an“underwritten” basis, where the arranger provides the entire financing upfrontand syndicates its exposure to other firms. The former example can belikened to the “good old college try,” whereas the latter example is aguarantee to an issuer that it will receive a certain amount of funding.
Underwritten financings typically occur when a financing is necessary to acertain event (such as an acquisition). Because of the large commitments of
The Products
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capital from financial institutions that are required for underwrittenfinancings, and because the arrangers of underwritten financings assume therisk of syndicating the loan to investors, they are typically more expensive foran issuer (the organization borrowing the loan) than a “best-efforts” loan. Inthe best-efforts case, the financing firm is only responsible for the amount ithas itself committed to the transaction, not the entire amount.
Structure: Syndicated loans typically come in one of two forms: Revolvingcredit (RC) facilities and term loans. They are generally issued together andcomprise the different tranches (pieces) of what is known as a “loanpackage.” RC facilities are similar to credit cards, while term loans aresimilar to a standard car loan:
The revolving credit facility: similar to credit cardsA revolving credit facility is an unfunded financial instrument that can bedrawn upon at the issuer’s discretion, just like a credit card. Also like a creditcard, RC facilities have annual administration costs, a fee for drawing onthem (similar to an APR for holding a balance) or an annual fee if unused.RC facilities are usually provided by standard commercial banks, much likethe credit card industry.
At the end of their duration, the balance of a revolving credit facility is due,just as with a credit card. Also like a credit card, an RC can also be refinancedwith a lower interest rate before the end of its duration. RC facilities aregenerally rated by the major rating agencies, which like the credit score of anindividual in the credit card application process, typically plays a large role indetermining loan sizes and interest rates.
Unlike credit cards which have an essentially unending duration, RC facilitiesare issued in durations of 5 to 7 years, based on an issuer’s needs. Also,companies typically have only one revolving credit facility, whereas manypeople have multiple credit cards. RC facilities are dominated in a specificcurrency, whereas credit cards can be used across currencies. Finally, the RCis a floating-rate instrument with a fixed rate spread above LIBOR (LondonInterbank Offered Rate). Typically, the credit card has a fixed APRpercentage that does not fluctuate with any other interest rates.
The term loan: similar to car loansThe term loan is a fully funded instrument, which is drawn from the momentit is issued, much like a car loan. In this case, there are no undrawn or drawnfees, but annual administration fees do exist. Like a regular car loan, the term
loan is issued for a duration of anywhere from 5 to 7 years, depending on theneeds of the issuer. Also like the car loan, the term loan is paid off over time(amortization) with a balloon-payment at the end of its duration. However,typically this annual rate of amortization is 1% of the loan, as opposed tomuch higher rates for car payments. Finally, the term loan is also a ratedinstrument by the rating agencies, which like an individual’s credit score inthe car loan application process, will play a large role in determining loansizes and interest rates.
Unlike a car loan, term loans are generally invested in by institutionalinvestors, rather than commercial banks, hence why they are typicallyreferred to as “institutional tranches.” As with the RC facility, term loans arealso floating-rate instruments with a fixed rate paid above LIBOR (LondonInterbank Offered Rate), as opposed to a fixed interest rate for a car payment.
There are a variety of term loans, including term loan A’s (issued to higher-rated credits with shorter durations, typical commercial bank investors, andlarger amounts of amortization), term loan B’s (with longer durations,institutional investors, and less amortization), and 2nd lien term loans (withsimilar structures to term loan B’s, but with less security than other termloans).
Process
There is a somewhat standard process involved when a company attempts toissue a leveraged loan. In many cases, loans do not make it through thisprocess. Also, in many cases the terms of the loan are fundamentally alteredduring the deal lifecycle.
A backup in a financial market can also keep a product from being executed.During the high-yield market back-up of 2005, JPMorgan became notoriousfor structuring and executing syndicated loan transactions that would take theplace of high-yield bonds for issuers. In this case, the process of issuing aproduct must be somewhat flexible, as must be both the arranger and theissuer.
For syndicated loans, the standard issuance process generally takes anywherefrom 8 to 12 weeks from pitch to close. Here’s a look at the standard process:
a) The pitch: In this phase, a financing firm has proposed a leveragedfinance product to an issuer (a company). Through regular dialogue with
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the company, either a coverage team or a leveraged finance relationshipmanager has found that a syndicated loan and/or high-yield bond might bethe right financial solution to the issuer’s needs. In such a case, thecoverage investment banker will bring along the appropriate people fromleveraged finance, including a senior member of an origination team anda capital markets expert to pitch the financing idea to the client.
In this phase of the process, the pitch has generally gone through many latenight iterations in order to contain the most updated relevant marketinformation, comparable company analysis, pro forma company financialmodels, financial product information, transaction timetables, costanalysis, and credential slides. The pitch is a rough idea of the projectedfinancing structure and its cost to the issuers. As detailed private financialinformation has not been shared by the company with the financialinstitution at this point in the process, pitches are usually prepared withpublic information from the company’s web site, the SEC, and otherpublicly available sources.
In a financial auction scenario, this part of the process would be when thesell-side or M&A advisory firm has held a management presentation onbehalf of the corporation for sale, so that the bidders and their financingfirms can attend. In a similar process to the standard pitch phase, the sell-side firm will walk through the basics of the company, including thefinancial status, a history of the firm, a background of the managementteam, and a general overview of their idea of a potential transaction,including the size of potential debt tranches and even transactiontimetables.
b) Due diligence and transaction consideration: If the pitch process hasgone well, and the company decides to further explore the possibility ofissuing a loan, the company will release confidential financial and otherinformation to the financing firm, in order to get a better idea of thespecifics of the proposed transaction. At this same time, the financing firmreadies a list of due-diligence questions, while working with its internalcredit team. From here, the financing firm or firms will generally revisitthe issuer in order to “kick the tires,” while asking questions probing thenature of the business. All of this is generally done to get a better feel forwhether the transaction is possible and what hiccups could occur duringthe process.
In a best-efforts financing, this due diligence is typically not as intense asan underwritten financing would be. This is because in a best-effortsfinancing, the financing firm would not be on the hook for the cash in theevent the firm releases damaging information or misses its projectedfinancial targets and the loan cannot be sold to investors. Also, becausebest-efforts financings are usually done for investment-grade clients or asroutine refinancings for leveraged clients, the financing firm’s reputation isgenerally not on the line in a best-efforts financing, while that can be in thecase of an underwritten financing.
The vast majority of transactions that make it through the pitch phasegenerally make it through this due diligence phase.
c) Internal credit approvals: In order for any financial institution tocomplete a leveraged finance transaction, an internal credit committeemust review and sign off on the proposed transaction. Also referred to asan underwriting committee, this internal credit team is responsible forprotecting the firm from ill-advised deals and overly aggressive structures.If it were entirely up to deal teams, deals of all sorts would be mandatedand would either struggle to find investors or get entirely “hung” in market.Therefore, before signing any sort of financing agreement, the leveragedfinance origination teams must get the approval and sign-off of theirinternal credit committee.
In order to get this approval, a credit deck outlining the company, itsmarket risks, the transaction, detailed financial models, and the potentialinvestors for the proposed transaction is assembled and brought tocommittee, which reviews it in great detail. This process requires a lot ofback-and-forth between all parties, as the credit committee generally asksprobing questions that require the deal team to work with the issuingcompany to figure out. Often, this includes revising financial models withdifferent scenarios, as well as conducting more outside market researchinto competitors and similar deals that have been done. Once the creditcommittee has approved a deal, a summary of terms and conditions will bedrafted by the financing firms’ lawyers and sent over to the company.
d) Winning the mandate: At this point in time, the company is usuallyreviewing financing proposals from a variety of firms. With no clarity intowhat any of the other firms have proposed and the idea of millions ofdollars of fees from a transaction, the deal teams will work very hard to
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push their credit committee to the extremes of what is acceptable. In somecases, this means that a credit committee will not allow the transaction.But the majority of transactions that do get approved by credit typicallyend up being reviewed by the company.
From here, the company has the option of choosing one of the financingproposals, choosing none of them, choosing multiple financing proposals,or choosing a subset of the proposals and continuing to negotiate. In thecase of the large leveraged financings, clients will in most instances choosemore than one financing firm and make them all come to the same terms.This creates a scenario in which the financial institutions involved arereferred to as “joint bookrunners.” Having multiple financing firmsinvolved is quite common for deals larger than $1 billion. For deals lessthan $250 million, it is typical that one firm will win a mandate andbecome a sole bookrunner.
It is difficult to estimate what percentage of the deals that make it tomandate phase are won. For the very best large firms in non-auctionscenarios, a good majority of deals are won, say 60-75%. However, in theauction scenario, this could be a 1 out of 10 hit rate for any firm, if notworse. Auctions, in this sense, are much tougher to win. As a financialsponsor seeks to bid on an issue, not only is it competing with other firms,but the firm itself also finds the best financing source. As a result, theremight be 10 financial sponsor firms competing for a property and, if eachof them had three financing sources competing for their business, therecould be 30 different possible scenarios. Therefore, the auction processmight entail multiple rounds of bidding before a suitable suitor is chosenand a mandate awarded.
Once a financing source has been chosen, the mandate is given. Thistypically means that the financing firm and the company review the termsand conditions and execute the financing papers. Underwritten financingsare typically long documents outlining the financial commitment given bythe financing firm, as well as the fees associated with the transaction.These executed docs have time limits, so execution of the transaction atthis point is pretty imminent. From here, nearly all transactions arelaunched, closed, and funded.
e) Transaction launch: Prior to the transaction going “live,” a number ofprocesses must be completed. A list of investors must be circulated, a
confidential information memorandum outlining the company and thetransaction must be drafted, a sheet of terms must be readied for lenders toreview, and the formalities of those leading the transaction must bedecided. Each of these events is rather time-consuming; the entiretransaction launch period typically takes two to four weeks. Once theseprocesses are completed, the transaction goes live, which begins the periodwhere a transaction is “in market.”
At this point, the financial institution’s salespeople begin making calls toinvestors, while marketing materials about the transaction are circulated tothose interested in the transaction. The most important part these materialsis the confidential information memorandum (“info memo”). The infomemo is a large book outlining most everything about the transaction andthe company in great detail. The book often takes a few weeks to write andrewrite with the help of company management. Once completed andcirculated, it becomes an investor’s primary source of investmentinformation. The info memo contains general guidance regarding theindicative size, structure, pricing, and ratings of the new debt facilities.This book also serves as a key starting point for the lenders’ presentation.
f) External presentations (rating agencies and lenders’ meetings): Ifnecessary, immediately before or after the launch of the transaction thecompany will go to the rating agencies (Moody’s and Standard & Poor’s)to have its new facilities reviewed. This process typically entails a several-hour presentation (prepared by the financing firm or firms) by the companymanagement to the rating agencies. The rating agencies will take thisinformation into consideration, spend a few days digesting the presentationwhile requesting additional information from the company, and come to aconclusion about the ratings of the company’s debt. This process isdefinitely closed-door— rating agencies do not reveal their methodologiesfor arriving at ratings. However, with a substantial amount of experiencein this field, it is not uncommon for the seasoned leveraged finance firmsto be able to predict these ratings with great accuracy beforehand.
The ratings of the company are probably the most crucial part of the loanstructuring and syndication process. Investors look to these ratings to seewhat similarly rated credits exist and whether or not this is a safe and/orfavorable investment. As CLOs and CDOs must meet certain investmentcriteria in ratings categories, the ratings outcome can determine whether ornot they can invest in a credit. Even the financing firm waits in
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anticipation of the ratings decisions, as this will absolutely affect theindicative structure and pricing of the facilities. A poor rating candramatically alter the attractiveness of a certain credit and its potentialsuccess in the market.
Because this is such a crucial piece of the process for its clients, the largestfirms have a rating agency team to help with the process. This team is alsointricately involved with the leveraged finance team when proposingcapital structures and advising the most optimal debt transactions forclients. Quite often, their expertise and assistance in the process savesclients millions of unnecessary dollars.
The lenders’ meeting is also a major part of the in-market process. Thesemeetings generally take place for new debt facilities and event-drivenfinancings (in other situations, a conference call with lenders, rather than ameeting usually suffices). The lenders’ meeting is organized by thefinancing firm at a local hotel or conference venue where all of the relevantcompany and transaction information will be discussed. Investors whohave been invited into the transaction attend the presentation, where theyare able to evaluate the company, the management team, and thetransaction more accurately. Scheduled a week or so after the transactionhas been in market, this is often the first time investors truly take a look atthe information and is a good way to get everyone excited about it. Duringthe presentation at the lenders’ meeting (which has been prepared by thefinancing firm and the company management), the management team willspeak in depth about the company, its future, and its financial status. Thefinancing firm will then talk about the financial transaction and will directQ&A accordingly.
g) Investor evaluation process: For one to two weeks following the lenders’meeting (or conference call), armed with all of the relevant informationrelated to the loan, investors will review the transaction with their internalcredit committees and decide whether or not to invest. They will performtheir own due diligence, calling the financing firm and the company inorder to ask questions. They will build their own financial models basedon the financial information given in the information memorandum and thelenders’ presentation.
This part of the process is generally a quiet period for the financing firm.However, investors will call the analyst or associate from the leveraged
finance deal team or the sales team to ask follow-up questions. Likewise,the leveraged finance sales team will regularly contact investors in order tocheck on their investment status. In the event they have decided to invest,they will call their sales contact at the finance firm and indicate theircommitment amount to the transaction. In the case of the large firms andthe bigger transactions, this commitment is often on the order of tens orhundreds of millions of dollars.
h) Investor commitment period: As these commitments trickle or flood in(depending on how enthusiastic investors are) the “book” is built. Fromhere, the sales and capital markets teams meet on a regular basis to giveperiodic syndication updates to the company. As the commitments arefinalized and the commitment deadline passes, the sales team, capitalmarkets group, and structuring team will sit down to review thetransaction. At this point in time, transactions often change in price and/orstructure.
In the event that the commitments greatly exceed the amount of thefacilities (what is commonly referred to as oversubscription), the pricingwill commonly be reduced or the structure will be altered to be morefavorable for the issuer. This oversubscription happens for a variety ofreasons, including when ratings come out more favorable than expected,the management team “wows” investors, the company is a popular credit,or even just when the market is hot and investors are sitting on idle cashbalances. Price “reverse-flexing” is quite common to adjust the pricing towhat the market will accept. At this time, the new terms are recirculatedand investors are given a chance to alter their commitment amounts.
It is not common that the commitments won’t meet the amount of thefacilities, since the sales team is constantly in touch with investors and willbe able to predict if/when a transaction might struggle. Subsequently, thesales team will liaison with the leveraged finance origination team to adjustthe terms before the commitment deadline is met. In this case theleveraged finance team works with the company, the capital marketsgroup, and the sales force to adjust the terms in a variety of ways, includingextending the commitment deadline, inviting more lenders, increasing thepricing, adding call-protection, increasing the upfront fees paid to lenders,or even downsizing the facilities. The acceptable “flexing” of thetransaction is typically outlined in the commitment papers and agreed uponwith the company well before the in-market period. As a price flex of 25
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basis points (.25% in interest) on a $1.0 billion facility can mean anincremental cost of $2.5 million in interest annually over a 5 to 7 yearfacility life, these flex terms are often heavily scrutinized.
In a worst-case scenario—an underwritten financing that has come upshort—the financing firm will use the commitments it has from other firmsin the syndicate and will foot the rest of the bill. Much like splitting acheck at dinner, the person holding the check might be left with the balanceof the bill if it is not able to syndicate the entire amount. Naturally, afterthe transaction has closed, the financing firm might try to sell its positionin the secondary market at a discount, in order to rid itself of anyunnecessary exposure.
i) Credit agreement finalization: After the transaction has been finalized, acredit agreement summarizing all of the terms of the transaction is sent tolenders, where it is reviewed, signed, and sent back to the financing firm.This is the master document to all syndicated loans and is absolutelynecessary for a syndication to exist.
j) Closing and funding: After the credit agreement has been signed, the dealcloses and, in the case of a term loan, is funded. Appropriate fees are paidto the financing firm and the lenders from the company. The financing firmcollects all of the funds-flow information from the lenders and organizes allof this documentation for its back-office administration team. From here,the funds are wired from the lenders into a bank account for the company.In the case of the revolving credit facility, these accounts are set up andready to be drawn upon in the event that the funds are needed.
