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CARE
FINANCE
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CARE
FINANCE
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WILLIAM JARVIS
AND THE STAFF OF VAULT
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the accuracy and reliability of the information contained within and disclaims all warranties.
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ISBN 1-58131-502-3
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Table of Contents
INTRODUCTION 1
THE SCOOP 3
Structuring/Origination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Credit/Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Ratings and Capital Structure Advisory . . . . . . . . . . . . . . . . . . . .47
Corporate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Visit the Vault Finance Career Channel at http://finance.vault.com — with
insider firm profiles, message boards, the Vault Finance Job Board and more.
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Vault Career Guide to Leveraged Finance
Table of Contents
GETTING HIRED 63
ON THE JOB
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Table of Contents
Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
A Day in the life of a Leveraged Finance Structuring/
Origination Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96
Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
A Day in the Life of a Leveraged Finance Structuring/
Origination Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106
Managing Director/Group Head . . . . . . . . . . . . . . . . . . . . . . . . .107
A vast majority of this activity has been spurred by the field of leveraged
finance. With financial institutions eager to lend money and borrowers
excited to capitalize on market conditions, the effects in just the past few
years are easily identified: the second, third, and fourth largest LBOs of all
time, record fundraising by hedge funds and private equity shops, M&A
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FINAN
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 of
Leveraged Finance
CHAPTER 1
The financial markets can be divided into two major sections: debt and equity.
Under this overarching organization structure, think of leveraged finance as
the intersection of investment banking, commercial banking, hedge funds,
private equity, and sales & trading on the debt side of the financial markets.
Major deals
One of the great advantages to working in leveraged finance is that you will
typically work on notable transactions. As an analyst or associate in a major
leveraged finance firm, you may even see at least one of your deals make the
cover of The Wall Street Journal. Notable brands like RJR Nabisco, Burger
King, United Airlines, Domino’s Pizza, and Sony MGM have all accessed the
leveraged finance markets. From multi-billion dollar leveraged buyouts to
major corporate restructurings, there are plenty of headline transactions
across the field.
A typical rating agency grid appears on the next page. The solid bold lines
denote the “investment grade” vs. “leveraged” threshold.
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BB+ Ba1
BB Ba2
BB- Ba3
CCC+ B1
CCC B2
CCC- B3
B+ Caa1
B Caa2
B- Caa3
CCC Ca
C D/C
D C
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The words “leveraged” and “debt” normally have negative connotations. But
this shouldn’t necessarily be the case. Millions of people have loans for their
homes. In this sense, they are borrowing money and are “leveraged,” as most
of them do not have the cash on hand to pay off their loans immediately. Just
because someone has a home loan or a car loan, or does not have much cash
on 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 in
relation to their cash or future earnings potential, the more “leveraged” they
are.”Investment grade” companies are the least risky of those in the debt
markets. They are typically your long-standing, exceptionally stable
companies, such as General Electric, Pfizer, John Deere, and ExxonMobil.
Their credit history is outstanding and they have the ability to borrow large
amounts of debt at any time, since they typically have the cash on hand to pay
back those loans at any given time. Of these thousands of companies, only a
handful have the highest debt rating (“Triple A”).
so, because you know you’re likely to be paid back immediately (and
probably without having to hound him for the money). That friend would be
considered “investment grade.” Now consider the college buddy who always
asks to borrow money for beer runs, yet amazingly can never “remember” to
pay you back. That college buddy would be considered “leveraged.”
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It is important to note that entire financial markets exist for companies in both
of these buckets (investment grade and leveraged). When it comes to bonds,
there is a high grade market for investment grade companies, and a high-yield
market (also known as junk bonds) for leveraged companies. For loans, there
is a high grade syndicated loan market (also known as the investment grade
syndicated loan market) for investment grade issuers and a leveraged loan
market for those companies that are considered leveraged.
For companies that are not rated, their access to either market is determined
by their financial ratios, while crossover companies typically access the
market that plays to the better of their ratings.
This type of lender-client relationship has existed for centuries. But in the
past few years these lending institutions have evolved, as have the needs of
their clients. In the late 1990s investment banks and commercial banks were
able 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 financial
advice to clients, but also utilize the know-how of their commercial banking
division to deliver that financial solution. Together, this has allowed
companies to access the financial markets even more readily and has
fundamentally 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, was
becoming obsolete. Clients were becoming larger and their financing needs
were growing. Subsequently, lending institutions started finding others to
provide the loans alongside them. Instead of bearing the risk of an entire $1
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billion loan, they found they could significantly diminish their risk by
“syndicating” this loan exposure to others. With institutional investors also
seeking new ways to place money into the financial markets, the syndicated
loan became a prime source of investment. Subsequently, the syndicated loan
market exploded in volume, so much in fact that a secondary loan trading
market was created out of it. Today, as opposed to a bilateral relationship
with a single lending institution, a company that “issues” a loan can have
hundreds of investors in its syndicated loan. This investor interest not only
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opened up the syndicated loan market, but it also made other financial
markets more transparent, due to the emergence of the relative value of
products across asset classes. Although still issued in a very small number of
situations, the bilateral loan for the multi-billion corporation is now
essentially obsolete.
Being able to issue bonds has made it possible for companies to raise money
for acquisitions, to invest in capital projects, or to refinance existing debt.
Together, the bond and loan represent the major financial instruments in the
world of leveraged finance.
conditions, fewer bankruptcies, record low issuance rates, and the relative
value of the asset classes as investment areas for institutional investors.
these transactions. Although the big firms continue to dominate the industry
issuance in loans and bonds, smaller firms have realized they can make an
exceptional return on their money and time by providing financing to middle-
market companies (middle market is generally defined as a company with
less than $500 million in annual revenues and/or less than $50 million in
annual EBITDA). For example, by raising $25 million for a company by
assembling a syndicate of lending institutions hungry to put idle cash to work,
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small lending shops are finding themselves with a few million dollars in fees
and profitable new relationships.