At this point in time, if the transaction is a landmark deal or a majorcorporate event, it is typical for the financing firm to design and distributedeal toys commemorating the successful execution of the deal. These dealtoys often take the form of something unique to the company. Forexample, in the case of an NFL football team, the toy might be a player’shelmet or actual NFL football with the deal information inscribed right onthe front. If truly a celebratory occasion, a closing dinner might be held ata nice restaurant for all of the major players involved in the transaction.Both are ways that the financing firm expresses its appreciation for thefinancing business.
A high-yield bond, like a leveraged loan, is a funded financial instrumentissued by a corporation for a variety of purposes (acquisitions, capitalimprovements, etc.). Unlike the leveraged loan market, the high-yield bondmarket is a public market and the high-yield bond is a registered security withthe Securities and Exchange Commission.
Because investors in public markets have restrictions on the amount ofconfidential information about a company they can have, the fact that thehigh-yield bond market is a public market can prevent a firm from investingin the same company in both the leveraged loan and the high-yield bondmarkets, unless it utilizes only publicly available information when decidingto invest in the high-yield bond. If a bond is issued privately, with privatefinancial information, it is referred to as a “private placement” and ismarketed and sold to a smaller set of financial institutions.
Key characteristics
High-yield bonds are typically fixed interest rate products that exist for 7 to10 years on the market. The bonds are non-amortizing and are generally non-callable by the issuer for four to five years of their life, at which time theissuer will have the opportunity to repurchase them. As the companies thatissue high-yield bonds are relatively large, the typical high-yield bondissuance is greater than $100 million. The high-yield bond can come in avariety of forms from senior secured debt to unsecured notes, subordinatednotes, discount notes, floating rate notes, and holding company notes.
The high-yield bond secondary market is slightly more complex than that ofthe syndicated loan market and is generally more active. High-yield bondtrading levels often correlate with the frequent movements in the equitymarkets and the overall general direction of these levels is reflected in thesyndicated loan market. Initially brought to fame and dominated in the 1980sby Drexel Burnham’s Michael Milken, annual new issuance market volumesin the high-yield bond market have grown to nearly $100 billion per year.
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The Products
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Process
The process for marketing a high-yield bond is largely similar to that of asyndicated loan in that a transaction is pitched, structured, marketed, and sold toinvestors. With the exception of the roadshow (a period during which thefinancial institution and the issuing company travel to meet with investors), whichtakes the place of the lenders’ meeting for syndicated loans, the high-yield bondissuing process is typically more condensed than that of a syndicated loan. TheVault Career Guide to Investment Banking (Chapter 6: Stock and Bond Offerings)provides a comprehensive step-by-step overview of the bond offering process.
Capital Structures
When structuring a financing transaction, such as a high-yield bond or asyndicated loan, it is not uncommon for a client to have prior outstandingdebt. Whether this consists of current liabilities from an accounts payablesystem or other outstanding syndicated loans, existing debt can bedramatically impacted when new debt is placed within a capital structure.
For example, debt that could have been easily repaid in the event of a forcedliquidation might lose its place entirely on the payback schedule, if more“senior” debt is placed ahead of it in the capital structure. For this reason andmany others, it is important to understand where debt fits into capital structures.
A comprehensive capital structure would look like the following:
This chapter provides an overview of each major group within the world ofleveraged finance and each group’s purpose, role and lifestyle, as well aswhere each group fits into their larger organizations.
Structuring/Origination
In a role that can be very closely compared to investment banking coverage,those in leveraged finance structuring/origination functions are primarilyconcerned with generating revenues for the firm. When a leveraged financeorganization has a specific group dedicated to structuring and origination, thisteam’s focus will be successfully closing as many transactions as possible, asmore deals equals more revenue. In this sense, these groups operate as well-oiled machines: Pitch… Win… Execute… Close… Repeat.
There are typically four players in most deal teams: a managing director, avice president, an associate, and an analyst. In complex deal situations, therecan be numerous analysts, whereas in the routine debt refinancing, theremight only be a managing director and a top performing analyst. In thissituation, the managing director will source the deal and oversee the process,while the analyst does most of the heavy lifting. The nuances of each role arecovered more in depth in Chapter 9 of this guide.
The structuring and origination function is the heart of leveraged finance.Lifestyles are typically hectic, as different deals are managed in a variety ofstages. This lifestyle has been described as a “zoo on fire,” as the deal teamis constantly managing a very wide variety of people and processes.However, with this significant and never-ending responsibility comes a senseof pride, as this function is often recognized as leading the battle cry anddelivering financial results.
Credit/Risk
Whereas the main function of the structuring/origination deal teams is tobring in deals, the credit/risk teams are focused on protecting the firm’sbalance sheet. Well before a deal ever goes to market and typically before it
Leveraged Finance Groups
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is ever pitched, a deal team must seek the approval of the transaction with itsinternal credit committee. This generally involves a very intense analysis ofthe terms and conditions of a deal and an understanding of the risks of atransaction. As the firm is typically a holder of a piece of the debt of everytransaction it structures, this team takes a much longer-term view of thecredits it analyzes. Although deal teams are undertaking initial underwritingrisk, this risk generally lasts 6 to 8 weeks until a deal is closed, as opposed tothe 5- to 7-year deal life, which the credit committee must deal with.
In order to underwrite a transaction, a deal team works with a credit teamquite intensely during the structuring of a deal. This credit team setsexpectations for the deal team, in terms of the expected “hold” position thefirm will take, as well as the terms and conditions that the firm must have inits legal documents. In order to meet these needs and assist with the creditapproval process, the deal teams generally put together “credit decks,” whichcan range from 20 to more than 100 pages of analysis on a target company,its industry, its peers, its financial performance, and the proposed transaction.
Whereas a deal team in leveraged finance might have four members (MD, VP,associate and analyst), it is generally uncommon for that deal team to havemore than one credit executive working with the deal team. Along with thedeal team, the credit executive will take the deal to “committee” where it isgiven the final seal of approval before any legally binding contracts aresigned. This credit committee has the ultimate responsibility for thetransaction. As the firm’s internal balance sheet “police,” they serve an oftenthankless but exceptionally important role, primarily because a deal teamoften views them as yet another hurdle they must overcome in the pursuit offees; these credit teams are rarely recognized when deals are successful, yetare often scrutinized when deals fail.
All investors have internal credit teams or executives who make decisions toinvest in credits. During the investor commitment period in the deallifecycle, these credits are analyzed by those internal credit committees.Even the rating agencies use a similar understanding of the deal to make aratings assessment. Because of the importance of being able to analyze creditrisk, thorough training in credit analysis can lead to many career options inthe world of leveraged finance.
Credit/risk also monitors a number of important trends throughout the firm.The group generally works with the corporate banking team to understand the
amount of exposure the firm has to different types of risk. Savvy credit teamsmonitor trends and standards in the debt markets in order to prevent erosionin the terms and conditions being offered by the leveraged finance firm toclients. (Naturally, if it were up to the deal teams or clients, these termswould be extremely investor-friendly, in order to guarantee that a deal getsdone and the fees get paid.) Credit is also the team that gets involved whenan underwritten deal gets hung in the financial markets and the leveragedfinance firm is stuck footing the bill. Credit executives are generally fromstructuring/origination, corporate banking, or another side of the firm, and areseasoned professionals.
The lifestyle in the credit/risk group is more similar to that of a Fortune 500corporate finance group than an investment bank. Without the incentive ofmassive fees driving their bonus checks, credit/risk professionals generallywork more normal hours, such as 8 a.m. to 7 p.m., with few weekends. Whena complex deal is coming through the pipeline, or a deal needs a last minuteapproval, it is possible that a credit executive would work until 10 p.m.However, that is the exception rather than the rule.
Ratings and Capital Structure Advisory
Ratings are a major function of the leveraged finance process. A slightupgrade in a rating can mean an issuer is considered investment grade ratherthan high yield, and thus has access to wider range of financial markets. Aslight downgrade in its ratings and that same issuer could be spendingmillions of unnecessary dollars in interest expense. Therefore, many largeleveraged finance shops have groups solely dedicated to working with dealteams to help engineer the most financially optimal transactions at the leastpossible expense to the client. These teams have a thorough understanding ofthe rating agencies’ methodologies and how simple changes in a company’scapital structure can change the issuers’ cost of debt.
These teams are generally part of the corporate finance investment bankingplatform, but are not always organized under the leveraged finance umbrella.However, because of the sheer volume of capital structure work thatoriginates from the leveraged finance group, the ratings and capital structureadvisory teams work quite frequently with their leveraged finance colleagues.Typically, a dedicated ratings specialist will attend client pitches, playing amajor role in delivering the firm’s financing proposal. This same professional
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will also work very closely with the deal teams when structuring the ratingsagency presentation and prepping the company management. This ratingsteam will often pre-calculate expected costs of debt based on the credit profileof the firm and its peers, as well as expected scenarios based on ratingsoutcomes. For a CFO or a treasurer, this kind of knowledge is invaluablewhen planning for the company’s future.
Organizationally, these teams tend to be much smaller than their leveragedfinance counterparts. Whereas a firm might have 100+ professionalsdedicated to structuring and originating transactions, it might only have 10 to15 ratings professionals. As these professionals are usually paired with dealteams on transactions in the pitching and ratings process, they tend to workthe standard long hours of their corporate finance peers and can usuallyexpect the exact same compensation. With a position that affords intenseanalysis of companies and many potential scenarios, this job tends to be bothquite analytical and thought-provoking in nature.
Corporate Banking
While the coverage and leveraged finance groups pitch and execute deals, thecorporate banking team keeps tabs on the industry and monitors clients.Professionals in this group maintain relationships with each of the borrowersand collect information in order to monitor the credit profile of a typicalclient. At any given moment, a corporate banker should be able to tell youtheir firm’s outstanding and potential financial exposure to a specific client.In terms of leveraged finance, a corporate banker should be able to tell a dealteam the current outstanding balance of a client’s revolving credit facilityand/or term loan. This sort of knowledge, as well as their industryunderstanding, makes corporate bankers valuable to both deal teams andcredit/risk teams.
When putting together pitches and internal credit presentations, leveragedfinance teams almost always include comparable transactions of industrypeers, as well as financial information about the client. This is wherecorporate bankers come in. Not only do they know about the transactions ofindustry peers, but they generally have a lot of industry knowledge about thepeers and can comment on them. As for financial information on the client,the corporate banking team maintains updated financials based on quarterlyreporting associated with syndicated loan facilities and/or SEC filings.
The corporate banking role extends into a client management relationship.For example, if a company wants to draw money on their syndicated loanfacilities, it will generally call its corporate banker. Once a deal is completed,it is generally the corporate banker who manages the non-pitchingrelationship. While the coverage and leveraged finance teams often call theclient in order to generate fees for the firm, the corporate banking groupworks to maintain the existing relationship. However, this boundary can beblurry-the best investment bankers will maintain an open dialogue with aclient to temper the sales nature of pitching. In order to best maintain theseclient relationships, many investment banks place their corporate bankingteams in appropriate regional offices so that they can be geographically closeto their clients.
Organized into industry coverage teams, the corporate banking group isusually a part of corporate finance investment banking. However, withoutpitching and deal execution defining as much of their job, junior resources incorporate banking generally have a better lifestyle than their corporatefinance peers. Although they do work on various parts of the deal process,including the pitches, revenue generation is not the corporate banking group’sprimary function, and thus, analysts and associates typically do not pull all-nighters for a deck of slides. The lifestyle tends to be a little less hectic andinvolves a more steady and predictable workflow.
However, it should be noted that workload in corporate banking becomesheavier when clients report quarterly financial performance. Also, corporatebanking teams in “hot” sectors tend to be quite busy. For example, as Fordand GM underwent substantial erosion in the financial performance recently,transportation corporate banking teams became very active, following theindustry events and assisting deal teams with pitches.
Capital Markets
Capital markets can be considered as sandwiched between corporate financeinvestment banking and sales & trading. At most firms, this is the group thatwill conduct research on a financial market, passing along this information todeal teams in order to provide deal structuring advice. At smaller firms, thisrole is partnered with sales responsibilities—capital markets professionals atthese firms not only conduct research on financial markets, but also workwith investors in order to sell the product. However, at the most active
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leveraged finance shops, the capital markets role is more the former than thelatter, primarily concerned with understanding the day-to-day activity in afinancial market and being able to synthesize this activity for deal teams andclients.
Capital markets professionals are particularly important in the leveragedfinance field. A talented capital markets person will understand markettrends, be able to communicate these on an issuer-by-issuer basis, have athorough knowledge of recent transactions, and also have a broadunderstanding of the financial markets in general. Professionals in capitalmarkets work very closely with leveraged finance deal teams in order togenerate ideas, provide advice on interest rates and structuring solutions, andeven give periodic market updates as requested by clients. A great capitalmarkets professional makes the life of the deal teams and sales teamssubstantially easier.
Because they have their hands in nearly all aspects of the deal process, capitalmarkets professionals often experience their jobs as daylong firedrills. As itrequires gathering a vast amount of knowledge from a wide variety of people,the job is a seemingly never-ending rollercoaster of events. A capital marketsprofessional might give a market update to a client in the morning, attend alenders’ presentation over lunch, and get dialed in to multiple pitches orattend numerous deal-team sit-downs for upcoming deals in the afternoon.The pace of the job is furious, but it generally slows down after the marketsclose and clients have gone home. As for weekend work, there is alwaysplenty to do—deal teams are continually seeking guidance for the nextupcoming major transaction, or prepping for Monday morning firmwidemarket update calls.
Capital markets professionals tend to be former structuring professionals whorely on the breadth of their previous experience. Junior capital marketsresources generally serve something of an analytical and research-orientedfunction. (This should not to be confused with equity or high-yield researchteams, which are totally different functions altogether. The type of researchcapital markets performs is more trend-oriented and/or comparabletransaction-oriented, rather than the intense financial modeling of specificcompanies or financial products that is the work of the other researchfunctions.) These capital markets teams also maintain league tables (industryrankings), a variety of market update slides, and transaction case studies. Asdeal teams are often asked by clients, “what other transactions like this are out
there,” a capital markets professional will try to already have a slide ofcomparables ready and waiting.
The lifestyle of capital markets appeals to those who enjoy having diverse jobresponsibilities. With an endless list of requests from teams, presentations toattend, and conference calls to take part in, time and priority management arecritical in order to maintain sanity. Also, as the gateway to the financialmarkets, this person needs to be an encyclopedia of past transactions in orderto give the best guidance possible to deal teams. Capital markets is definitelynot the place for those seeking a quiet cubicle with intense financialmodeling. It is also generally not a career path for those junior resourcesinterested in moving to private equity. However, it is definitely a place forsomeone seeking a springboard into sales & trading or even an opportunity ata hedge fund.
Syndicated Loan Sales & Trading(Primary and Secondary)
Syndicated loan sales & trading is a fairly complicated operation. How it isstructured and set up varies from firm to firm. As the syndicated loan marketis a private market (issuers need not register with the SEC when issuingsecurities), investors can find themselves in an interesting predicament: ifthey receive private information such as forward-looking company financials,they are not able to use this information to invest in other markets and/orother products of an issuer (such as the company’s stock or bonds issued bythe company). However, if they remain public-side investors, they are notable to gain the insight into a credit that their peers are. Because leveragedloan origination teams sit on the private side of the wall, how a firm organizesits sales & trading operation can dictate a lot about its potential success.
Most firms organize their syndicated loan sales & trading platform into twogroups: primary and secondary. The primary team works closely with thecapital markets team (and is often considered one and the same) on a dailybasis. As deals are proposed, the sales team will have insight into investorfeedback, helping their capital markets counterparts understand market trendsfor future transactions. As deals are structured, the sales team is responsiblefor distributing and allocating these syndicated loans to investors. Like anyother sales force, these relationships define their success. These primary loan
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sales personnel also work closely with leveraged finance origination teams tounderstand the nuances of transactions, in order to answer investor questions,as well as judge investor appetite for certain transactions.