In the future, this trend is expected to continue. Although interest rates have
been rising over time, this will not deter companies from continuing to seek
syndicated loans and high-yield bonds, which have become a necessary part
of a firm’s capital structure. Although it will be unlikely that firms will want
to refinance their existing debt with more expensive (higher interest) debt,
many issuers will still turn to these financing sources for general corporate
needs or to acquire other companies. Also, with the rise of interest rates has
come a rise in M&A volume, which fuels the issuance of debt to make those
mergers and acquisitions happen. Finally, to quote a tenet of basic corporate
finance, the cost of debt is often substantially less than the cost of equity. So
it seems likely that these leveraged finance shops will remain in business and
profitable for many, many years to come.
The leveraged finance markets are quite complex, but the underlying
principle and motivation—providing financing for companies—is simple.
Whether this financing involves a loan to refinance existing debt, or the
issuance of a complex loan and high-yield bond package in order to execute
the largest LBO of all time, these markets are quite often at the center of the
action on Wall Street. Companies still call their banks and loan officers for
advice on syndicated loans, but at the same time are now speaking to
managing directors at investment banks that can provide a number of
complex financing alternatives, tapping a variety of financial markets. With
nearly $1 trillion of combined annual global volume in the U.S. in the
leveraged loan and high-yield bond markets, these leveraged finance markets
provide ample access for investors to put money to work.
Are the leveraged finance and investment banking the same animal? Sort of.
As leveraged finance was originally a commercial banking function, most of
the premier leveraged finance shops can be found within the investment
banks of the largest finance institutions, such as JPMorgan Chase, Bank of
America, and Citigroup. Because of the sheer amount of leveraged finance
deal volume at these institutions, there will typically be entire floors and
provide M&A or IPO advice like an investment bank. The loan market is a
private market, and as such is not limited in terms of what type of firm can
provide lending solutions. If you’re a treasurer of a multi-billion dollar
company and you need a large loan for an acquisition, you’ll go to the firm
with the best interest rate, regardless of whether it’s an investment bank or
not. 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 it
is similar to investment banking.
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This breadth vs. depth tradeoff is directly related to the amount of transaction
experience offered in leveraged finance. For example, the day-to-day grind
might be a little more hectic in a leveraged finance role, as a deal team could
potentially be closing two multi-billion dollar transactions on the same day—
something that would be quite unlikely in a coverage role. However, this
transaction-oriented environment involves substantially less idea generation
and pitching of ideas to clients than one would find in an investment banking
industry coverage group. That is not to say that someone in leveraged finance
will not do any pitching—quite the contrary. While the industry coverage
group 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 the
appropriate people from the leveraged finance platform to comment on the
markets, comparable transactions, and provide other relevant advice.
If you are beginning your career in finance, it is important to think about your
long-term career goals when considering a role in investment banking
coverage versus leveraged finance. If your goal is to work in a specific
industry—let’s say running a health care company—you would probably be
better served in a health care coverage group at an investment bank.
However, if you are interested in working at a hedge fund or private equity
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shop, working in leveraged finance will give you the opportunity to interact
with many of these firms, as you close numerous deals of theirs.
Furthermore, you will be trained in certain debt metrics (what’s typically
called “credit” training), which are useful in understanding the industry and
are not typically emphasized in the coverage side of the bank. This is not to
say that moving from a coverage group to a private equity shop or hedge fund
can’t happen—it certainly does, and even the top tier PE shops and hedge
funds seek people with very specific industry knowledge. However, it’s
definitely the case that your exposure (most likely in late-night financial
modeling revisions) to the private equity shops will be higher in leveraged
finance groups when compared to your exposure working in an industry
coverage group. In an industry where relationships are everything, this
exposure will definitely matter.
There are a wide variety of deals executed within leveraged finance. Most
common are syndicated loans and high-yield bonds for working capital or
general corporate purposes (day-to-day financing needs). However, in
leveraged finance you’ll also find leveraged buyouts, when private equity
shops 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 to
avoid Chapter 7 bankruptcy (liquidation). In this case, the companies will
work with both the financial institutions’ leveraged finance groups and the
federal bankruptcy court to get financing packages in order to stay in
business. Leveraged finance also covers dividend transactions, where
loans/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 of
a business unit, and even general debt refinancings, where an existing
loan/bond is taken out with a new loan/bond. Examples of each of these types
of deals is discussed in more detail in Chapter 5.
There are so many different areas within leveraged finance and so many
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related to the field that there is place for almost everyone. For example, there
is deal origination, for the person who enjoys managing numerous processes
such as putting together presentations, financial modeling, and pitching.
There is also capital markets work (for both syndicated loans and high yield
bonds) for the person who enjoys understanding the flow of the markets and
conducting research about the market’s trends. For the person who enjoys the
asset management aspect of managing a firm’s exposure to the syndicated
loan/high yield bond markets, there are positions in internal credit/portfolio
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management work. Finally, there is a sales & trading function for both
syndicated loans and high yield bonds.
The culture of leveraged finance depends almost entirely on the culture of the
firm in general. At a pure investment bank such as Goldman Sachs, you
might find the culture to be almost entirely opposite from that of the
commercial lending arm of a larger financial institution, such as General
Electric Commercial Finance. Whereas one might be very rigid and
hierarchical, the other might be golf-shirt and khakis on Fridays, where an
analyst can chat it up with any managing director at any time. This kind of
specific nuance is covered in the next chapter.
EBITDA
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In leveraged finance, there are some common terms and phrases, from
“revolving credit facility” to “senior debt,” that you will learn as you read
this guide and learn more about the world of leveraged finance.
However, no term is more important than the word EBITDA. Companies
live and die by it. The leveraged finance markets are built around it.
For example, let’s pretend you operate a lemonade stand. You probably
bought lemons, water, cups, ice, a stand, and some poster board for
advertising. Let’s also say you paid someone to help you operate the
stand. Finally, let’s say you sold all of your lemonade. If you were to
have paid these costs and come out positive, you would have made an
operating profit. But you still have not paid interest on your credit card
for the stand, nor have you paid the taxes on your income. Ignoring the
depreciation on your lemonade stand (since you never factored that cost
in because it was not a real cost to you) the amount of profit you have
left is your EBITDA—before you pay either interest or taxes. EBITDA is
your cash flow available for all sorts of things—buying another lemonade
stand, paying off debt on your credit card, or even just paying your taxes
and pocketing the rest.
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Major Industry Players
CHAPTER 2
In this chapter, we’ll review some of the major players on both the sell-side
and the buy-side. The specific firms we mention are chosen based on the
league tables of the sell-side firms and on reputation for the buy-side firms
and private equity shops. Although a good starting point for considering
potential employers, these lists should be considered in light of a particular
firm’s culture and the emphasis it places on its leveraged finance group versus
its other operations.
As this book is more focused on sell-side firms than those on the buy-side, in
Chapter 4 you will find a more detailed discussion of the sell-side-an
overview of the typical groups/departments within those organizations. For
a 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 the
Top Private Equity Employers.
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Investment Banks
There are a few distinct types of investment banks in the world of leveraged
finance: first, the “bulge bracket” investment bank with a large commercial
banking operation; second, the standalone investment bank that typically
provides advisory solutions for clients; and third, the investment bank that
does have a commercial presence, but is considered boutique or regional.
Top firms
• Bank of America • JPMorgan Chase
• Citigroup • Wachovia
• Deutsche Bank
These are truly the dominant players in the industry. These are firms that have
been lending to companies for years; therefore, their relationships with
issuers—both on the investment banking side and the commercial banking
side—are very strong. In other words, they that not only have they been a
client’s commercial bank (lending institution) for many years, but they also
have a history of providing financial and M&A type advice to these
corporations. Therefore, when one of their clients needs a loan or bond, these
investment banks are typically called upon to provide their advice and
expertise-as they have been for many years. These investment/commercial
banks place a large amount of emphasis on their leveraged finance operations
because of the substantial amount of fees generated from these transactions.
Most of these firms have dedicated leveraged finance professionals in all of the
major 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 under
the “debt capital markets” heading within the corporate finance section of the
investment bank. Some of these firms have entire teams dedicated solely to
originating deals, while others will align this origination responsibility into
their industry coverage groups. Regardless of how it chooses to structure
these operations within their organization, the bulge-bracket investment bank
with a substantial commercial banking operation will have resources
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• 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
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Major Industry Players
Because of the vast expansion of the field of leveraged finance, as well as the
increase in size and scope of the financial markets, these types of firms are
redefining stereotypical investment banking: they are becoming “one-stop
shops” for clients. As the commercial banking operations of these firms have
become more integrated with their investment banking operations, a client
can rely on one banker to get nearly everything it needs, including M&A
advice, a syndicated loan, a high-yield bond, an IPO, or even savings and
checking accounts. Furthermore, clients can now count on one banker to
know everything about their companies, which creates a very trusting
relationship. Since most of these clients started at one point or another with
a small loan from one of these banks, it comes as little surprise that leveraged
finance contacts are very often the managers of these extremely valuable
relationships. Needless to say, this is very good exposure for a young
leveraged finance analyst or associate.
Typically, these firms will place analysts and associates directly from their
corporate finance investment banking programs into their leveraged finance
division, just as they would place analysts/associates into any other industry
coverage group. Furthermore, analysts and associates are treated exactly the
same as their other corporate finance peers in just about every aspect.
However, unlike at a coverage group, where an analyst or associate might
have a substantial amount of “down time” during the afternoons before
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Top firms
• Credit Suisse • Lehman Brothers
• Goldman Sachs • Merrill Lynch
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 a
pure matter of transaction volume, however, they just do not have the breadth
of experience or leveraged finance market presence. However, they will seek
to do this type of arranging of financing for firms where an obvious M&A
relationship, or other type of fee relationship, exists. For this reason, a much
larger portion of the leveraged finance deals handled by a standalone
investment 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 larger
deals that have a leveraged finance component.) In contrast, a firm such as
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Major Industry Players
At the standalone investment bank, the overall lifestyle will be similar to the
investment bank with a large commercial banking presence. Analysts and
associates are also part of the investment banking corporate finance program
and are expected to work long hours. The only difference between a
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Top firms
• ABN AMRO • PNC
• Jefferies & Co • SunTrust
• KeyBank • Wells Fargo
• National City
billions of dollars to potentially lend, these large regional banks will arrange
financing typically only for local companies where they can leverage the
power of their relationship for future ancillary business, such as
checking/savings accounts or other treasury business, such as hedging and
foreign exchange. In this sense, their relationships, rather than the fees of
event-financings, drive their lending rationale. Furthermore, they seek to
place their capital to work in other areas of the bank and opt not to enter the
highly competitive large cap leveraged finance space. At any rate, the
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Major Industry Players
Even further down the scale of size, many smaller boutique investment banks
have 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. Like
the pure investment banks, they too are not chasing a quantity of transactions;
instead, they are typically seeking event-driven deals. In order to distribute their
capital wisely, these firms tend to work with smaller companies in the middle
market space. However, they still arrange financing for the same variety of
transactions 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 work
with venture capital firms, which is something that the larger leveraged finance
shops very rarely do. Also, these smaller lending institutions tend to own a
larger piece of the financing package than their larger leveraged finance
counterparts 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 pure
investment banks and in general is more similar to a commercial banking
operation. Also, with less deal volume than their larger counterparts, one can
generally expect to close fewer transactions at these firms, yet be much more
acutely involved in every piece of the leveraged finance process. With much less
transaction volume, analysts and associates at these shops typically become even
more involved in every aspect of the process and this will add to the depth of
their working experience. . Also, with generally fewer people in the leveraged
finance groups, analysts/associates have an opportunity to take on a substantial
amount of responsibility and even truly develop client relationships.
not. 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 and
funding of a transaction
These firms typically work very frequently with smaller mid-cap companies,
providing everything from financing for heavy equipment to multi-million
dollar revolving lines of credit. Due to the nature of these product offerings
and the size of these clients, most of these firms’ leveraged finance teams play
only in the syndicated loan market, and stay out of the high yield bond
market. Naturally, if a firm is already providing smaller loans for other types
of financing needs for a company, a syndicated loan makes sense to provide
financing for a company’s larger financing need. However, it is not
uncommon to find some of the larger players, such as GE Commercial
Finance and CIT Group, to be co-leading a multi-billion dollar transaction
alongside a large investment bank. These leveraged finance deals would be
sourced from their large cap teams.