The secondary loan market is arranged quite differently. As trading nowbecomes a part of the equation, firms have organized platforms to meet theneeds of their investors. Secondary loan sales personnel work with investors,as well as their own internal research teams, to generate trading transactionsand ideas. Once structured, this information is passed along to the tradingteam, which executes the trade. In these markets, some credits are especiallyactive and pique the interest of investors on a regular basis. Other credits areless active and investors take more of a buy-and-hold strategy. Naturally, thefirms that generate the most secondary trading volume are either the premierplayers in the primary leveraged finance markets and/or are the big players insales & trading—JPMorgan, Credit Suisse, Citigroup, Deutsche Bank,Goldman Sachs, Bank of America, Lehman Brothers, and Morgan Stanley.
When compared to other markets, movements in the secondary loan marketare not as extreme. For a loan to move 2 pts from 102 to 100 within a periodof a week would be considered a large event. Like their high-yieldcounterparts, loans also move in 1/8ths. However, unlike their high-yield andequity counterparts, loans are generally less volatile, since they are based onthe creditworthiness of a company, which, too, is less volatile. Furthermore,investors in these loan markets typically take very large longer-term positionsin the multiple millions of dollars, which dwarfs the average hold size andperiod of equity holders. With this hold position in mind, a simple 1/8thmovement can mean millions of dollars in loss or gain, which explains whyinvestors in this market are usually not interested in too much volatility.
In the past decade the secondary loan trading market has truly expanded.With annual trading volume increasing every year and nearing $200 billion(versus just $30 billion in 1995), this market continues to flourish. In tandemwith the rapid growth in the primary market discussed earlier, the syndicatedloan market is quite a formidable presence and a place of true financialopportunity.
The culture and the lifestyle of secondary syndicated loan sales & tradingteams is similar to that of other S&T groups: intense work right before and assoon as the market opens and throughout the day, but only a little bit of clean-
up work once markets close and on weekends. In general, the best hours onWall Street, as long as you don’t mind early mornings.
High-Yield Bond Sales & Trading
High-yield bond sales & trading is a fast-paced day of market-making,bringing clients together and executing multi-million dollar transactions.Like the equity markets, the high-yield bond market is public, exceptionallyliquid, and moves at a rapid pace. (For more information on sales and tradingcareers, see the Vault Career Guide to Sales & Trading.)
Because the high-yield bond market is public, leveraged finance teams rarelyinteract with the high-yield sales & trading platform. Much of theinformation related to the market can be gained from online informationsources, there is little need to call a sales-trader for current market tradinglevels. Furthermore, by the time current market information is delivered to aclient, it runs the risk of being somewhat stale.
As with primary loan sales, typically the only times deal teams interact withsales teams is during a new offering (either a new issuance or a tender offer),when trying to gauge investor feedback to a new issuance. Aside from thisinteraction, most leveraged finance teams simply work with their capitalmarkets colleagues, as opposed to the sales teams. Because the capitalmarkets teams are very up-to-date on the markets, most of the informationthat leveraged finance teams need can be obtained from this team.
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Leveraged finance teams work with a wide variety of types of transactions,including very high-profile event-driven financings, such as LBOs, corporaterestructurings, and spin-off financings, as well as the routine debtrefinancings. However, each type plays a key role in the debt capital markets,as well as the field of leveraged finance. Just as many individuals have debtin multiple forms like credit card loans and house mortgages, so do most largecompanies.
The Leveraged Buyout
The leveraged buyout is widely considered the premier leveraged financetransaction. Ever since the landmark RJR Nabisco LBO, very few othertransactions command as much respect on Wall Street as the LBO. Firmshave built leveraged finance platforms and coverage teams for the solepurpose of servicing the needs of their high-profile LBO/private equity fundclients. There are even specific league tables that rank the firms that providethe most financing for these deals. In short, the LBO is the flagship leveragedfinance deal.
To the leveraged finance firm, an LBO represents a potentially extremelyprofitable transaction and a chance to interact with the firm’s most profitableclients: financial sponsors. To the financial sponsor, the leveraged financeshops represent access to financing markets and the cheapest form of capital:debt. To the LBO targets, a properly executed LBO can represent millions ofdollars in interest saved over the already burdensome proposed debt. For allparties involved, the LBO is a big deal.
Either referred to as a “go private” (when a publicly traded company isacquired via an LBO and subsequently taken private), an “MBO”(management buyout, where the company is taken private by themanagement of a firm) or just an LBO, the transaction generally involves amixture of roughly 25% equity and 75% debt. Equity typically takes the formof a large check written by a financial sponsor and debt takes the form ofsyndicated loans and high-yield bonds. As financial sponsors are alwaysseeking to reduce the amount they are spending to purchase a company and
The Transactions
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financing firms are seeking the exact opposite, there is always a strugglebetween the two when it comes to the debt/equity ratio.
With hundreds of LBOs executed every year, the competition among leveragedfinance firms for these deals is intense. As the financial sponsor coverage teamsfrom investment banks maintain relationships with their clients, the leveragedfinance teams are busy negotiating and executing the transactions their coverageteams have provided. Because of the sheer volume of business, leveragedfinance divisions will often have their own financial sponsor subgroups thatwork exclusively with these LBO/private equity clients. The biggest players inthe financings of LBOs tend to be a mixture of the biggest leveraged financeoperations, as well as the pure investment banks with topnotch financial sponsorcoverage teams. The top firms in terms of providing LBO financings are:JPMorgan, Credit Suisse, Deutsche Bank, Lehman, and Bank of America.
Since the RJR deal, there have been quite a few notable LBOs. Since 2004, thesecond (Hertz), third (SunGard), and fourth (Boise Cascade) largest LBOs havebeen executed by premier private equity shops. LBO volume continues to surge,with private equity cash balances and interest rates as the only potentially limitingfactors in buyout activity. Furthermore, almost every stable firm is a target;household names that have been purchased in the last few years through LBOsinclude Dunkin Brands, Burger King, Sealy, MGM, and Wyndham International.
On a very simplistic level, the LBO can be compared to purchasing ahouse for the purpose of renting it. Sounds easy, right? Well, it is. Saythat you decide to purchase a 5-bedroom $400,000 house on a collegecampus with the idea that you are going to rent it to college students tocover the mortgage payment. Your idea is that these students will payfor the mortgage payment and you will own the home, once they havepaid it off for you.
In order to execute the transaction, typically you (the financial sponsor)would go to a bank (leveraged finance firm) to get a loan in order topurchase the house (target company). You would put in about 25% ofyour money into the deal; the other 75% would be the loan (analogousto a leveraged loan or a high-yield bond) from your bank. You would payyour real estate broker (the M&A buy-side firm) for helping you value thecompany and the current owner would pay its real estate broker (M&Asell-side firm). Finally, upon closing, you would pay the bank the closing
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The Transactions
costs (underwriting fees paid to the financing firm) and the bank wouldwire funds to you. Once the transaction is executed and the house ispurchased, you are on your way to an LBO.
From here, let us assume that you find some college students to rent yourhouse. With the money that you charge them, you are able to pay yourmonthly mortgage payment. Every month that goes by, you are payingmore principal and less interest on the debt. After all of these paymentsare made, the debt is gone and the only financing piece that remains fromthe original transaction is the equity check you put into the house.However, (drum roll, please) this is now worth 100% of the capitalstructure, rather than its original 25%. Your $100k is now worth $400k.
Much like the LBO target company that pays the newfound debt created bythe LBO with its operating earnings, the renters of the house have paid offyour debt. The financial sponsor now owns a company by adding leverageto the capital structure. You now own a home by virtually doing the same.However, in the case of an LBO, there is typically a 5- to 10-year full payouttimeline, not a 25-year mortgage timeline.
Even in the case that it takes you 20+ years to complete this transaction,this $300k gain is a phenomenal return on your investment. However, itis also likely that the property has appreciated and your financial gain iseven larger. In the case of financial sponsors, they too will seek thisappreciation in the form of improving the company’s existing operationsand “juicing” their return even more. They will reduce costs, improvesales, and unlock as much value from the company as possible. They willoften be able to pay off the debt sooner than expected and refinance theloan with a lower interest rate, while executing a dividend transaction toreduce the money they have on the table.
Now, imagine if you were able to do that for billion dollar companies, notjust $400,000 houses. Take it one step further: your firm allows you toinvest some of your own money in the fund. The returns would beoutstanding and so would your personal financial situation. Welcome tothe world of private equity and leveraged buyouts.
The leveraged finance platform plays a key role in financing these targets.As regular clients to the firm, financial sponsors interact with the premierleveraged finance shops on a daily basis, for both target LBOs as well asexisting portfolio companies. As individuals do when buying homes,financial sponsors shop around for the best financing cost and terms. Forthem, this is a fixed pie equation—the more they spend on debt, the lessmoney they make. Negotiations between the PE shops and leveragedfinance firms are intense, but in the end, usually successful for both.
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The Corporate Restructuring
Another of the landmark transactions executed in leveraged finance is thecorporate restructuring. Have you ever flown on United Airlines? Have you everheard of Interstate Bakeries Corporation? (If not, you probably have heard of itsbrands—Twinkies, Wonder Bread, and Ding Dongs, to name a few.) These aretwo prime examples of companies that have worked with the federal bankruptcycourt in order to avoid liquidation. They both have required debt financingpackages that gave them the ability to operate while in Chapter 11 bankruptcy.Where did this financing come from? You guessed it—a leveraged finance firm.
Commonly structured in the form ofdebtor-in-possession (DIP) loans, thesefinancing packages are very risky for aleveraged finance firm to arrange andthus exemplify the equation of risk =reward. Needing guaranteedfinancing, these struggling clientsmust have an underwritten financingpackage capable of helping themoperate without sinking them inastronomically high interest rate costs.Therefore, they offer what little theyhave as incentive—they place theassets of their firm as collateral for theloan. If the firm must be liquidated,the assets will be sold and will be paidto the most senior debt holders first.These debt holders are the investors inthe DIP financing.
Not only is this transaction already a risk for a leveraged finance shop, but thefinancing firm is knowingly taking this risk on a company that has a not-so-pretty financial track record. (Airlines are popular in the restructuring world.)However, the reward for this risk comes in extraordinary large fees upon exit
of bankruptcy, as well as a rock-solid financial relationship for what willundoubtedly be numerous large fee events in the near future (IPO, bondofferings, M&A advisory work, restructuring advisory fees, etc.).
On the whole, restructuring work is generally advisory in nature, and is gearedtowards helping firms rethink their operations in order to reinvent themselves.However, a key portion of this reinvention is having the money to stay afloat andeither avoid or exit bankruptcy, which is precisely where a leveraged financefirm comes into play. Unlike the process-orientation of a typical leveragedfinance deal, the corporate restructuring tends to be a much longer process, moresimilar to a coverage role than a leveraged finance role. Not only must thefinancing firm work with the client, but it also must work with the federalbankruptcy court and numerous legal teams, often with the distractions oflobbyist firms and labor unions. The three major players in this mixture ofadvisory and financing are JPMorgan, Citigroup, and General Electric.
Other Event-Driven Financings
Aside from the LBO and corporate restructuring, there are a number of othertypes of event-driven financings. What is meant by event-driven? These arefinancings that are pursued In order to execute a separate transaction and arecontingent upon, or work in tandem with, this other financial event. Theseevents include acquisitions, IPOs, recapitalizations, acquisition financings,spin-offs, and divestitures.
Generally, these financings change the financial makeup of a company andsubsequently are the more complicated leveraged finance deals to arrange.They are often composed of a revolving credit facility, institutional term loan,and high-yield bond. In some cases, the financing package can span both thedebt and equity markets, which is definitely a challenge for even the mostsophisticated financing institutions. Due to the importance of the financingin order for the transaction to occur, nearly all event-driven transactions areunderwritten by the leveraged finance firms.
Event-driven financings are often very profitable deals and typically stemfrom a strong relationship with a client. The origin of this kind of deal moreoften than not comes from the coverage side of the investment bank. Forexample, the coverage team pitches a spin-off to a client and, based on theprofile of the company, has determined that the appropriate debt financing
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Vault Career Guide to Leveraged Finance
The Transactions
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must accompany it. When the M&A market is hot, the leveraged financemarket generally is too. Furthermore, even if the final product to merge acompany is an equity-related issuance, a bridge financing will often be set upby the leveraged finance team before that transaction takes place. In the caseof many high-yield bonds, bridge transactions are executed in order toprovide a company with the immediate financing it needs, while the financingfirm waits for the high-yield bonds to close in the financial markets.
A prime example of a recent event-driven financing is the $400M milliondividend recapitalization for Burger King. In this transaction, the privateequity owners who bought Burger King a few years earlier in an LBOstructured a dividend financing, which subsequently added more debt toBurger King’s capital structure. This transaction was completed in order totake part of their financial investment “off the table.” Dividend financingsare quite common among financial sponsor-owned firms, where they haveinvested substantial sums of money and are seeking to reap the financialrewards for doing so.
The big players in this market are those providing the most institutional termloans, the most dividend-related high-yield bond and leveraged loan issuance,and the most M&A related issuance. These players also have the ability toprovide all-encompassing financing solutions, including both equity anddebt-related products. These are the big three leveraged finance shops:JPMorgan, Bank of America, and Citigroup. Not far behind, you’ll find thepure investment banks such as Goldman and Lehman Brothers, and otherlarge players, such as Deutsche Bank and Credit Suisse.
The Debt Refinancing
The bread-and-butter deal for any major firm in leveraged finance is thestandard debt refinancing. These are the bellwether deals of the financingmarkets, are generally the most routine transactions, and they keep theleveraged finance firms in business. The fastest deals to execute, debtrefinancings easily comprise a majority of the volume in the leveraged loanmarket, as well as a substantial amount of volume in the high-yield market.
With no significant capital structure changes as part of the transaction andrating agencies, investors, internal credit, and structuring teams alreadyfamiliar with the issuer, there is significantly less work involved in these
transactions. Also, with the average life of an existing credit facility typicallyat less than four years, issuers access the syndicated loan market on a regularbasis in order to extend the tenor or reduce the interest rate on their debt, ifpossible. Often, issuers will even “tender” for their existing high-yield bonds,to refinance with a cheaper debt instrument. Seasoned issuers will also“drive-by” the high-yield market to issue newer bonds.
Although not the most glamorous transactions, leveraged finance teamsgenerally enjoy working on these refinancing and debt tender deals every sooften, as they are the most predictable in terms of hours, expectations, andgeneral impact on lifestyle. Without the need for so much of the process(such as visiting the rating agencies) a standard refinancing, tender offer, ordrive-by financing could take 4 weeks from pitch to close, whereas an LBOcould take eight to 12 weeks from pitch to close, maybe more, depending onregulatory approval. The easier a deal process is to manage, the moreenjoyable it typically is for everyone involved from a leveraged financeperspective.
However, because loan refinancings are so much more standard in nature,they also are not as profitable for the firm to arrange. Generally arranged asbest-efforts (refinancings are underwritten in only the rarest of transactions),these deals command arrangement fees of only a few hundred thousanddollars, unlike the multimillion dollar fees for underwritten event-drivenfinancings. On the other hand, high-yield tender offers and drive-byfinancings still command somewhat large fees (although not what a first-timeissuance would bring in). Whereas a $500 million loan issuance for a debtrefinancing might earn a few hundred thousand dollars in fees, the same high-yield bond will likely earn a couple of million dollars. This also speaksvolumes in terms of the complexity of an issuance in the high-yield market,as well as the frequency of high-yield versus syndicated loan issuance.
In this sense, the pure investment banks are on the “quality” side of the“quantity versus quality” fence, generally leading very few loan refinancings,while sticking to tender offers and drive-by high-yield bond issuance.However, when financial markets hit rough times and the event-drivenfinancings slow down, it is the standard loan refinancing that can be countedon for fee generation. Because of this, the large leveraged finance shops stillseem to thrive in these downturn economies. When it comes to the majorplayers for refinancings, those are the same major players for both leveragedloans and high-yield bonds. For loans, the top firms are JPMorgan, Bank ofAmerica, Citigroup, Deutsche Bank, and Wachovia. For high-yield bonds,the top firms are JPMorgan, Bank of America, Citigroup, Credit Suisse, andDeutsche Bank.