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Major Industry Players
Most of the pay and lifestyle discrepancies tend to reflect the relative size of
the firm and the atmosphere of the group. If you were working at a
commercial finance company and every other division left at 5 p.m. sharp on
Friday, 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 as
little surprise that commercial finance shops do not expect all-nighters from
their analysts. Also, working every weekend is not usually expected of
analysts and associates at commercial financial companies and junior
resources are certainly not “on call” on weekends the way their investment
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banking counterparts are. Still, while nobody will dispute that investment
banking analysts and associates work completely insane hours, it should be
noted that the hours in commercial finance are not a cakewalk either. When
closing a deal or in the middle of a long-due diligence process, a commercial
finance analyst can expect 80-hour workweeks.
golf shirts as opposed to Hermes ties and Gucci loafers. Lunch outside the
office, as opposed to at one’s desk, is a more typical occurrence at a
commercial finance company. For many, this lifestyle tradeoff of a
commercial finance atmosphere versus I-banking is worth every single
penny, and more.
These same investors also have the option to play in the increasingly growing
bond and loan secondary markets, as these markets have also boomed due to
the rapid expansion of their primary markets. Investors tend towards the
leveraged loan and high-yield bond markets since they typically move
together. For example, if a company is downgraded by the rating agencies,
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Major Industry Players
thus suggesting that its risk profile is greater than its peers offering debt at a
similar interest rate, the trading levels of its leveraged loan and high-yield
bond are likely to fall to reflect this negative change. Institutional investors
anticipating this change might seek to sell their positions in these firms and/or
short these markets. This type of credit prowess rewards the institutional
investor that has done its homework.
For these institutional investors, the gateway to entry into the leveraged loan
and high-yield bond market comes from either the firm originating the
transactions, or the firm administrating the transactions. When a leveraged
loan deal is structured, marketed, and syndicated many of these investors are
given the chance to invest in the loan. Similarly, when the high-yield bond is
marketed, these institutional investors are given the opportunity to buy into
these bonds. On the secondary side, as a firm finds an interest in the
outstanding leveraged loan or high-yield bond of a firm, it would call its
relationship manager at its investment bank to place a trade. When placing
such a trade, it is not atypical for the order amount to be multiple millions of
dollars. So a one-point move in the trading level of a position can have a
major financial impact on a firm.
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Without league tables to rank the buy-side firms, it should be noted that the
major institutional investors in the high-yield bond market are typically
insurance corporations, money managers, and investment corporations, such
as Fidelity, PIMCO, and AIG. Though hedge funds play in this financial
market quite frequently, only the large ones are generally targeted in the
roadshow offering process. In contrast, on the leveraged loan side,
institutional investors tend to include all of the above players, as well as quite
a few hedge funds, including large firms like Highland Capital, Eaton Vance,
Van Kampen, and SAC Capital. All of these investors, and more, are targeted
in the loan syndication process.
Private equity firms are the final major player in the leveraged finance
markets (aside from the companies that actually issue the high-yield bonds or
leveraged loans). Typically using money from lending transactions in order
to buy firms, private equity shops are clients of those arranging leveraged
finance transactions. Often, their funds are also investors in their own and
others’ transactions, further illustrating their dependence on the leveraged
loan and high-yield bond markets.
leveraged finance firm. Like individual homeowners who will pay 25% of
the purchase price from his or her own pocket and borrow the remaining 75%,
private equity shops also borrow money when executing an LBO (this
process is covered in greater detail in Chapter 5). With these borrowed funds,
private equity shops are able to leverage their own money and execute
market-changing transactions. At the center of this execution is the leveraged
finance firm, lining up this necessary financing.
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Major Industry Players
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 to
execute mega-LBOs. Recent corporate divestitures and secondary buyout
activity, where a firm is bought by one private equity shop and later sold to
another, have also become a rapid source of expansion in the private equity
markets. 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 find
the highest bidder. Needless to say, as the cash balances of these firms remain
robust, buyout activity will only continue to become more innovative and
aggressive.
their money “off the table” though leveraged loans or high-yield bond
dividend transactions. Financial sponsors also will execute the same
leveraged finance transactions for their portfolio companies as any other
corporation would, including debt refinancings, recapitalizations, IPO/spin-
off financings, and M&A transactions.
seeking a slight career transition might seek out a two-year program with the
big names in private equity, including KKR, Blackstone, Bain Capital,
Madison Dearborn, Carlyle, Texas Pacific Group, Hicks Muse, JPMorgan
Partners, and Thomas H Lee. With financial-sponsor transaction experience,
a firm understanding of the lucrative buyout process, and interaction with the
leveraged finance markets, a career in private equity can be a comfortable
career fit for a former leveraged finance banker. Although the hours might
not be drastically better than the in investment banking, private equity firms
generally pay at the top end of the Wall Street scale, assist with MBA
applications to top-tier programs such as Wharton and Harvard Business
School, and many even allow “carry” in the firm’s funds (a share of the firm’s
profits). These are the typical reasons why some seek a change of pace into
the private equity field.
The leveraged finance players providing the bulk of the financing money for
private equity transactions also happen to be the firms with the largest balance
sheets and top-notch financial sponsor coverage teams. At the top of this list
are familiar leveraged finance names, such as JPMorgan, Deutsche Bank,
Bank of America, Citigroup, Credit Suisse, Goldman Sachs, and Lehman
Brothers. As the nature of LBO transactions tends to favor purchasing stable
companies (whose earnings can be used to pay of the loans used to purchase
the company), there tends to be more activity in the large cap space when it
comes to LBOs. The major leveraged finance players in the industry also
have the ability to offer their financial sponsor clients a wide variety of
financing solutions across both debt and equity markets, which is not typical
of a large commercial finance operation.
Still, though they do not generally compete in the large cap LBO space
because they place less emphasis on serving private equity shops, commercial
finance companies are active in the middle market LBO arena. Examples of
these include GE Antares, CIT Group, CapitalSource, Ableco-Dymas, and
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Madison Capital.
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The Products
CHAPTER 3
As discussed earlier, there are two major financial products that drive the
leveraged finance industry: the leveraged loan and the high-yield bond. In
this chapter, we take a detailed look at the key characteristics and the issuing
process 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 the
leveraged finance industry, yet they are not typical of 99% of the industry’s
transactions.
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 in
size from $1 million to $5-$7 billion and are generally arranged as part of a
financing package for an issuer. This instrument is almost always considered
senior secured debt (secured by the assets of the company), but on rare
occasions can be senior unsecured debt. Due to the need for material non-
public information (such as forward-looking company financials) in order to
structure and complete a deal, the syndicated loan market is a private market.
Exceptionally large, the U.S. leveraged loan sees nearly half a trillion dollars
in annual new issuance volume, representing thousands of transactions.
Key characteristics
Underwritten vs. arranged: Leveraged loans are either arranged by a
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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 refinanced
with a lower interest rate before the end of its duration. RC facilities are
generally rated by the major rating agencies, which like the credit score of an
individual in the credit card application process, typically plays a large role in
determining loan sizes and interest rates.
currency, whereas credit cards can be used across currencies. Finally, the RC
is a floating-rate instrument with a fixed rate spread above LIBOR (London
Interbank Offered Rate). Typically, the credit card has a fixed APR
percentage that does not fluctuate with any other interest rates.
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The Products
There are a variety of term loans, including term loan A’s (issued to higher-
rated credits with shorter durations, typical commercial bank investors, and
larger amounts of amortization), term loan B’s (with longer durations,
institutional investors, and less amortization), and 2nd lien term loans (with
similar structures to term loan B’s, but with less security than other term
loans).
Process
There is a somewhat standard process involved when a company attempts to
issue a leveraged loan. In many cases, loans do not make it through this
process. Also, in many cases the terms of the loan are fundamentally altered
during 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 notorious
for structuring and executing syndicated loan transactions that would take the
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place of high-yield bonds for issuers. In this case, the process of issuing a
product must be somewhat flexible, as must be both the arranger and the
issuer.
For syndicated loans, the standard issuance process generally takes anywhere
from 8 to 12 weeks from pitch to close. Here’s a look at the standard process:
In this phase of the process, the pitch has generally gone through many late
night iterations in order to contain the most updated relevant market
information, comparable company analysis, pro forma company financial
models, financial product information, transaction timetables, cost
analysis, and credential slides. The pitch is a rough idea of the projected
financing structure and its cost to the issuers. As detailed private financial
information has not been shared by the company with the financial
institution at this point in the process, pitches are usually prepared with
public information from the company’s web site, the SEC, and other
publicly available sources.
In a financial auction scenario, this part of the process would be when the
sell-side or M&A advisory firm has held a management presentation on
behalf of the corporation for sale, so that the bidders and their financing
firms can attend. In a similar process to the standard pitch phase, the sell-
side firm will walk through the basics of the company, including the
financial status, a history of the firm, a background of the management
team, and a general overview of their idea of a potential transaction,
including the size of potential debt tranches and even transaction
timetables.
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The vast majority of transactions that make it through the pitch phase
generally make it through this due diligence phase.
In order to get this approval, a credit deck outlining the company, its
market risks, the transaction, detailed financial models, and the potential
investors for the proposed transaction is assembled and brought to
committee, which reviews it in great detail. This process requires a lot of
back-and-forth between all parties, as the credit committee generally asks
probing questions that require the deal team to work with the issuing
company to figure out. Often, this includes revising financial models with
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From here, the company has the option of choosing one of the financing
proposals, choosing none of them, choosing multiple financing proposals,
or choosing a subset of the proposals and continuing to negotiate. In the
case of the large leveraged financings, clients will in most instances choose
more than one financing firm and make them all come to the same terms.
This creates a scenario in which the financial institutions involved are
referred to as “joint bookrunners.” Having multiple financing firms
involved is quite common for deals larger than $1 billion. For deals less
than $250 million, it is typical that one firm will win a mandate and
become a sole bookrunner.
Once a financing source has been chosen, the mandate is given. This
typically means that the financing firm and the company review the terms
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in this field, it is not uncommon for the seasoned leveraged finance firms
to be able to predict these ratings with great accuracy beforehand.
The ratings of the company are probably the most crucial part of the loan
structuring and syndication process. Investors look to these ratings to see
what similarly rated credits exist and whether or not this is a safe and/or
favorable investment. As CLOs and CDOs must meet certain investment
criteria in ratings categories, the ratings outcome can determine whether or
not they can invest in a credit. Even the financing firm waits in
Because this is such a crucial piece of the process for its clients, the largest
firms have a rating agency team to help with the process. This team is also
intricately involved with the leveraged finance team when proposing
capital structures and advising the most optimal debt transactions for
clients. Quite often, their expertise and assistance in the process saves
clients millions of unnecessary dollars.
The lenders’ meeting is also a major part of the in-market process. These
meetings generally take place for new debt facilities and event-driven
financings (in other situations, a conference call with lenders, rather than a
meeting usually suffices). The lenders’ meeting is organized by the
financing firm at a local hotel or conference venue where all of the relevant
company and transaction information will be discussed. Investors who
have been invited into the transaction attend the presentation, where they
are able to evaluate the company, the management team, and the
transaction more accurately. Scheduled a week or so after the transaction
has been in market, this is often the first time investors truly take a look at
the information and is a good way to get everyone excited about it. During
the presentation at the lenders’ meeting (which has been prepared by the
financing firm and the company management), the management team will
speak in depth about the company, its future, and its financial status. The
financing firm will then talk about the financial transaction and will direct
Q&A accordingly.
g) Investor evaluation process: For one to two weeks following the lenders’
meeting (or conference call), armed with all of the relevant information
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related to the loan, investors will review the transaction with their internal
credit committees and decide whether or not to invest. They will perform
their own due diligence, calling the financing firm and the company in
order to ask questions. They will build their own financial models based
on the financial information given in the information memorandum and the
lenders’ 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
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The Products
finance deal team or the sales team to ask follow-up questions. Likewise,
the leveraged finance sales team will regularly contact investors in order to
check on their investment status. In the event they have decided to invest,
they will call their sales contact at the finance firm and indicate their
commitment amount to the transaction. In the case of the large firms and
the bigger transactions, this commitment is often on the order of tens or
hundreds of millions of dollars.