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Vault Career Guide to Leveraged Finance
The Transactions
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CHAPTER 1
LEVERAGEDFINAN
GETTING HIRED
Chapter 6: What Leveraged Finance Firms areLooking For
Chapter 7: The Hiring Process and Interview
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What Leveraged FinanceFirms are Looking For
Like investment banking in general, leveraged finance groups are veryspecific in their search for junior talent. As each crop of newanalysts/associates enters from undergraduate programs, top-tier MBAprograms, or even as lateral hires, firms are making an investment in theseresources and taking a risk that they may or may not work out. Thesequestions are at the very core of the firms’ thinking: How do we replace thetop talent that left last year? Will this next crop of talent be as good as thelast? How many future leaders of the firm are in this class?
Firms tend to have top junior resources conduct interviews and resumescreening in order to assess all-important questions such as, “Will I enjoysitting next to this person for 100+ hours a week” and “Do they have what ittakes to be truly successful and ‘get it’”? For the top-performing leveragedfinance junior talent, these questions about incoming resources are prettyeasy to answer. The top performers seem to fit a certain mold and gel withthe existing team.
Each and every firm seems to have its own culture and nuances, which is whyit is difficult to generalize about what type of personality will be successful atall firms. Where one firm might rather have a Wharton finance-educatedstudent, another firm might prefer someone with a liberal arts background thatthey can mold. Despite these cultural differences, a few aspects of the hiringprocess remain relatively consistent at the major leveraged finance shops.
Personality Type
A few personality traits are standard across leveraged finance platforms.Leveraged finance shops are interested in people who are trustworthy,intelligent, friendly, and detail-oriented team players, with exceptional peopleskills. In order to land a position in leveraged finance, you must show thesecharacteristics both on your resume and in your interview.
Why do these particular skills matter? The leveraged finance deal process isvery hectic and very process-oriented. As a deal team works on multiple piecesof a process at any given time, all members of the team need to be able to count
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CHAPTER 6
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on you. An MD needs to be able to leave town for a week on a roadshow foranother deal and not come back to a deal in shambles. And as the deals movethrough the market, you might be asked to send clients important information.The deal team needs to know that it can count on you to think through theassignment and do it correctly. Furthermore, when explaining the analysis tothe client, you need to be able to represent the firm in the most upstanding waypossible, since the firm’s reputation is always on the line.
As for the importance of friendliness and getting along with your colleagues,at most leveraged finance shops, the teams are arranged like the rest of debtcapital markets-in a trading floor or similarly close-knit atmosphere. Even ifyou are in cubicles, you are not isolated or working by yourself. The dealsare accomplished by the work of many on a wide variety of team projects. Ifyou are the hiring manager, do you really want to spend 100+ hours a weeksitting beside someone with no personality who is not friendly?
What types of personalities do not fit the mold? If you prefer to work alone,leveraged finance is not the place for you. If you like to problem-solve in anopen-thought consulting-type atmosphere, working in leveraged finance mayfrustrate you because of its frenzied pace and focus on process. If you findyourself wanting a predictable lifestyle, leveraged finance is not an ideal fit.This is a get-your-hands-dirty business, where getting tasks accomplished isthe main key to success. In some cases, VPs may bind their ownpresentations and MDs rework financial models at all hours of the night to geta deal through the markets.
One of the most common ways that junior professionals damage their careersis by being overconfident. Leveraged finance is a great fit for someone whostrives for and graciously accepts compliments, but does not let them go tohis or her head. The following scenario takes place more often than youmight think: someone has been at a firm for six months and has been fortunateto have closed a couple of high-profile deals. Thinking he is now a “hitter,”he shows up on Fridays in golf shirts, begins calling clients by their firstnames, and starts trying to staff others under him. He criticizes a managingdirector, thinking the director is wasting his precious time with a boringrefinancing, reworking pitch pages that do not matter, and asking for all sortsof unnecessary work. A couple of negative comments to his peers about thisMD and before you know it, he is the black sheep of the floor. Or worse,come bonus time, he is given a number so far below the range that he would
have earned more at a minimum-wage job, based on the hours he workedthroughout the year.
Although one might not agree with the style or the way that the deals getdone, the bottom line is that you earn your rank in the world of leveragedfinance. Managing directors and vice presidents have worked hard to getwhere they are and more importantly, they control junior resources’ bonus,lifestyle, and upward mobility. This is probably the single most importantlesson to keep in mind. Leveraged finance is a place where you earn yourway to the top, by putting in your time and investing hard work. Thepromotions do not come easily or quickly, but when they come, they areworth it. So, work hard, maintain a positive attitude, and respect yourelders—before you know it, you will be in their shoes.
Education
For the most part, investment bank corporate finance programs generally dothe hiring for the leveraged finance teams. At these banks, firms placeanalysts and associates into industry coverage groups, M&A, or leveragedfinance based on the needs of these teams and how the analyst/associate hasprioritized his or her personal choices. However, some firms hire into theseteams directly during the recruiting process. Whether a firm hires directlyinto the leveraged finance team or not is an important firm-by-firm distinctionthat you should research during the recruiting process.
It’s an unavoidable fact that there are “target” undergraduate and graduateprograms for each bank. This does not necessarily mean that someone froma non-target school cannot be hired into a program. Rather, these candidateswill not have the on-campus interviews and dedicated information sessionsthat their peers’ target schools have during the fall undergraduate recruitingseason. The target programs vary from firm to firm and lists of them canoften be found on each firm’s web site. But they typically do include acommon set of schools: Wharton, Harvard, Yale, Columbia, Princeton, NYU,Georgetown, Dartmouth, Brown, Williams, UVA, Northwestern, Michigan,and Notre Dame for undergraduate recruiting and Wharton, HBS, Stanford,Northwestern, Columbia, MIT, University of Chicago, Dartmouth, UCLA,Duke, Michigan, NYU, UVA, Cornell, University of Texas, Yale, and Emoryfor MBA recruiting.
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Vault Career Guide to Leveraged Finance
What Leveraged Finance Firms are Looking For
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Does an undergraduate need to major in finance to land a position inleveraged finance? No. Although it is helpful to understand the basics offinance before beginning your job, the general corporate finance trainingprograms are designed to teach you these basics. It is more important to havethe right personality fit, understand the nature of the business, and be able toarticulate why you want to work in corporate finance and/or leveragedfinance. Quite often the people that are the most successful do not have aformal finance background, but have analytical skills and a desire to succeed.
For firms with a general recruiting process and a subgroup placement later,targeting a leveraged finance team during this process, as opposed to justtargeting the firm, should not be a hindrance to getting hired. With a solidneed for analysts/associates every year due to the size of the team, it is verypossible for the interested student to make his way into leveraged finance byexpressing interest in the group, meeting with VPs and MDs within the group,and even talking to the group’s staffers. Furthermore, even if you’re notoriginally placed into leveraged finance when you join the bank, you canoften switch from an industry coverage team to the leveraged financeplatform. Once you are at the firm, the rest is up to you.
The Resume
Inundated by thousands of resumes, hiring managers find it very easy todistinguish who is genuinely interested in the business. In a business drivenby absorbing and understanding a large amount of information very quickly,a well-crafted resume speaks volumes about an individual. A poorly put-together resume, on the other hand, will get you rejected before you have achance to even interview. In order to make the most of this opportunity toshine, you should prepare a resume that is specific to leveraged finance andinvestment banking, and that also conveys all of the personality traitsdiscussed above. Then tie these into a solid cover letter.
First things first—the world of investment banking often values form as muchas substance. This is also true when it comes to your resume. Not only shouldyour resume have great highlights about you, but it should be well-laid-out andeasy to read. Even for the most accomplished MBA, this still means one pagewith decent-sized margins. If you are having trouble with formatting, buy aresume book and study its layouts. Organize information into sections: contactinfo, education, relevant experience, and activities/interests. Keep it simple.
A resume is not a competition to list as many extracurricular activities aspossible. Rather, investment banks would like to see that you were involvedwith a few things and were dedicated, as opposed to being involved ineverything. So do not list everything you have ever done; convey what youdid, how you improved the world around you, and do it as briefly as possible.Leveraged finance firms are interested to know that you can take a largeamount of information and boil it down to the important points very quickly.
Also important: show, don’t just tell. Most jobs are self-explanatory, which iswhy it is extremely important to show the interviewers what value-add you hadto your job. If you were a lifeguard, it’s easily to understand that you watched apool all day while working on your tan. But aside from stating the obvious, youneed to emphasize what other responsibilities you had and how you added value.Maybe you also taught swim lessons or coached a local swim team.
Finally, do not ever make anything up. Just as they do due diligence for allof their clients, leveraged finance bankers will not hesitate to do the same foryour background.
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Vault Career Guide to Leveraged Finance
What Leveraged Finance Firms are Looking For
The Investment Banking Internship
The best way to get into leveraged finance is to get an internship withan investment bank—in any corporate finance area—before yougraduate. Even if you are unable to secure a spot interning in theleveraged finance group at an investment bank, you still have a chanceof eventually getting hired into the group if you take an internshipelsewhere in the bank’s corporate finance program.
If you are unable to get an I-banking internship, you should spend your timetrying to get another internship or other relevant experience that you canparlay into good conversation during the interview period. Working atanother financial services firm outside of corporate finance shows yourdedicated interest in the industry. Even studying finance abroad will showyour interest in the global financial markets. These types of experiences dohelp when you are being compared in a stack of resumes a mile deep.
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NYU Law | Stern MBA | Harvard | Wi l l iams | Northwestern- Ke l logg | Amherst | Pr inceton | Swarthmore | Ya le Pomona Col lege | Wel les ley | Car leton | Harvard Bus inessSchool | MIT | Duke | Stanford | Co lumbia Law | Penn Ca lTech | Midd lebury | Harvard Law | Wharton | Dav idson| Washington Univers i ty St . Lou is | Dartmouth | Ya le Law| Haverford | Bowdoin | Co lumbia | Boa l t School of Law Wesleyan | Ch icago GSB | Northwestern | C laremontMcKenna | Washington and Lee | Georgetown Law Univers i ty of Chicago | Darden MBA | Corne l l | Vassar Gr inne l l | Johns Hopkins | R ice | Berke ley - Haas | Smith Brown | Bryn Mawr | Co lgate | Duke Law | Emory | NotreDame | Cardozo Law | Vanderb i l t | Un ivers i ty of V i rg in ia Hami l ton | UC Berke ley | UCLA Law | Tr in i ty | Bates Carneg ie Me l lon | UCLA Anderson | S tanford GSB Northwestern Law | Tufts | Morehouse | Un ivers i ty ofMich igan | Stanford Law | Thunderb i rd | Emory | Boa l tHa l l | P i t t | UT Aust in | USC | Ind iana Law | Penn State BYU | U Chicago Law | Boston Col lege | Purdue MBA Wisconsin-Madison | Tu lane | Duke - Fuqua | UNC ChapeHi l l | Wake Forest | Penn | Ca lTech | NYU Law | Stern MBA| Harvard | Wi l l iams | Northwestern - Ke l logg | Amherst P r i nce ton | Swar thmore | Ya l e | Pomona Co l l ege Wel les ley | Car leton | Harvard Bus iness School | MIT Duke | Stanford | Co lumbia Law | Penn | Ca lTech M idd l ebu ry | Ha rva rd Law | Wha r ton | Dav idson Washington Univers i ty St . Lou is | Dartmouth | Ya le Law Haverford | Bowdoin | Co lumbia | Boa l t School of Law Wesleyan | Ch icago GSB | Northwestern | C laremontMcKenna | Washington and Lee | Georgetown Law Univers i ty of Chicago | Darden MBA | Corne l l | Vassar Gr inne l l | Johns Hopkins | R ice | Berke ley - Haas | Smith Brown | Bryn Mawr | Co lgate | Duke Law | Emory | NotreDame | Cardozo Law | Vanderb i l t | Un ivers i ty of V i rg in ia Hami l ton | UC Berke ley | UCLA Law | Tr in i ty | Bates Carneg ie Me l lon | UCLA Anderson | S tanford GSB Northwestern Law | Tufts | Morehouse | Un ivers i ty ofMich igan | Stanford Law | Thunderb i rd | Emory | Boa l tHa l l | P i t t | UT Aust in | USC | Ind iana Law | Penn State BYU | U Chicago Law | Boston Col lege | Purdue MBA
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The Hiring Process andInterview
Hiring Trends
As of this book’s printing in 2006, with the financial markets still relatively hot,corporate finance programs are hiring at record rates. MBAs from the topprograms have numerous job offers in hand upon graduation, much like the dot-com days. However, just as the economy can turn south, so can the hiring needsof firms. While leveraged finance firms are somewhat stable, they are notimmune to this economic downturn. In bad economies, there will be less dealflow, which means less revenue, and subsequently less need for resources.
The silver lining in this cloud is that with general debt refinancings being anecessary part of millions of firms’ capital structures, there is a something ofa necessary need to always have leveraged finance bankers on hand.Furthermore, in an economic downturn, this favors still hiring the cheapestlabor and finding ways to remove the expensive unnecessary labor. Thisbodes well for those seeking to enter the field from undergraduate and MBAprograms in even the worst economic periods, as there should always be aneed for new and fresh talent. Every year, people retire, leave to pursue otheropportunities, and get promoted. However, it is in these years that having thecoveted corporate finance internship can give you a substantial leg up on yourcompetition. Just ask anyone who graduated in the dark years of 2001-2002.
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L I B R A R Y
CHAPTER 7
To B-School or not to B-School?
Where does business school fit into the leveraged financeequation?
Most investment banking analysts wrestle with the question of whetherto leave leveraged finance to go to business school, as the timing makesfinancial sense. Paid a bonus in July, an investment banking analyst isable to make a clean break after his second or third year without leavinga half-year’s bonus on the table. However, even associates are oftenwilling to leave, seeing the value of the MBA in the upper echelons ofmanagement of banking, or desiring a serious career change.
Despite the fact that business school is a common route for analysts andassociates, the best analyst-to-associate professionals (junior bankers whohave been promoted from analyst to associate without going to businessschool) generally have no immediate need for an MBA as they have alreadylearned the processes and procedures of leveraged finance. If you look at theprofiles of MDs and VPs, many of those within leveraged finance do not haveMBAs because there was less of a need for an MBA for advancementpurposes when they were promoted. This is where leveraged finance, withits commercial banking roots, differs from traditional investment banking:top-performing analysts are not pushed out to MBA programs. Rather, theyare kept in-house and groomed for management positions.
More so in leveraged finance than in investment banking as a whole, MDs andVPs who worked from analyst to associate to VP to MD had very little to gainfrom leaving the field, getting the MBA, and returning back to leveragedfinance. As the old saying goes, “the proof is in the pudding.” If the mostsenior MDs do not have MBAs, then there was likely very little need for it toadvance to their level when they were being promoted. The same holds verytrue for commercial banks and finance companies.
What are the values of having an MBA in leveraged finance?
If you are interested in an MBA (or are currently pursuing one) and leveragedfinance, the above does not mean that there is no value in the degree in thefield. Many MDs and VPs who hold MBAs did not originally start inleveraged finance. Subsequently, they used the MBA as something of a“career reincarnation,” redirecting themselves into the field. Furthermore, asthe MBA has become an increasingly popular degree, it has changed theplaying field. The same leveraged finance MD who did not pursue the degree20 years ago might view the situation entirely differently today.
Aside from the personal and alumni network that MBA graduates bringto the table (which can be immensely valuable), MBAs bring a uniqueperspective to the table. With prior job experience, they view situationsvery differently than their analyst-to-associate counterparts. Also, sincethey have not spent three years on the same deals with the same clients,they usually are less in-the-weeds and bring fresh insight to deals. Quiteoften, this fresh perspective is very much appreciated.
You should consider the profiles of a firm’s senior management. In thecase of the investment banks, commercial banks, and financecompanies, the very top-tier management usually have MBAs. If yourgoal is to run a division or firm, the degree could be quite useful from acredential perspective. That being said, the best man for the job in
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leveraged finance is still likely to be chosen based on experience,regardless of whether or not he/she has an MBA.
What are the relevant classes I should take if I am gettingmy MBA now?
If you are currently pursuing an MBA and are interested in courseworkrelevant to leveraged finance, look no further than your corporatefinance and accounting classes. As a debt function, leveraged financetends to be concerned quite a bit with the interaction of the threefinancial statements: the income statement, the balance sheet, and thecash flow statement. Understanding how these three interact bodeswell for your success in leveraged finance. A sound understanding ofboth corporate finance and accounting will deliver you these necessaryskills.