In the event that the commitments greatly exceed the amount of the
facilities (what is commonly referred to as oversubscription), the pricing
will commonly be reduced or the structure will be altered to be more
favorable for the issuer. This oversubscription happens for a variety of
reasons, 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 cash
balances. Price “reverse-flexing” is quite common to adjust the pricing to
what the market will accept. At this time, the new terms are recirculated
and investors are given a chance to alter their commitment amounts.
It is not common that the commitments won’t meet the amount of the
facilities, since the sales team is constantly in touch with investors and will
be able to predict if/when a transaction might struggle. Subsequently, the
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sales team will liaison with the leveraged finance origination team to adjust
the terms before the commitment deadline is met. In this case the
leveraged finance team works with the company, the capital markets
group, and the sales force to adjust the terms in a variety of ways, including
extending the commitment deadline, inviting more lenders, increasing the
pricing, adding call-protection, increasing the upfront fees paid to lenders,
or even downsizing the facilities. The acceptable “flexing” of the
transaction is typically outlined in the commitment papers and agreed upon
with the company well before the in-market period. As a price flex of 25
j) Closing and funding: After the credit agreement has been signed, the deal
closes and, in the case of a term loan, is funded. Appropriate fees are paid
to the financing firm and the lenders from the company. The financing firm
collects all of the funds-flow information from the lenders and organizes all
of 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 and
ready to be drawn upon in the event that the funds are needed.
example, in the case of an NFL football team, the toy might be a player’s
helmet or actual NFL football with the deal information inscribed right on
the front. If truly a celebratory occasion, a closing dinner might be held at
a nice restaurant for all of the major players involved in the transaction.
Both are ways that the financing firm expresses its appreciation for the
financing business.
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The Products
What it is
A high-yield bond, like a leveraged loan, is a funded financial instrument
issued by a corporation for a variety of purposes (acquisitions, capital
improvements, etc.). Unlike the leveraged loan market, the high-yield bond
market is a public market and the high-yield bond is a registered security with
the Securities and Exchange Commission.
Key characteristics
High-yield bonds are typically fixed interest rate products that exist for 7 to
10 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 the
issuer will have the opportunity to repurchase them. As the companies that
issue high-yield bonds are relatively large, the typical high-yield bond
issuance is greater than $100 million. The high-yield bond can come in a
variety of forms from senior secured debt to unsecured notes, subordinated
notes, discount notes, floating rate notes, and holding company notes.
The high-yield bond secondary market is slightly more complex than that of
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the syndicated loan market and is generally more active. High-yield bond
trading levels often correlate with the frequent movements in the equity
markets and the overall general direction of these levels is reflected in the
syndicated loan market. Initially brought to fame and dominated in the 1980s
by Drexel Burnham’s Michael Milken, annual new issuance market volumes
in the high-yield bond market have grown to nearly $100 billion per year.
Process
The process for marketing a high-yield bond is largely similar to that of a
syndicated loan in that a transaction is pitched, structured, marketed, and sold to
investors. With the exception of the roadshow (a period during which the
financial institution and the issuing company travel to meet with investors), which
takes the place of the lenders’ meeting for syndicated loans, the high-yield bond
issuing process is typically more condensed than that of a syndicated loan. The
Vault 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
For example, debt that could have been easily repaid in the event of a forced
liquidation 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 and
many others, it is important to understand where debt fits into capital structures.
+ Subordinated debt (Senior Subordinated notes, Discount notes, and Holdco notes)
+ Other debt (Other debt financing)
= Total debt
+ Common Equity
= Total Capitalization
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Leveraged Finance Groups
CHAPTER 4
This chapter provides an overview of each major group within the world of
leveraged finance and each group’s purpose, role and lifestyle, as well as
where each group fits into their larger organizations.
Structuring/Origination
There are typically four players in most deal teams: a managing director, a
vice president, an associate, and an analyst. In complex deal situations, there
can be numerous analysts, whereas in the routine debt refinancing, there
might only be a managing director and a top performing analyst. In this
situation, 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 are
covered more in depth in Chapter 9 of this guide.
Credit/Risk
is ever pitched, a deal team must seek the approval of the transaction with its
internal credit committee. This generally involves a very intense analysis of
the terms and conditions of a deal and an understanding of the risks of a
transaction. As the firm is typically a holder of a piece of the debt of every
transaction it structures, this team takes a much longer-term view of the
credits it analyzes. Although deal teams are undertaking initial underwriting
risk, this risk generally lasts 6 to 8 weeks until a deal is closed, as opposed to
the 5- to 7-year deal life, which the credit committee must deal with.
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 have
more than one credit executive working with the deal team. Along with the
deal team, the credit executive will take the deal to “committee” where it is
given the final seal of approval before any legally binding contracts are
signed. This credit committee has the ultimate responsibility for the
transaction. As the firm’s internal balance sheet “police,” they serve an often
thankless but exceptionally important role, primarily because a deal team
often views them as yet another hurdle they must overcome in the pursuit of
fees; these credit teams are rarely recognized when deals are successful, yet
are often scrutinized when deals fail.
All investors have internal credit teams or executives who make decisions to
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Leveraged Finance Groups
amount of exposure the firm has to different types of risk. Savvy credit teams
monitor trends and standards in the debt markets in order to prevent erosion
in the terms and conditions being offered by the leveraged finance firm to
clients. (Naturally, if it were up to the deal teams or clients, these terms
would be extremely investor-friendly, in order to guarantee that a deal gets
done and the fees get paid.) Credit is also the team that gets involved when
an underwritten deal gets hung in the financial markets and the leveraged
finance firm is stuck footing the bill. Credit executives are generally from
structuring/origination, corporate banking, or another side of the firm, and are
seasoned professionals.
The lifestyle in the credit/risk group is more similar to that of a Fortune 500
corporate finance group than an investment bank. Without the incentive of
massive fees driving their bonus checks, credit/risk professionals generally
work more normal hours, such as 8 a.m. to 7 p.m., with few weekends. When
a complex deal is coming through the pipeline, or a deal needs a last minute
approval, it is possible that a credit executive would work until 10 p.m.
However, that is the exception rather than the rule.
These teams are generally part of the corporate finance investment banking
platform, but are not always organized under the leveraged finance umbrella.
However, because of the sheer volume of capital structure work that
originates from the leveraged finance group, the ratings and capital structure
advisory teams work quite frequently with their leveraged finance colleagues.
Typically, a dedicated ratings specialist will attend client pitches, playing a
major role in delivering the firm’s financing proposal. This same professional
will also work very closely with the deal teams when structuring the ratings
agency presentation and prepping the company management. This ratings
team will often pre-calculate expected costs of debt based on the credit profile
of the firm and its peers, as well as expected scenarios based on ratings
outcomes. For a CFO or a treasurer, this kind of knowledge is invaluable
when planning for the company’s future.
Corporate Banking
While the coverage and leveraged finance groups pitch and execute deals, the
corporate banking team keeps tabs on the industry and monitors clients.
Professionals in this group maintain relationships with each of the borrowers
and collect information in order to monitor the credit profile of a typical
client. At any given moment, a corporate banker should be able to tell you
their 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 deal
team the current outstanding balance of a client’s revolving credit facility
and/or term loan. This sort of knowledge, as well as their industry
understanding, makes corporate bankers valuable to both deal teams and
credit/risk teams.
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Leveraged Finance Groups
Capital Markets
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leveraged finance shops, the capital markets role is more the former than the
latter, primarily concerned with understanding the day-to-day activity in a
financial market and being able to synthesize this activity for deal teams and
clients.
Because they have their hands in nearly all aspects of the deal process, capital
markets professionals often experience their jobs as daylong firedrills. As it
requires gathering a vast amount of knowledge from a wide variety of people,
the job is a seemingly never-ending rollercoaster of events. A capital markets
professional might give a market update to a client in the morning, attend a
lenders’ presentation over lunch, and get dialed in to multiple pitches or
attend 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 markets
close and clients have gone home. As for weekend work, there is always
plenty to do—deal teams are continually seeking guidance for the next
upcoming major transaction, or prepping for Monday morning firmwide
market update calls.
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The lifestyle of capital markets appeals to those who enjoy having diverse job
responsibilities. With an endless list of requests from teams, presentations to
attend, and conference calls to take part in, time and priority management are
critical in order to maintain sanity. Also, as the gateway to the financial
markets, this person needs to be an encyclopedia of past transactions in order
to give the best guidance possible to deal teams. Capital markets is definitely
not the place for those seeking a quiet cubicle with intense financial
modeling. It is also generally not a career path for those junior resources
interested in moving to private equity. However, it is definitely a place for
someone seeking a springboard into sales & trading or even an opportunity at
a hedge fund.
Most firms organize their syndicated loan sales & trading platform into two
groups: primary and secondary. The primary team works closely with the
capital markets team (and is often considered one and the same) on a daily
basis. As deals are proposed, the sales team will have insight into investor
feedback, helping their capital markets counterparts understand market trends
for future transactions. As deals are structured, the sales team is responsible
for distributing and allocating these syndicated loans to investors. Like any
other sales force, these relationships define their success. These primary loan
sales personnel also work closely with leveraged finance origination teams to
understand the nuances of transactions, in order to answer investor questions,
as well as judge investor appetite for certain transactions.
In the past decade the secondary loan trading market has truly expanded.
With annual trading volume increasing every year and nearing $200 billion
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(versus just $30 billion in 1995), this market continues to flourish. In tandem
with the rapid growth in the primary market discussed earlier, the syndicated
loan market is quite a formidable presence and a place of true financial
opportunity.
The culture and the lifestyle of secondary syndicated loan sales & trading
teams is similar to that of other S&T groups: intense work right before and as
soon as the market opens and throughout the day, but only a little bit of clean-
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up work once markets close and on weekends. In general, the best hours on
Wall Street, as long as you don’t mind early mornings.
Because the high-yield bond market is public, leveraged finance teams rarely
interact with the high-yield sales & trading platform. Much of the
information related to the market can be gained from online information
sources, there is little need to call a sales-trader for current market trading
levels. Furthermore, by the time current market information is delivered to a
client, it runs the risk of being somewhat stale.
As with primary loan sales, typically the only times deal teams interact with
sales 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 this
interaction, most leveraged finance teams simply work with their capital
markets colleagues, as opposed to the sales teams. Because the capital
markets teams are very up-to-date on the markets, most of the information
that leveraged finance teams need can be obtained from this team.
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financing firms are seeking the exact opposite, there is always a struggle
between the two when it comes to the debt/equity ratio.
With hundreds of LBOs executed every year, the competition among leveraged
finance firms for these deals is intense. As the financial sponsor coverage teams
from investment banks maintain relationships with their clients, the leveraged
finance teams are busy negotiating and executing the transactions their coverage
teams have provided. Because of the sheer volume of business, leveraged
finance divisions will often have their own financial sponsor subgroups that
work exclusively with these LBO/private equity clients. The biggest players in
the financings of LBOs tend to be a mixture of the biggest leveraged finance
operations, as well as the pure investment banks with topnotch financial sponsor
coverage 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, the
second (Hertz), third (SunGard), and fourth (Boise Cascade) largest LBOs have
been executed by premier private equity shops. LBO volume continues to surge,
with private equity cash balances and interest rates as the only potentially limiting
factors in buyout activity. Furthermore, almost every stable firm is a target;
household names that have been purchased in the last few years through LBOs
include Dunkin Brands, Burger King, Sealy, MGM, and Wyndham International.
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The Transactions
costs (underwriting fees paid to the financing firm) and the bank would
wire funds to you. Once the transaction is executed and the house is
purchased, you are on your way to an LBO.
From here, let us assume that you find some college students to rent your
house. With the money that you charge them, you are able to pay your
monthly mortgage payment. Every month that goes by, you are paying
more principal and less interest on the debt. After all of these payments
are made, the debt is gone and the only financing piece that remains from
the original transaction is the equity check you put into the house.
However, (drum roll, please) this is now worth 100% of the capital
structure, rather than its original 25%. Your $100k is now worth $400k.
Much like the LBO target company that pays the newfound debt created by
the LBO with its operating earnings, the renters of the house have paid off
your debt. The financial sponsor now owns a company by adding leverage
to 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 payout
timeline, 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, it
is also likely that the property has appreciated and your financial gain is
even larger. In the case of financial sponsors, they too will seek this
appreciation in the form of improving the company’s existing operations
and “juicing” their return even more. They will reduce costs, improve
sales, and unlock as much value from the company as possible. They will
often be able to pay off the debt sooner than expected and refinance the
loan with a lower interest rate, while executing a dividend transaction to
reduce the money they have on the table.