Advanced finance classes that discuss acquisition finance, capitalstructures of companies, and the financial markets will also be veryuseful when it comes to understanding the day-to-day workings ofleveraged finance. These classes will touch on all of the majorterminology of leveraged finance and will put the transactions andfinancial markets into perspective. Finally, if your career center offersclasses on investment banking and/or commercial lending, these aredefinitely a must for anyone interested in leveraged finance.
If I am thinking about a career in leveraged finance, whichis better: a full-time or part-time MBA?
The quick answer to this question from a recruiting standpoint is full-time. Not only will you have access to the career center (which youmight not with a part-time program), but you will also have theopportunity to intern with a firm, which is the golden way to get a careerin leveraged finance. If you are a part-time MBA and are seeking tomake a switch to leveraged finance, this is a difficult transition becauseyou might be job-hunting, attending classes, and working at the sametime, while you are competing with a group of peers who are able to dosummer internships at their target firms. However, sometimes part-timeMBAs will come over to leveraged finance once they have completedtheir MBA program, generally as lateral hires, if they do not make itduring the regular recruiting season, or they are hired after full-timeoffers have been extended.
However, for those currently in the field of leveraged finance, theanswer is part-time, as it tends to serve as much purpose without thehigh cost of tuition. Provided you are able to manage the MBA time
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The Standard On-Campus Interview/Recruiting Process
The interview process for the large leveraged finance firms is much like that ofinvestment banking corporate finance programs. An information session andresume-drop, followed by an on-campus interview period, and later a “SuperSaturday” process (with a day full of interviews at the firm’s offices) is the normfor all investment banks. These Super Saturdays often include multipleinterviews with multiple teams to assess a candidate’s fit for the firm as a whole.However, often an individual will have at least one interview with someone fromleveraged finance, which is the perfect opportunity to express his or her seriousinterest in the field. And if the firm hires directly into teams, you should be busyexpressing your interest in leveraged finance from the very get-go.
In order to tackle the process successfully, it is very important to understand theperspective of the firm representatives. Alumni of schools and other HR personnelvolunteer to help with the recruiting process, often traveling during their busyschedules to give on-campus presentations, as well as review resumes and coverletters. They meet hundreds of students annually, passing out business cards alongthe way. This means, in order to stand out during a recruiting process, you mustnot only present yourself exceptionally via your credentials, but you must also usethe information sessions as a chance to connect with these people on both apersonal and professional level. A positive impression during the resume reviewand/or interview feedback session will greatly increase your chances at a job offer.Besides, most bankers enjoy meeting new people and talking about everythingfrom football to their most recent successful deal experience.
During the resume-drop period, these same people sort through hundreds ofresumes, eliminating candidates from the process for major spelling errors, lowGPAs, irrelevant job experience, silly cover letters, or putting the wrong firmname in a cover letter. Narrowing down a field of talented candidates is noteasy, especially when they have limited interview slots. You must also present
commitment and your firm is willing to pay for the degree, the part-timeMBA can be a huge payoff. Not only will it give you the credentials youare searching for, but having your firm pay for it lets you know that theyare genuinely interested in your career potential with them.
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yourself on paper in the best light possible. Your cover letter and resume mustbe to-the-point and polished. It is also at this point, during a resume reviewsession, where having a recruiter know your name will be immensely valuable.
From here, firms will notify those selected of their interview date and time.Interviewers will take time out of their days to come to campus to interview.Realize that these interviewers are often returning to the office, knowing thatthey will be working late to make up for the missed time. Their time isimmensely valuable, so be cognizant of this and come well-prepared.
After this process, the interviewers generally discuss among themselves, as theyrank candidates, whom to invite back to the firm for a Super Saturday. Theseselected candidates will be invited back for a series of interviews at the firm withmultiple teams. After this grueling process, the interviewers sit down again in aconference room to review the candidates, and then potentially extend job offers.A sole voice of dissension from one person during the review process can bedetrimental to a candidate’s chances. Conversely, a voice of support could bethe edge needed to give that candidate an offer. So it’s critical to convey aconsistent message throughout the process, avoid controversial topics, and bepolished. Practicing for this only makes your chances better.
As for the commercial banks and non-investment banking platforms, theirrecruiting process is largely the same, yet generally more focused on aposition within leveraged finance, not just the firm in general. They oftenrecruit from a wider set of target schools, with emphasis on location andregion. Also, their interviews tend to be a little bit less competitive, as peopleare interviewing for a specific group, within a specific division of a firm,rather than just for a division of the firm in general, like the investment banks.
The not-so-standard process
If you were not given an interview, but felt that you connected with a recruiter,all is not lost. This is actually how many people end up working at investmentbanks, by remaining persistent (but not overly pushy), working their way to aninterview. Many times, a selected candidate will miss his interview forwhatever reason, opening up an extra interview slot. Take the initiative to seeif you can be an alternative, or interview before or after the schedule starts.
If you are not scheduled to interview, you might consider e-mailing thoserecruiters you met at the information session to ask if they can make time intheir schedule. If they have traveled to the school to meet candidates and
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have some extra time, they generally will not mind. Also, if you come acrossas just as polished as the best interview candidates, you might just have a legup on the competition, since you have shown your genuine interest in thefirm. Basically, you should make yourself known (in a positive light) at everychance possible so that the firm will definitely want to interview you.Nobody wants to turn down a qualified candidate who is sincerely interestedin working for them. At the same token, no firm wants to hire someone whogrovels for a position, or is overly pushy during the hiring process.
Lateral Hires
Lateral hires are quite prevalent in the world of leveraged finance, more so thanin many other areas of banking. Those with leveraged finance and other relevantexperience tend to change banks quite frequently. Like any ambitiousprofessionals in any field, leveraged finance professionals are always seeking tobetter their lifestyle, pay, rank/title and/or amount of responsibility. Butleveraged finance and the rest of the credit world are somewhat unique becausetheir firm skillset of very transferable finance skills open up a wider variety ofcareers, than say, someone in a specific industry coverage group at an investmentbank. This makes lateral hires a definite staple of the industry.
The hiring process
At a junior level, lateral hiring is very common, especially in the summer monthsafter bonuses have been paid. After a firm has lost certain resources to privateequity, hedge funds, and MBA programs, it typically will seek to replace theseresources with the upcoming recruiting class. However, as leveraged finance tendsto have a somewhat larger turnover during the hot economic periods, due to thevariety of available options, it is not uncommon for a firm to seek out immediateexperienced replacements for deal teams. Although more expensive than trainingfirst-year analysts, these replacements are able to hit the ground running.
In order to find qualified applicants, a firm will likely hire a headhunter, suchas Glocap, to review and bring in candidates for interviews. Also, the firmwill seek out internal candidates to interview, as well as anyone else whoreceives a recommendation from a current employee. At this point, the searchto fill an interview schedule might only take a week or so, while the firmreviews resumes on a real-time basis.
With a need to fill and a sense of urgency, firms will substantially abbreviatetheir interview process. For every available slot, they might bring in five toseven candidates for interviews and put them through a simulated “SuperSaturday” with interviews only by the leveraged finance team. Afterconducting a day of these interviews, the firm will usually make theirdecision quickly, often passing an offer to the candidates within a few days.Start dates usually follow soon thereafter.
Of course, since the lateral hire has come into the firm outside of the generalrecruiting cycle, she or he will be put through an accelerated training course.With previous credit backgrounds and a firm understanding of MicrosoftPowerPoint, Word, and Excel, these resources are usually cranking on dealsand adjusting to their environments in just a few days.
How do I get in as a lateral?
The quick nature of the lateral hiring process in leveraged finance highlightswhat the firms are searching for in lateral hires, aside from the cultural “fit”:previous credit and/or deal experience, a solid understanding of financialmodeling, and previous exposure to a process-oriented environment. Lateralhires commonly come from the other leveraged finance groups mentioned inChapter 4, both internally and externally. Lateral hires also come from othercorporate finance positions, Fortune 100 management programs, top-tierconsulting firms, commercial banks, private equity shops, hedge funds, andeven law firms (if they have experience working with credit agreements andterm sheets). All are usually considered good inroads into the field.
If you have this or other relevant experience, and are interested in the field,you should be able to find your way into leveraged finance. However, thiswill definitely take initiative on your behalf. Here are some suggestions as tohow to get your name and credentials noticed:
1) First, research the leveraged finance firms you are interested in joining. Todo this, find a set of league tables, which will list the rankings, by searchingthrough the WSJ, Thomson Financial, or Bloomberg for syndicated loans,leveraged loans, and high-yield bonds. These league tables are producedquarterly, generally with full articles for the annual rankings.
2) Drop your resume and cover letter online with the institutions that you areinterested in joining. If there is not an online site, mail these materials to
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their human resources department. HR will be the first place contacted, ifa firm is searching for resources.
3) Contact headhunters, expressing your goals and interests. They are usuallypaid for placement of professionals by firms seeking to fill staffing needs,which automatically places you in good hands. To find lists ofheadhunters, search the Internet, BusinessWeek, Forbes, and Fortune.They are often ranked as well as profiled in various financial publications.Be wary of any headhunter that charges you for access to their services.
4) Search your local alumni database for people who work at your targetfirms. Contact friends and even friends of friends who work in corporatefinance. Even if they are not in the leveraged finance division, they mighthave a friend or another colleague who would be willing to take a look atyour credentials and grant you at least an informational interview.
5) Contact your university’s career management office and see if you can get thename and e-mails for the contacts at the firms for which you are interested.After having followed their standard hiring procedures by dropping yourresume online (and/or mailing it to them), a follow-up absolutely betters yourchances. However, generally waiting a couple of days for them to reply isadvised, since thousands of resumes are generally dropped online.
6) Use the Internet to search for recent transactions and the professionalsassociated with them. If you can locate their e-mail information on theinternet, it never hurts to send them a quick e-mail note, expressing yourinterest in their work and their field. Whereas this may not land you withan interview, this person might be willing to help you out.
7) Search online at the major private equity shops and hedge funds for lists ofprofessionals. You may find people with leveraged finance backgroundswho may even have worked in your current position, or have gone to youralma mater.
8) Remember that everything you do is a reflection of you. Firms are notinterested in hiring the person who is not polished, well put-together, orpushy. Be mindful of everyone’s time and put yourself in the hiringmanager’s shoes—do you really want someone calling you five times a weekabout a job? Probably not. Be interested, but not over-the-top outrageous.Keep in mind that firms have seen everything, so trying to be original isprobably not going to work stay resourceful and stick to the traditional routes
A candidate will be face several different types of interview questions wheninterviewing for any corporate finance position. There are behavioral questions,career-related questions, case-study questions, brainteasers, basic financequestions, and sometimes even team projects or take-home financial modelingprojects (this is typical of the very top-tier private equity shops). Furthermore, asleveraged finance is a debt function entirely its own, these teams will most likelyhave a few basic questions of their own. Some common examples are below:
Behavioral interview questions
1) Give me an example of a time when you: led a team, struggled on a project,disagreed with a team member, took initiative, failed at something, letsomeone down, etc
2) How would your friends/colleagues describe you?
3) What three adjectives would best describe you?
4) What is your definition of success?
5) What would a former manager say about you, if they had to give 3positives and 3 negatives?
Career-related interview questions
1) Where do you see yourself in five years? 10 years?
2) Do you prefer working alone or in a team? Why?
3) What is your idea of the perfect job?
4) If you had all the money in the world, what would you be doing?
Brainteasers:
1) How many gas stations are there in North America?
2) How many golf balls fit into a 747 airplane?
3) Give me numerous examples of how you can tell if a refrigerator light hasgone out.
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General finance questions
1) How many types of financial statements are there? Briefly define each.
2) What is NPV? Walk me through a simple NPV calculation.
3) Given a company, talk to me about a few different ways to value it.
Leveraged finance questions
1) Why leveraged finance? Tell me what you think about some recent dealexamples.
2) What is meant by EBITDA? How is it calculated?
3) What is meant by senior debt? Subordinated debt?
4) What is an LBO? Why are they important to leveraged finance?
5) What is leverage? Why is it important?
A common misperception is that for most of these questions, there is a rightor wrong answer. This is not the case. Most interviewers are mainly tryingto assess who you are, whether you would be a good fit for an organization,and how much you know about the job, career path, industry, and yourself.More than anything, it is important to keep your cool during the interview,always trying to answer a question without giving up and getting frustrated.Furthermore, if you do not know the answer to a question, working aroundthe question and saying “I don’t know that, but I DO know this…” or “Iwould go here to find that answer” will usually suffice. These interviewersare definitely not expecting you to know everything. Rather, they want youto be creative, resourceful, and interested. Subsequently, the absolute worstthing you can do in an interview is say, “I don’t know” and give up.
But make sure you do your homework. Read The Wall Street Journal regularlyand be sure to skim the headlines the day of your interview. Scour the company’sweb site, making note of any recent major headlines. Showing a genuine interestin the firm is much easier when you can ask questions about a recent deal or talkabout a recent organizational announcement. This also gives you a chance tobond with your interviewer. After the interview is over, write a thank you e-mailor even a handwritten note to all of your interviewers. Phone calls arecumbersome, so avoid them. A simple “thank you” e-mail will not go unnoticed.
How much will I make and what will my lifestyle be like? These are probablythe two most frequently asked questions in the job search. Rumors continuallycircle around how much the best-of-the-best in leveraged finance are paid, andhow these numbers are decided. Furthermore, just about every firm has its ownunique hierarchy, with different titles for every position, different pay scalesand compensation packages, and different barriers to promotion (covered inChapter 9). As someone at a commercial bank or finance company might be asenior associate, a third-year analyst at a top-tier investment bank with the sameexperience might have a lesser title, but command more compensation. Mostof these nuances depend on the economy, as well as the firm. But here’s an in-depth view of what you generally can expect.
We’ll start with investment banks. Although they vary from firm to firm, themajor titles at investment banks (from the most junior to the most senior) tendto be analyst, associate, vice president, and managing director. Firms willoften break these into multiple roles, to add further title and pay stratification.For example, some firms have junior analysts and analysts, associates andsenior associates, principals, directors, managing directors, and even seniormanaging directors. The difference between the titles largely correlates tocompensation and experience.
Pay is fairly consistent among the different corporate finance programs ofinvestment banks-these programs generally pay analysts and associates inline with their peers for fear of losing top talent to other shops. Theseprograms pay analysts on a July-to-July cycle, which is definitely against-the-grain of the industry. However, once promoted to associate, firms tend to payon the calendar year, with bonuses hitting bank accounts in mid-February.
However, once past the associate level, the pay scale tends to change based onfunction, roles, and responsibilities. Whereas a senior managing director in a dealorigination function might earn multiple millions of dollars per year, that sameamount of experience in a credit/risk function might only pay a few hundredthousand dollars. These financial rewards are aligned with revenue generation,as well as the lifestyle of the position. Subsequently, the most lucrative of theseroles is typically the person generating the most fees for the bank.
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CHAPTER 8
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Investment Banks: Structuring/Origination
Within structuring/origination, there are four major roles: managing director,vice president, associate and analyst. As the hierarchy is structured, there aregenerally more analysts than associates, more associates than VPs, and moreVPs than MDs. At most firms, the ratio tends to be one MD for every one totwo VPs, two to three associates, and three to four analysts.
Managing director: Sitting at the top of the leveraged finance food chain, theMD generally spends most of his/her time speaking with treasurers and CFOs ofcompanies, in order to assess their financial status and need for debt facilities.The MD is usually the key relationship manager for the bank because ofcontinuous dialogue with the client. As senior members of the deal team, MDshave something of a sales role, and interact with a limited number of clientswhom they have worked with throughout the years. The top MDs are groupheads, who may have contracts outlining their compensation structure.
Managing directors will spend quite a bit of time pitching ideas to clients, astheir salary is typically determined based on the fees they earn from their dealflow. In this sense, it is not uncommon for the best-of-the-best MDs tocommand multiple-millions of dollars in compensation in good years (think$3 million or more in bonuses). Naturally, it pays to be an MD in a leveragedfinance group that executes a high volume of exceptionally profitable LBOs,DIP facilities, and recapitalizations. However, more often than not, the salaryof an MD is enough to support his/her basic lifestyle and the bulk of paycomes in the form of a bonus paid with stock options that must vest over acertain period of years. These “golden handcuffs” are usually incentiveenough for senior MDs to stay at their current firms for long periods of time,which generally ensures consistency at the most senior ranks.
As for lifestyle, managing directors typically work “market” hours—from 8a.m. to 7 p.m. However, when working on more complex transactions, theywill often work later, reviewing financial presentations and editing offeringmemorandums. Rarely is a weekend worked from the office, but it is notuncommon for an MD to review materials and make calls from their homeson the weekend or on the train ride home from work. MDs also tend to haveaccess to corporate expense accounts, in order to entertain clients over lunch,dinner, a ballgame, or on the golf course.
Vice president: The vice president on a deal team is the right hand man of theMD. Once a mandate has been won, the VP generally takes over and managesthe process going forward. From the negotiating and signing of legal documentsto the final signoff of the information memorandum, the VP’s role is to ensurethat everything in the deal goes smoothly. Throughout the deal lifecycle, a VPwill often act as the relationship manager, delivering the periodic client updatecall and subsequently laying the future foundation for his promotion to MD.
Although, like MDs, VPs interact frequently with clients, VPs tend to besalaried and not commission-based they way MDs typically are. The verybest VPs are paid extremely well, commanding salaries in the multiplehundreds of thousands of dollars, like their other corporate financeinvestment banking counterparts. In great years, it is not uncommon for a topperforming VP in a very active team to clear $1 million. However, in badeconomic times, or working in groups that do not originate manytransactions, these VPs tend to make closer to $250k.
The high performing VPs are generally on the fast track to promotion,spending three to four years in the role before becoming a managing director.At some firms a vice president will be referred to as a “principal” or“director”—the main distinction of this role from that of a managing directoris a lower salary. VP titles are also quite often awarded to those who spend agood amount of time interacting with clients.
Associate: Either fresh out of a top-tier MBA program or recently promotedfrom third-year analyst, the associate role is highly sought after. For those top-performing analysts fortunate enough to land the analyst-to-associate (“A-to-A”)promotion, this position has a lot of upside. Able to hit the ground running morequickly than their just-out-of-B-school counterparts, these associates stand amuch higher chance to be ranked near the top of their class. The downside isthat an A-to-A might have trouble separating herself from the day-to-dayfinancial modeling that came with the analyst lifestyle and subsequently, mightrun the risk of becoming a micromanager. The deal lifecycle is so process-oriented that this can easily become the downfall of an associate.
Associates generally have a very similar lifestyle to that of an analyst. Eager tobe promoted to VP, they arrive in the office early. They typically leave late,reviewing work with their analysts to get projects completed. It is notuncommon for even the most senior associates to work 80+ hour workweeks,including nearly every weekend. As is the case with the deal cycle in leveraged
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finance, there are typically quite a few projects needing to be completed at anygiven time. This lifestyle lends itself to the never-ending workday.
However, associates are paid accordingly with other corporate financeinvestment banking associates, which tends to reward them handsomely fortheir work ethic. With base salaries as high as $95k, signing bonuses in the$25-45k range, and full-year bonuses well in excess of $150k, the first-yearassociate gets paid well for his efforts. The more experienced associates canexpect to be compensated very well in the good economic years. This cantranslate into bonuses near $300k, with salaries clearing $150-200k. However,in slower years, this bonus amount can easily be cut in half. Whereas analystsare generally very excited to make their base salary in their bonus in a goodyear, senior associates are hoping to double their salary amount.
Analyst: Hired either straight out of an undergraduate program, or as alateral hire from another firm, the analyst is the “workhorse” of leveragedfinance. A fantastic analyst can make an associate’s life much easier, whereasa sub-par analyst can make a deal team miserable. Responsible foreverything from financial modeling to handling all of the details on a road-show, an analyst in leveraged finance is a jack-of-all-trades. The best analystshave an unending source of energy, a positive attitude, attention topresentation detail, a solid understanding of financial modeling, a list ofoutstanding tasks always with them, the foresight to predict the next step inthe process, and most important, the ability to be trusted with anything.Outstanding analysts will be given even more work, more responsibility, andthe best deals. In leveraged finance, those deals are often the mostcomplicated and the highest-profile.
Analysts are paid like their peers in corporate finance investment banking,which means they stand to earn $100k+ in their first year on the job.However, on the whole, leveraged finance analysts typically work just asmany, if not more hours than these investment banking peers. With aBlackBerry firmly attached to them at all times and access to the theircomputer nearby, analysts quite often find themselves in the office seven daysa week for their two-year contract. For the days where they are not in theoffice, they are generally nearby or at least are able to be remotely connected.The very best analysts are able to predict the workflow and head off projectsbefore they turn into all-nighters or weekend disasters.
As is the practice in the rest of corporate finance, the best analysts will beoffered third-year contracts and the best of those third-year analysts will beoffered associate contracts. Whether an analyst receives a third year orpromotion to associate is determined by both the resource needs of the firmand the analyst’s ranking compared to his/her peer class. In determining ananalyst and associate rankings, the analysts and associates are force-rankedwithin their class and among the larger corporate finance junior resourcepool. With the market momentum in the past years, this trend towardspromotion has been more the rule than the exception. In recent years, about50% of second-years were offered a third year and roughly 50% of those weregiven the A-to-A offer. It is more common find managing directors who havestarted as analysts and worked all the way to the top in leveraged financewhen compared to other areas of an investment bank.
Generally staffed by a VP in their team, analysts and associates are usuallyplaced on a variety of deals, which means that they should not all be “live” orclosing at the same time. Inevitably, this is never actually the case. This dealvariety helps to ensure that these junior resources will be able to work withdifferent issuers, deal teams, and financial products. At first, most juniorresources are staffed alongside other seasoned ones.
Investment Banks: Capital Markets/Loan Sales and Distribution
Managing director/vice president: In a capital markets function, themanaging director and vice president often have very similar jobresponsibilities; one’s title reflects not job responsibilities but years ofexperience in the field. As loan sales and distribution is typically groupedwith these capital markets professionals (if not one and the same at mostfirms), these positions are compensated similarly. Managing directors andvice presidents spend most of their time advising deal teams and clients onmarket conditions, as well as delivering these deals to investors.
With years of relevant experience, these professionals generally hail fromorigination and structuring teams or another section of the investment bank’scorporate finance practice, and are typically compensated on a scalecomparable to their managing director and vice president peers in originationand corporate finance. Although their function is not specifically “on the
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line” (they are not directly responsible for generating revenues for a firm),and this means that their pay scale might not be quite the same as thosesuccessful at originating many deals, it is generally very close. However,because the pay for a capital markets MD does not depend as much on feegeneration as it does for an origination MD, this can lead to more consistentearnings for the capital markets MD/VP year after year.
In this sense, the capital markets and loan sales teams are like head coaches ofprofessional sports teams: whereas the players (the deal team) are out winning thegames, the coach is directing the team during games, drawing up new plays(adjusting the terms of the deal in market), conducting research on othercompetition (market comparables), talking to fans (investors), and interactingwith the team’s owners (the client). While marquee players bring in extraordinaryfinancial contracts, the very best coaches are generally not too far behind.
As the firm’s eyes and ears of the financial markets, the capital markets andloan sales positions tend to work more “market” hours. In at 7am and out by7pm is somewhat typical for these senior professionals. However, even thesenior capital markets professionals will commonly find themselves workingwith origination teams and issuers to structure large deals well into theevenings. Loan sales professionals often work late too, but in a differentcapacity and outside of the office. Often, they are attending dinners/sportingevents with investors and/or clients. Regardless, the lifestyles of seniorprofessionals in both capacities tends to be quite hectic: following the markets,talking to clients, answering questions from investors, and spending the dayattached to a BlackBerry. Weekends for these teams are typically freer thanthey are for origination teams, but there is always occasional work that needsto be done.
Associate/analyst: As part of the corporate finance program, the associate andanalyst role within these teams is much like their peers in other groups. On ajunior level, in capital markets these tend to be positions that are more gearedtowards research, while in loan sales these roles are more focused oninvestment-grade deals and coverage of smaller clients. Because they are paidon the same scale as an origination associate/analyst, it appears on first glancethat the capital markets analyst or associate role would offer a better lifestylethan in origination. However, because of the pace of the job, that’s notnecessarily true.
While an origination analyst or associate completes a number of differenttasks over the span of a week (such as writing an info memo, adding pages toa credit deck, or completing slides in a pitch), the capital marketsassociate/analyst usually completes tasks on a daily or hourly basis. Thenature of the job is like a sprint, not a marathon, often involving numerousfire drills. For example, deal teams might ask for league tables and credentialslides, investors might want to know the spread differential between aparticular syndicated loan and a high-yield bond, a senior MD of the bankmight want a deck of slides outlining market conditions, and a client mightwant a set of recent 2nd lien LBO deals. These are all likely requests in thefirst half of a day for a capital markets associate or analyst.
Therefore, it is not uncommon for an associate/analyst in these groups tospend the entire day at his desk, working through a large list of requests. Onthe upside (if you can call it that), the day will most likely end beforemidnight (and usually closer to 9 to 10 p.m.) and resume again promptly at 8a.m. Although the capital markets have closed and the MD and VPs mighthave gone home, there are always materials needing preparation for earlymorning meetings and late-night last-minute requests from deal teams. Thisis quite different from origination, where the day of an analyst might not enduntil 4 a.m., but the next day will not usually start until 10 a.m., as there isless market sensitivity in origination/structuring.
Weekend work for capital markets associates and analysts is usually a regularoccurrence. While unlike the weekends of their origination counterparts,weekends for capital markets analysts and associates are usually not spententirely in the office, the variety of the requests is less predictable than inorigination. In origination, there are usually projected deadlines for projects.In capital markets, those deadlines are usually ASAP. As for sales, workingon a weekend would be quite out of the ordinary. A quick phone call orBlackBerry message to a client might occur, but not the creation of marketupdate slides or league tables, which usually happens in capital markets.
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These functions are essential to the leveraged finance platform but are notgenerally aligned with revenue generation. As such, they are typicallycompensated on a lower payscale, and the lifestyle in these groups is better.
Managing director/vice president: Similar to other senior resources, thelifestyles of the managing director and vice president roles within these teamsis less intense than their coverage counterparts. With the exception of corporatebanking, these roles are not usually the primary client contacts for the firm.Also, since they are not usually aligned with revenue generation, they arecompensated on a different scale. Whereas an all-star managing director inorigination might get the credit for bringing in $25 million of fees for a deal andwill be paid in-line with this fee generation (or lack thereof in a bad year),someone in a non-revenue generation role will have more stable earnings. Thismeans that the top-tier ratings advisory managing director will most likely notearn as much as the top-tier origination managing director. However, when itcomes to compensation for group/department heads, all bets are off.
In terms of hours, the senior resources in these functions can expect to workeven more predictable hours than those senior professionals in origination.Like their counterparts, weekends are usually free and you will not usuallyfind them in the office at 9 p.m. However, as with any other major leveragedfinance function, if a large or complex deal is coming to the market, everyoneon a deal team usually works well past their “normal” hours.
Associate/analyst: Much like the origination/structuring and capital marketsjunior resources, these individuals are part of the corporate finance programat the investment banks. However, the ebb-and-flow of workload in thesepositions tends to be more similar to origination than to capital markets.Their day-to-day will fluctuate based on their group and or deal-flow, but willgenerally be long hours, marked with long-term projects and firm deadlines,such as the creation of a ratings agency presentation. Also, the pay willgenerally coincide with the entire corporate finance program. As for weekendwork, junior resources in all of these groups can definitely expect it. Usuallyworking intensely on one or two deals, as opposed to three to five inorigination, their weekend lifestyle is slightly more predictable.
Organizationally, commercial banks and commercial finance companies tendto set up their leveraged finance platforms in relation to their deal flow.Whereas some of the larger players like GE have dedicated origination teamsto cover large cap and small cap issuers, smaller middle-market players mightcombine all of their origination, capital markets, and sales roles. Typicallythough, the large players are set up in a manner similar to the investmentbanks, although they will combine the complementary functions such assales/capital markets and underwriting/credit/risk. At these firms, thetitles/hierarchy are similar to that of investment banks, as is the way that payfor each function depends on how closely tied that group is to revenuegeneration. However, at the commercial banks, pay and lifestyle are oftenvery different than that at an investment bank.
Compensation
On the whole, pay within a commercial bank’s leveraged finance platform tendsto be less than at a major investment bank. As commercial banks are not usuallyleading the signature event-driven multi-billion-dollar financing transactions,their leveraged finance platforms are not bringing in the same volume of revenuesas their investment banking counterparts. Assuming the same mix of event-driven financings, as well as refinancings, this means, on average, the fees perdeal will be less since same-purpose smaller deals tend to generate less in fees.
With a fixed equation of people to revenues, this ratio will be less for thecommercial banks than the investment banks. As firms compensate theirsenior managers relative to their revenue generation, these senior people oftenearn less than those same managers at investment banks. Also, organizationstend to pay relative to other functions and departments within itsorganization, which benefits the leveraged finance investment bankers moreso than the commercial bankers.
This is not to say that these professionals are not paid well. It simply meansthat the scale is smaller at a commercial bank than at an investment bank. Agood rule of thumb is to assume that the same position at a commercial bankis paid about 50-75% of what its peer at an investment bank is paid, up to acertain point. As top performing first-year analysts at investment banks madeclose to $150k in 2005 ($60k base salary, $10k signing bonuses, and $80k inyear-end bonus), the same top performing first-year analyst at a commercialbank might have made $75k (base salary of $50-55k, $5-$10k signing bonus,$10-15k year-end bonus). This would also apply to second- and third-year
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investment banking analysts: $175k and $200k at investment banks versus$85k and $100k at commercial banks.
This compressed pay scale continues through the ranks. While the topperforming managing directors in an investment bank’s leveraged financegroup can expect to earn millions of dollars in any given year, a counterpartat a commercial bank might expect to earn only multiple hundreds ofthousands of dollars. A top performing vice president at a commercial bankmight make $300-500k in compensation, whereas top performing senior vicepresidents at investment banks can make $1 million.
Lifestyle
Of course, the greater pay at an investment bank’s leveraged finance groupversus at a commercial bank is related to a lifestyle tradeoff. Generally,analysts in a commercial banking leveraged finance division can expect longdays of hard work and occasional weekends, but not the grueling hours andweekend expectations of their counterparts in investment banking corporatefinance programs. Instead, their hours are typically 8 a.m. to 9 p.m. (and oftenextending until midnight), but absent the expectations of all-nighters andeveryday weekend work. Associates and vice presidents also generally havebetter hours than their investment banking peers, with fewer late nights. At amanaging director level, the consistency of hours for a commercial bankingMD tends to be better than for the I-banking MD, although the difference inhours is not as severe at the MD level as it is for junior professionals.
Also, there is less stress for those at commercial banks and commercialfinance companies when compared to the pressure at an investment bank.This is partially due to the risk/reward fluctuation of salary and the ebb andflow of hiring/firing that comes with the general economy.
In a bad economy, no job is safe at the investment bank. Investment banksfollow an up-or-out policy when it comes to scheduled promotions, such asthe promotion from second-year analyst to third-year analyst. These hurdlescan be very hard to overcome—regardless of an individual’s performance—when a firm finds it has over-hired or the economy turns south. ConsideringA-to-A promotions are only 50% in a good economy, this is definitely a majorissue to take into account. In contrast, commercial banks and financecompanies, such as GE and CIT, do not follow the same rigor and structure—these firms typically promote people into jobs when they are ready, rather
than requiring that they make that leap after a certain time periods. Thesefirms are still very structured when it comes to hiring, firing, and promotions,but in these downturn economies, they can afford to be less extreme when itcomes to promotions and firing.
When it comes to lifestyle and pay in leveraged finance, the mot importantfactor is consistency. This goes for everything including hours, weekendwork, hiring/firing, compensation, and promotions. At the investment banks,there definitely is a risk/reward payoff in the good economies. However,even the top performers are not safe in bad economic times at theseinvestment banks, as they are subject to the volatility of the markets and theeffects the economy has on an organization. At a commercial bank or financecompany, the stability of the company has less to do with the financialmarkets and, subsequently, so do all of these pay/lifestyle elements—a certainamount of career stability exists during bad economies at commercial banks,much more so than at investment banks.
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The Leveraged FinanceCareer Path
Analyst
Generally the lowest ranking tier on the leveraged finance totem pole, thisrole usually involves all of the “grunt” work on a deal. At the majorinvestment banks, the analyst is either hired straight from an undergraduateuniversity or is a lateral hire from another firm. From here, they are placedinto a rigorous training program, where they are taught the basics of corporatefinance. After successful completion of the program, they are placed intotheir leveraged finance groups. At commercial finance companies, analystsare direct hires from undergraduate universities, are lateral hires from otherfirms, or were previously part of a rotational finance program.
At the investment banks, analysts are usually hired into a two-year program,where they compete against their peers for rankings that determine bonuscompensation and promotion. At the end of this two-year period, theanalyst’s contract is either extended for another year, making them a third-year analyst, or they are let go. Generally, 50% of second-year analysts canexpect to be promoted, but this depends on hiring needs, the economy, and thegeneral performance of the analyst talent pool. In some situations, this canbe as low as 25% and in others, as high as 90%.
After their first year, investment banking analysts are given a base payincrease of $10k and a July year-end bonus. In good years, this bonus istypically more than the analyst’s salary. Also, this bonus is indicative of theanalyst’s rank in comparison to his peers. As you might expect, the second-year bonus is larger than the first, and is indicative of whether or not ananalyst can expect a promotion. If promoted to third-year analyst, theindividual can also expect another $10k bump in base pay and a larger year-end July bonus. Finally, as rumored across Wall-Street, there is theoccasional bonus well-below the class range, which is basically a signal to ananalyst that she is not wanted at a firm.
Aside from the typical routes, some investment banks will have junioranalysts matriculate into their corporate finance program. These talentedindividuals often were not targeted (or did not apply) during the regular
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CHAPTER 9
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recruiting process for one reason or another. They generally pre-line for ayear before joining the corporate finance analyst program, giving them theunique opportunity to see different groups over the course of a year beforesigning the two-year analyst contract. Paid salaries and bonuses, they too areconsidered analysts and often are the top performers in the corporate financeprogram when they matriculate.
At the commercial banks and finance companies, analysts are generally eitherfrom a rotational management program or are hired directly fromundergraduate universities. However, they tend not to be on a “contract”basis, which means that they are employed without the option for the firm todiscontinue their employment after two or three years. At most of thesefirms, analysts are paid on a January-to-January bonus cycle. These bonusesare not as large as those of their investment banking counterparts. Naturally,if hired from a two-year rotational program, analysts at commercial financecompanies can expect a quicker path to promotion to associate (a year or sois not uncommon), a higher base salary, and a larger annual bonus.
A Day in the life of a LeveragedFinance Structuring/Origination Analyst
7:30 a.m.: It’s Thursday morning and you are just waking up from a late nightof last-minute pitch changes until 3 a.m. You’re headed to the client’s office,thankfully only a few blocks away in Midtown Manhattan at 11, so youalready printed and bound 25 copies of the refinancing pitch last night. Youcheck your BlackBerry to make sure that the deal didn’t dramatically changewhile you were sleeping, shut off the alarm clock, and grab your suit.
8:30 a.m.: You arrive to the office via the subway, coffee in hand, to find yetanother markup on your chair of the pitch from your associate. Thankfullyit’s only a few minor errors that you overlooked, but it means that you’regoing to spend the next few hours racing around, making changes, andsubstituting new pages. At any rate, it is better that you all caught themistakes before you were actually in the pitch. Usually you are not in theoffice until 9:30 or 10, but with an important client pitch, you knew you hadto be there early today.
8:40 a.m.: You login and check your voice mail, only to have 20 new e-mails, from your other deal teams, capital markets colleagues, friends, and
lawyers. You ignore a voice mail from your buddies, knowing that you’llneed all of the next two hours. You put everything else that was on your chairinto the stack of “stuff that’ll get done later.”
8:50 a.m.: You’re already cranking into the changes, saving the presentation,when your MD drops by your desk and says, “Let’s make this final changeand update this slide.” After you quickly do so and incorporate the otherchanges, you send the pitch over to your production group, with instructionson which slides to replace in your 30-page presentation.
9:30 a.m.: After sending the presentation, you walk over to find that thepresentations group is slammed with last minute requests. You call up yourassociate, who comes over to help. For the next 30 minutes, you are printingand swapping out pages while checking your BlackBerry. You also return toyour desk to quickly burn the new presentation to a CD and save it, yet again,to your hard drive. Once the books are completed and flipped, you throwthem in a bag and call your car service to make sure that a car is ready andwaiting to leave at 10:15.
10:00 a.m.: You’ve returned to your desk, only to have a flurry of messageson your desk for other deals. Ignoring them, you grab your suit jacket, checkyourself over once in the mirror, and stop by the VP’s desk, books and laptopin hand. The associate is right behind you and now you’re just waiting onyour MD, who is on the phone with another client.
10:30 a.m.: Now in the car, you’re only 10 minutes away from the client’soffice. The VP flips through the presentation only to temporarily freak out atthe last minute addition. The MD assures the VP that she made the changeand everyone reviews their speaking points for the presentation. Beingexceptionally diligent, you have printed out the latest news about the clientfrom the company web site, as well as online finance sites. You pass copiesaround. Even though it’s a refinancing, it’s multiple billions of dollars infinancing for one of the firm’s most prominent clients, which means that if allgoes well, there are definitely more transactions in the pipeline for your team.
10:45 a.m.: You arrive at the client’s office and you are escorted up to theirboardroom. You set up your laptop (the associate has also brought a backup)and you plug everything in. You also set up each chair with a copy of thepresentation and establish a dial-in line, as your capital markets expert wasnot able to make it in person. From a presentation standpoint, everything is
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good to go, which is your primary responsibility. You check for any lastminute BlackBerry messages before the presentation begins.
11:00 a.m.: The client arrives and the pitch begins. Business cards are passedout, pleasantries are exchanged, and the slides are discussed. Occasionallystopping for questions, the MD and VP tag-team the presentation while youand the associate stay alert for any financial modeling questions. As ithappens, the CFO poses a brief question to you about the assumptions in thefinancial model, which you rattle off with ease. Scheduled to last two hours,the pitch moves quickly and actually ends on time. The client is pleased, yetwants to discuss internally and get back to you with questions before arrivingat a final conclusion.
1:30 p.m.: The car you scheduled for the trip drops you off at the office andyou return to your desk exhausted. You grab another analyst and head out toa local deli to pick up some lunch.
2:00 p.m.: Now eating lunch at your desk, you sort through voice mails and e-mails to determine what you need to conquer in the afternoon. You’ve alreadygot a sit-down with Credit at 4 p.m. to discuss an auction financing for an LBOby a major private equity firm, which Credit already does not like. Also, you havea conference call at 6 p.m. to discuss closing dinner slides with your coveragecounterparts for your most recent transaction. Naturally, the associate from your4 p.m. deal has been eagerly awaiting your arrival from your pitch, ready to tweakthe financial model and credit package with the newest changes from that VP andMD. With a bid deadline on Tuesday, the financial sponsor coverage group wantsto get approval before the weekend, in order to put together some financing slidesfor a Monday morning presentation with the PE firm.
2:30 p.m.: After you’ve made a list of things to get done and have returned aphone call or two, you realize that these “tweaks” are going to take everyminute of the next hour and a half. You grab the most recent financial modelfrom the share drive, throw on your headphones and start cranking. If you arelucky, the model will not implode and you will make the 4 p.m. deadline.
3:00 p.m.: Your parents call. They’re worried about you, since you haven’tcalled in a few weeks. You tell them that you’ll have to call them later, buteverything is alright. Now, back to cranking on your financial model…
3:30 p.m.: The model is complete with the newest assumptions and you dropthese new numbers into the credit package. You scan through it to make sure
nothing else needs updating. Doing this, you notice that financing scenario isbetter, but still somewhat unlikely to get approved. The associate and VP stopby your desk to take a look and make sure they don’t want to make any otherchanges.
3:40 p.m.: The financial sponsor coverage team called and wants to check onthe conference room for the meeting with credit. You double-check, get backto them, and call up the credit executive. The associate and VP made theirminor changes to the presentation, so you click print on 10 copies on thepresentation and the financial model. The printer is busy, but you’ve got twobackups. Clicking print on both of these printers, you and the associate grabfive binder clips each and wait for the printing to finish. At 50 pages each,this could take a little while.
3:55 p.m.: The printing is complete. Promising to meet the VP and MD inthe conference room three floors down, you and the associate grab yournotepads, financial calculators, binders of company information, and thecredit packages. You should make it with a minute to spare.
3:59 p.m.: Nearly out of breath, but right on time, you pass out the creditpackages to everyone in the room: the financial sponsor’s coverage team, yourorigination/structuring team, the corporate banker, the credit executive, the loancapital markets MD, and the high-yield capital markets MD. For the next hour,everyone reviews the package, asks questions about the deal, the due diligence,and the company. You get to answer all of the financial modeling questions,while the associate tackles the mundane company questions, since you bothdecided early on to adopt these sections of the presentation. Somewhere duringthe presentation, you notice two or three minor errors, but since they’re buriedin 50 pages of work, nobody can blame you.
Surprisingly, at the end of the meeting, the credit executive gives signoff, butasks for some minor information, which you make note of and promise todeliver. The financial sponsor coverage team schedules another sitdown onTuesday morning to discuss the sponsor’s reaction to the financing proposal,since they will be with the client all day on Monday. However, at this point, yourfirm is just trying to remain competitive with the other financing firms and it’sexpected that there are many rounds of bidding and credit approval remaining,if your private equity group also remains competitive with its overall bid.
5:00 p.m.: With so much racing around, you avoid your desk in order to graba quick cup of coffee with an associate friend of yours. A recent business
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school grad, she talks about how much you would enjoy the two-year breakfrom this lifestyle. A third-year analyst up for the analyst-to-associatepromotion next year, you recognize that you have a lot on your plate toconsider. However, bonus talk has already come out for the first-yearassociates, and with numbers that high, it looks quite enticing to stay aroundfor a few more years.
5:15 p.m.: You return to your desk, scan your list of things to do, and knockout the low-hanging fruit, as well as those things needing to get done before6 p.m. The MD with your deal team from the morning pitch has just talkedwith the client, who accepts your firm’s financing offer. He fires around ane-mail, with congratulations, as well as a first-thing deal team sitdown in themorning to get started on drafting the info memo and launching thetransaction. In the meantime, he tells everyone to go home soon, since there’splenty of work to do tomorrow. Although exciting, you know that you willspend the majority of your weekend cranking on an info memo and preppingfor a deal launch. Thank goodness this transaction is a standard loanrefinancing from a prior deal, otherwise you would be up all night worryingabout a high-yield roadshow and/or rating agency presentation.
5:50 p.m.: You finish up some e-mails and phone conversations, so that youcan check out what is needed for the 6 p.m. conference call. Planning aclosing dinner is somewhat enjoyable, as it is a chance to reminisce about thedeal. You quickly review the deal toy choices, which were sent over to youfrom the firm preparing them, and you e-mail those choices out to the team.Since the dinner is two weeks away, you’re still in the idea generation phasewith the team, but you have already written down memorable quotes, made areservation at a high-end restaurant, sent out invites, and put together a slideof transaction highlights.
6:00 p.m.: The conference call only last 30 minutes and everyone is given atask to complete before Monday morning. Your task is to start sketchingPowerPoint slides with the associate. Enjoyable? Somewhat. TimeConsuming? Very.
6:30 p.m.: You start thinking about ordering dinner for the evening, whileyou check CNN and ESPN to see what happened in the world today. Sinceyou will definitely be at work late, you place an order with your team fromthe local Chinese restaurant.
6:45 p.m.: You make a quick call to the parents, who are happy to hear thatall is well and that you are still alive.
7:15 p.m.: Dinner arrives, so you go downstairs to pick it up. Carrying itupstairs, you locate an unsuspecting conference room, which will now smelllike General Tso’s chicken for the next two days. Most of the analysts andassociates from your group eat dinner together, talking about anything andeverything.
7:45 p.m.: You get back to your desk to find a markup of the credit packagefrom the VP on your second deal. The credit package markups are needed byfirst thing in the morning, as the financial sponsor coverage team wants toswitch up the transaction structure entirely. Of course, this will requireanother meeting with credit tomorrow, which means all chances of areasonable Friday departure are ruined. Also, it is about right now that yourealize you’ll be cranking most of this weekend to update slides in thefinancing pitch for Monday. However, since it is not the final round of theauction, this will be a relatively easy task. Realizing that you also have a firstthing meeting with the MD of your live deal, which will likely take all day tofinish, you decide to knock out these credit package changes ASAP.
10:00 p.m.: After finishing the modeling of the new transaction structure,with your associate periodically checking in, you are able to finally send overthe credit package and model to the financial sponsor coverage team. Theytake your information, review it, and will undoubtedly call you withquestions. However, it is time for a quick water break and then time to crankon the new info memo, for your live deal. You start by preparing theessentials: the contact list, the table of contents and framework, the timetable,and the historical company financials.
10:30 p.m.: The financial sponsor coverage team calls about the model, whichmakes you nervous. However, they call to say thank you and to ask about somequick modeling assumptions you have made. You walk them through yourchanges and plan on touching base with them tomorrow. Since you haveeverything under control, your associate from this deal decides to go home.
11:00 p.m.: The associate for your live deal was stuck cranking on a lenders’presentation for another deal, but is finally packing up her stuff and calling thecar service to go home. Knowing that you have a chance to save at least a fewhours of your weekend time, you decide to crank for a little bit longer on the infomemo. Since tomorrow will be busy, this also might be all of the good cranking
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The Leveraged Finance Career Path
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time you’ve got in the next 24 hours. Also, you know the deal team will beimpressed when you’ve made good progress by tomorrow on the outline.
2:00 a.m.: Realizing that you’re exhausted, but have made great progress onthe basic sections of the info memo, you decide to call it a night. Thankfully,there are many other analysts still cranking away, which kept you companyfor the past few hours. Since you live in Manhattan, you do not need to calla car service. Instead, you will just hop in a taxi waiting outside. To finishup the day, you respond to some e-mails from friends, shut down your laptop,and grab your BlackBerry. It has been another long day at the office, but theweekend is getting close.
Associate
At an investment bank, the first-year associate role tends to be filled either bysomeone who was promoted from a third-year analyst to associate, or bysomeone who was hired from an MBA program. Lateral hires into associateroles are not uncommon, but they do not comprise the vast majority of first-year hires.
The A-to-A step (from third-year analyst to associate) is a very significantpromotion, as it recognizes that an analyst has the skills necessary to managea larger portion of a deal. This promotion often comes with the annual Julybonus, a re-signing bonus of $30-40k, a month for incoming associatetraining (or a month off), a base pay increase to $95-$105k, and a stub bonusin January ($40-50k), in order to formally switch to the Jan-to-Jan pay cycle.Not only are these promotions somewhat rare, but usually promoted analystschoose to go other routes—such as business school, private equity, or hedgefunds—at this time.
Graduates coming from MBA programs are also given the same signingbonus, base salary, corporate finance training, and stub bonus as their A-to-Apeers. These MBA hires in many cases interned during their summer betweenprogram years, giving them the ability to lock up their career path well inadvance of graduation. They, like A-to-A associates, are also given very largeyear-end bonuses, pay increases for each successful year of employment, andforce-rankings against their peers. These associates are almost all older thantheir A-to-A counterparts, but they bring a different point of view and careerexperience to the table.
At commercial banks and finance companies, the promotion to associatetends to be less eventful. Often, an analyst is promoted without a re-signingbonus, but simply an increase in pay to somewhere in the range of $65-80k.As they may already be paid on a January-to-January bonus cycle, there istypically no need for a stub bonus. However, for associates coming frombusiness school, it is not uncommon for the firms to pay a relocation bonusof $10-15k and a stub bonus in January that will be smaller than that of theirinvestment banking peers.
Most associates at investment banks, commercial banks, and financecompanies tend to spend three to four years in the associate role beforepromotion to VP. If there is a senior associate or junior VP title, this can meanless time with the “associate” title. At commercial banks and financecompanies, promotions are generally less eventful and will occur at earlierperiods than at investment banks. Furthermore, with the formality that existsat investment banks, associates who have been in their position for three-and-a-half years and are not promoted to VP are usually asked to leave. This isnot necessarily the case at commercial banks and finance companies.
A Day in the Life of a LeveragedFinance Structuring/OriginationAssociate
7:00 a.m.: It’s a little bit early for you to be up, but you want to get a headstart on the day. Since it’s a Friday and your analyst has been cranking lateon an info memo for a new deal, you definitely want to get into the office andreview it ASAP. Also, your MD has called a 9 a.m. meeting for this deal andyou want to be prepared. So, you grab the BlackBerry and head to the office.
8:15 a.m.: Even as a third-year associate, you still are not used to the earlymorning hours, which follow long evenings. Although you were at work until11 p.m., your adrenaline still runs high, as you are now on two live deals.One, a multibillion dollar refinancing, was just mandated, and the second isin market with a lenders’ meeting on Tuesday morning. There’s alwaysplenty going on in this job, which is exactly why you love it. You check e-mails and start to review the info memo shell that your topnotch analystworked on late last night. That kid is definitely going places.
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8:40 a.m.: Realizing that you’ve got 20 minutes until your meeting, you rundownstairs to grab a cup of coffee and a bagel.
9:00 a.m.: You finish your bagel at your desk while reading the info memo, andhead over to the meeting, where the MD outlines the next tasks for thetransaction. The MD is exceptionally pleased to know that the info memo wasalready started and you all talk about the next steps. You set a firm deadline forthe info memo to be distributed to lenders, for a lenders’ meeting to be held, andfor sitdowns with the sales and capital markets teams. The MD, always on theBlackBerry, forwards you all a note from senior management, which says howproud they are that the deal team pulled off another successful pitch. As youhave been on quite a number of deals, you recognize that this is the calm beforethe storm and the crunch time before the deal launches.
10:00 a.m.: With some clear deadlines in hand, you quickly debrief with theanalyst, dividing up responsibilities. You all agree to meet at the office at 10a.m. tomorrow, to make sure that everything is on track and to review progress.Since the other analyst on your live transaction is out of the office for recruiting,you are doing all of the heavy-lifting for the lenders’ meeting and will need allof the help on this deal possible. With two live deals in market, things are busyright now. Thankfully your auctions have gone radio-silent, while the ownersreview bids from the private equity shops and financing firms.
10:15 a.m.: You return to your desk to find some investors have alreadycalled about the new transaction, even before the lenders’ presentation hasgone out. You call them back, giving them some information, and passing theword along to your sales team. People are definitely excited about this deal.
10:45 a.m.: As soon as you set down the phone, the VP for this deal comes overto your desk, checking in with you about the presentation. Almost on cue, theclient calls, asking to review the lenders’ presentation slides you sent last night.Since they will be traveling to New York on Monday for the presentation onTuesday, they’d like to wrap up any major changes before the weekend.
11:00 a.m.: You make the call to the client, going slide-by-slide through yournewest update to the presentation. You discuss talking points, where you allshould meet, and any other changes. The client suggests updates to a few slidesand you make note of them. Knowing these changes will be made to the infomemo, you make note to change those as well. You promise to send them a softcopy of the slides by 4 p.m., so they can print them out before they leave for home.
12:30 p.m.: Immediately after you get off the phone, you begin reviewing thechanges. Recognizing that this will take you a few hours, you decide to graba bite to eat from the cafeteria downstairs, since you know that you can getback to your desk quickly.
12:50 p.m.: Eating lunch at your desk, you start cranking on changes. TheVP stops by periodically to ask questions, but otherwise you spend most ofthe afternoon cranking on the changes and double-checking everything.Since hundreds of investors will be scrutinizing this deck of slides, you wantit to be as perfect as possible. Also, since this is going back to the client, youwant the work to be top-notch.
3:00 p.m.: With the changes made, you circulate this presentation to the VPand MD to show them what you are sending. Often, the CFO and treasurerwill call you directly and vice versa, but you still like to touch base with yourdeal team. Once you have final approval from them, you send over a copy ofthe lenders’ meeting slides.
3:30 p.m.: Your e-mail to the client has been sent, so now it is time to checkin with your other deal team. Meanwhile, the analyst is cranking on thetransaction overview section of the info memo and making good progress.You both grab some coffee to take a break, while you discuss the weekendand career stuff.
4:00 p.m.: Once back to your desk, you check e-mails and voice mails. Youmake some calls to friends, check CNN and the WSJ, and catch-up on the restof your day. About this time, the analyst from your deal has arrived back inthe office from the high-yield bond roadshow, completely exhausted. Youboth sit down to update on what has happened with the lenders’ presentation,while you strategize what needs to happen before Tuesday’s meeting.However, since the final approval for the deck of slides has not yet beengiven, you are really in a holding pattern on that front. Yet, updates need tobe made to that info memo, so that it can be sent to investors immediatelyafter the meeting. This will definitely be your weekend work.
5:00 p.m.: Before your MDs leave for the weekend, you check in with eachof them to make sure they know where everything stands. The lenders’ slidesfor the first transaction look great, the shell of the info memo for therefinancing transaction is underway, and your auctions still remain quiet withno news. From the looks of it, you might actually have something of aweekend. You also make sure to check in with the VPs, since they are leaving
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shortly too. As one of them is drafting part of a credit agreement thisweekend, she invites you to hop on a conference call tomorrow morning at 11a.m. Since you will be in the office anyhow, this is totally fine by you.
6:00 p.m.: You stop by both analysts’ desks to see how they are doing. Youdivide up some minor tasks, so that everyone can get out of the office tonight,since it is a nice evening outside. With only a few hours of work on Saturday,you feel great about this weekend.
7:00 p.m.: You shut down the laptop, remind the analysts not to stay late,since a lot of that work can be done tomorrow, and you head home. As for a7 p.m. departure on a Friday, you have seen a lot worse!
Vice President
The promotion to vice president signifies a shift in responsibilities to more dealmanagement and client interaction. At investment banks, this promotion is oftenvery formal and is reviewed by a management committee, as well as the leveragedfinance group heads and the team’s managing directors. This review is necessarybecause it generally means an employee will be paid bonuses in company stock,will be assuming client relationships, and will likely spend the majority of herremaining career with the firm. At commercial banks and finance companies, thepromotion process is still rigorous, but usually not as intense and can generally beapproved by a single group head. Also, without the typical investment banking“stratification” or “class” system, a promotion to VP is not usually dependent onyears of service with the firm at a commercial bank or finance company.
The vice president role is the point at which firms tend to depart from eachother with respect to how they organize their hierarchy. At some firms there arejunior/senior vice presidents and even principals/directors, before the finalpromotion to managing director. At other firms, the managing director title isonly used to signify a group head, which means someone could be a VP forquite some time and might not ever make managing director. Finally, at otherfirms, the vice president title is passed around to anyone with client interaction,in order to make clients feel as if they are dealing with the firm’s best talent.
As is the case with analysts and associates, vice presidents are usually groupedinto classes based on when they joined the firm. However, it is at this levelwhere pay tends to vary from firm to firm and group to group. A few firms willpay their vice presidents bonuses based on their individual fee generation, while
most will pay based on forced class-ranking, much like the analyst/associatemodel. Since VPs are not usually responsible for client relationships, the lattertends to be the norm, but revenue-generating VPs tend to be paid quitedifferently than non-revenue generating VPs. At the same firm, a VP in riskmight expect to earn $250k including bonus, whereas a top-tier VP inorigination might expect $1 million a year or more in total compensation.
Finally, VP pay can be remarkably different from firm to firm. VPs withinorigination groups at the top-tier investment banking leveraged finance shops arethe highest paid, whereas risk/credit VPs at middle market leveraged financeshops with significantly less deal volume and fee generation are probably theleast. Therefore, when choosing a firm for a career in leveraged finance, it isimportant to consider the nature of your role, the firm’s deal flow, and your team,as this could have a very substantial impact on compensation in the future.
It is also at the VP level where compensation tends to be paid mostly in stockoptions, as bonuses well exceed base salaries. (In good years, this can evenbe true at the senior associate level.) At any rate, most firms will choose toreward a certain amount (let’s say $250k, for example) of compensation incash, with the remaining portion in stock options that must vest over a periodof time. This tends to encourage the top performers to spend the majority oftheir careers with firms so that they do not leave cash on the table. Most firmsalso structure a formula into the equation that makes all of your options vestimmediately once you reach a certain age, enabling you to leave the firm atthat time without leaving money on the table.
Unlike the A-to-A and associate-to-VP promotion cycles, VPs are not necessarilyon a specific timeline when it comes to MD promotion. It is common that a VPwill spend five to 10 years employed at a firm (potentially longer), without gettingthe MD nod. Some firms only reserve the MD title for group heads, thus leavinga large number of VPs in the mix and the need for both senior and junior VPs.
Managing Director/Group Head
The managing director title is the pinnacle of leveraged finance, and bankingin general. Managing client relationships is the key to this job and, in the caseof origination/structuring, generating fees for the firm comes with thisresponsibility. That being said, there are usually more MDs inorigination/structuring roles than there are in credit/risk/underwriting roles.
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But being an MD also usually signifies having direct reports in the bankinghierarchy. Group heads are often just MDs with more responsibilities. Theyare also usually signed to long-term financial contracts due to these duties.
The typical first-year MD is somewhere in his late thirties and has been with afirm from associate to VP to MD. Usually promoted after a thorough reviewby the firm’s management team, this role is reserved not only for someone whohas put in years of service to the firm, but also shows the potential for manymore. As mentioned earlier, promotion to MD does not just happen after threeor four years at the VP level. Like Hall of Fame inductions for professionalsports, there are numerous qualified people, but only a certain handful of thesecandidates make it every year, depending on a firm’s needs. The best-of-the-best performers might find themselves in an MD role in their early/mid 30’s,promoted the first year possible and well on their way to top-tier management.
Managing directors at the investment banks are well-compensated for their efforts.Group heads can be rewarded with contracts in the multiple millions of dollars, andrainmaking origination/structuring MDs often find themselves in similarlylucrative positions. The typical leveraged finance MD can usually expect to earn$1 million or more in solid economic years, possibly as much as $3 million foroutstanding performance. Conversely, an MD in risk might only earn $500-$750kin comparison, which is less than his/her peers at the same firm. At commercialbanks and finance companies, origination/structuring compensation for MDs tendsto be in line with the risk/credit functions at the investment banks.
Because this compensation is paid nearly entirely in bonuses, each January canbe quite an intense month for a managing director. MDs tend to scrutinize thesalaries of their peers at other firms, making sure they are paid in line with theStreet. Due to this scrutiny, it is not uncommon for The Wall Street Journal orNew York Post to publish compensation studies, which break down the typicalpay of firms for analyst/associate/VP/MD. With compensation such a hot topic,big-name players will often move from firm to firm in order to seal the best dealpossible.
Managing directors often spend the remaining portion of their careers with aparticular firm, in part due to the sheer value of their stock options, and thenusually leave these firms once they have reached their mid/late 50s, unless theyhave been promoted to group head positions. However, due to the nature of thelifestyle and the pressure, it is not uncommon for an MD to retire by 55 in orderto collect all of her stock options. From here, many MDs go on to start their own
businesses, join charitable foundations, and even serve on the boards of directorsof their former clients.
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Transitioning to Private Equity/Hedge Funds
These days, leveraged finance is one of the hottest places to workbefore pursuing a career at a private equity shop or a hedge fund, a trendeasily confirmed by searching through the bios of private equityassociates/vice-presidents on the web sites of big hedge funds and PEfirms. Because they have so much transferable work experience, as wellas an understanding of the industries, top-tier analysts, associates, vicepresidents, and even managing directors commonly leave their positionsat leveraged finance firms for these shops.
More often than not, those working in leveraged finance seeking careers inprivate equity tend to make the career switch after their analyst years. Mostof the big name PE shops hold recruiting seasons in the early fall for theirexpected incoming July class. Much like the traditional investment banks,these PE shops tend to hire analysts for two-year periods and then send themalong to the top-tier business schools: Wharton, Harvard, and Stanford. Inmany cases, these analysts return to their PE shops as associates aftercompleting their MBA. This means that PE shops are reasonably able topredict the number of resources needed to fill for each and every hiring year.Therefore, they seek out this analyst talent at the cream-of-the-cropinvestment banks and leveraged finance shops very early in the year.
By hiring headhunters and using word-of-mouth on the Street, these privateequity shops are always on the lookout for the best talent for next year.Analysts fortunate enough to land interviews at the big-name private equityshops will face extremely tough interviews. These firms will often conductintense take-home financial modeling sessions in order to make sure that ananalyst has the skills to succeed. Highly sought after, these interviews canweed out even the best talent. Candidates from leveraged finance, financialsponsors coverage teams, and M&A groups tend to comprise the majorityof interview schedules, due to their financial modeling and deal experiences.
Another reason for this July-to-July switch to PE has quite a bit to dowith bonus pay cycles. Private equity shops also tend to pay their juniorresources on a July-to-July basis, which is in line with the start ofbusiness school, as well as the bonus period for the analysts they arehiring. For this reason, many associates and VPs tend not to be involvedwith the PE recruiting process, choosing not to lose valuable years ofwork experience or potential pay at their current firms.
As for hedge funds, analysts within leveraged finance are highly sought-after commodities because of their credit training experience. However,in contrast to private equity firms, hedge funds tend to hire employeesas needed, without a formal recruiting cycle. Hedge funds also tend toplace less emphasis on an MBA. With less hierarchy and less formality,this means that analysts/associates/VPs/MDs are all targets of hiring, iftheir skills are needed. Headhunters tend to play a large role in thisprocess, finding candidates with the right backgrounds, in order to finda good “fit” for a firm. Quite often, those in leveraged finance tend tohave the right background and experience for this career path.
Private equity and hedge funds offer a very different experience for theleveraged finance analyst/associate. While closing a deal (private equity)or modeling a transaction (hedge fund) might require quite a bit of timeand effort, the general lifestyle of the junior resource is more predictableand less hectic than in leveraged finance. These resources are paidcomparably to their investment banking peers, if not more favorably. Itis not until they reach the senior level where they usually get “carry” (theability to invest) in the firms’ transactions or fundraising. When thishappens, compensation is often taken to the next level.
As for senior professionals, the lifestyle tends to be similar to leveragedfinance in terms of hours. However, there tends to be less of a salesnature to the positions at PE firms or hedge funds when compared toleveraged finance or investment banking, as compensation at both PEshops and hedge funds hinges on the performance of financial assets,not selling a firm’s service. At the highest level, there is still a sense ofnetworking and client interaction at private equity shops, in order to buyfirms and maintain relationships. At hedge funds, the portfolio manageris less engaged with this social aspect of working, but still is wined-and-dined at the expense of the investment banks.
Instead of the process-oriented deal environment of leveraged finance,these private equity shops and hedge funds tend to employ a buy-and-holdstrategy. Where the leveraged finance firm holds the underwrite exposureof a company for a few weeks until a syndication is complete, a hedgefund might hold a position for months, and a private equity shop for years.Both firms seek value in the underlying asset, not the completion of atransaction. Due to this “buy and hold” mentality, this lends a more“normal” lifestyle, with more predictable hours for those in private equityand at hedge funds. These firms also tend to reward based on thefinancial performance of the transaction, which can be extremely profitablefor the senior management of the firms. Although leveraged finance canbe very lucrative for an individual, the sky is the limit when it comes tocompensation at the highest ranks of private equity and hedge funds.
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A dynamic and ever-changing industry, until the past decade or so, leveragedfinance truly was the sleeping giant of investment banking. But as financingfirms realized its potential, as the financial markets expanded, and asinvestors realized its vast opportunity, this giant awoke. Now a premiertraining ground for those crème de la crème private equity shops and hedgefunds, as well as a lucrative profession for even the best investment bankers,the world of leveraged finance has only begun to take off.
Over the next 10 years, the markets are only expected to get more fluid,products more complex, investors more savvy, and volume more robust, soleveraged finance is not only a good place to be now, but will continue to befor the foreseeable future. From its origins with junk bonds and commercialbanking, leveraged finance has truly come a long way.
Final Analysis
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William Jarvis graduated from Georgetown University's McDonoughSchool of Business and has worked at General Electric Capital and JPMorgan(the leveraged finance group).