Now, imagine if you were able to do that for billion dollar companies, not
just $400,000 houses. Take it one step further: your firm allows you to
invest some of your own money in the fund. The returns would be
outstanding and so would your personal financial situation. Welcome to
the world of private equity and leveraged buyouts.
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The leveraged finance platform plays a key role in financing these targets.
As regular clients to the firm, financial sponsors interact with the premier
leveraged finance shops on a daily basis, for both target LBOs as well as
existing portfolio companies. As individuals do when buying homes,
financial sponsors shop around for the best financing cost and terms. For
them, this is a fixed pie equation—the more they spend on debt, the less
money they make. Negotiations between the PE shops and leveraged
finance firms are intense, but in the end, usually successful for both.
Not only is this transaction already a risk for a leveraged finance shop, but the
financing 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
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Aside from the LBO and corporate restructuring, there are a number of other
types of event-driven financings. What is meant by event-driven? These are
financings that are pursued In order to execute a separate transaction and are
contingent upon, or work in tandem with, this other financial event. These
events include acquisitions, IPOs, recapitalizations, acquisition financings,
spin-offs, and divestitures.
Event-driven financings are often very profitable deals and typically stem
from a strong relationship with a client. The origin of this kind of deal more
often than not comes from the coverage side of the investment bank. For
example, the coverage team pitches a spin-off to a client and, based on the
profile of the company, has determined that the appropriate debt financing
must accompany it. When the M&A market is hot, the leveraged finance
market generally is too. Furthermore, even if the final product to merge a
company is an equity-related issuance, a bridge financing will often be set up
by the leveraged finance team before that transaction takes place. In the case
of many high-yield bonds, bridge transactions are executed in order to
provide a company with the immediate financing it needs, while the financing
firm waits for the high-yield bonds to close in the financial markets.
The big players in this market are those providing the most institutional term
loans, the most dividend-related high-yield bond and leveraged loan issuance,
and the most M&A related issuance. These players also have the ability to
provide all-encompassing financing solutions, including both equity and
debt-related products. These are the big three leveraged finance shops:
JPMorgan, Bank of America, and Citigroup. Not far behind, you’ll find the
pure investment banks such as Goldman and Lehman Brothers, and other
large players, such as Deutsche Bank and Credit Suisse.
The bread-and-butter deal for any major firm in leveraged finance is the
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standard debt refinancing. These are the bellwether deals of the financing
markets, are generally the most routine transactions, and they keep the
leveraged finance firms in business. The fastest deals to execute, debt
refinancings easily comprise a majority of the volume in the leveraged loan
market, as well as a substantial amount of volume in the high-yield market.
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transactions. Also, with the average life of an existing credit facility typically
at less than four years, issuers access the syndicated loan market on a regular
basis in order to extend the tenor or reduce the interest rate on their debt, if
possible. 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.
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.
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However, when financial markets hit rough times and the event-driven
financings slow down, it is the standard loan refinancing that can be counted
on for fee generation. Because of this, the large leveraged finance shops still
seem to thrive in these downturn economies. When it comes to the major
players for refinancings, those are the same major players for both leveraged
loans and high-yield bonds. For loans, the top firms are JPMorgan, Bank of
America, Citigroup, Deutsche Bank, and Wachovia. For high-yield bonds,
the top firms are JPMorgan, Bank of America, Citigroup, Credit Suisse, and
Deutsche Bank.
FINAN
Chapter 6: What Leveraged Finance Firms are
Looking For
Chapter 7: The Hiring Process and Interview
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What Leveraged Finance
Firms are Looking For
CHAPTER 6
Firms tend to have top junior resources conduct interviews and resume
screening in order to assess all-important questions such as, “Will I enjoy
sitting next to this person for 100+ hours a week” and “Do they have what it
takes to be truly successful and ‘get it’”? For the top-performing leveraged
finance junior talent, these questions about incoming resources are pretty
easy to answer. The top performers seem to fit a certain mold and gel with
the existing team.
Each and every firm seems to have its own culture and nuances, which is why
it is difficult to generalize about what type of personality will be successful at
all firms. Where one firm might rather have a Wharton finance-educated
student, another firm might prefer someone with a liberal arts background that
they can mold. Despite these cultural differences, a few aspects of the hiring
process remain relatively consistent at the major leveraged finance shops.
Personality Type
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Why do these particular skills matter? The leveraged finance deal process is
very hectic and very process-oriented. As a deal team works on multiple pieces
of a process at any given time, all members of the team need to be able to count
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 debt
capital markets-in a trading floor or similarly close-knit atmosphere. Even if
you are in cubicles, you are not isolated or working by yourself. The deals
are accomplished by the work of many on a wide variety of team projects. If
you are the hiring manager, do you really want to spend 100+ hours a week
sitting 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 an
open-thought consulting-type atmosphere, working in leveraged finance may
frustrate you because of its frenzied pace and focus on process. If you find
yourself wanting a predictable lifestyle, leveraged finance is not an ideal fit.
This is a get-your-hands-dirty business, where getting tasks accomplished is
the main key to success. In some cases, VPs may bind their own
presentations and MDs rework financial models at all hours of the night to get
a deal through the markets.
One of the most common ways that junior professionals damage their careers
is by being overconfident. Leveraged finance is a great fit for someone who
strives for and graciously accepts compliments, but does not let them go to
his or her head. The following scenario takes place more often than you
might think: someone has been at a firm for six months and has been fortunate
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Although one might not agree with the style or the way that the deals get
done, the bottom line is that you earn your rank in the world of leveraged
finance. Managing directors and vice presidents have worked hard to get
where they are and more importantly, they control junior resources’ bonus,
lifestyle, and upward mobility. This is probably the single most important
lesson to keep in mind. Leveraged finance is a place where you earn your
way to the top, by putting in your time and investing hard work. The
promotions do not come easily or quickly, but when they come, they are
worth it. So, work hard, maintain a positive attitude, and respect your
elders—before you know it, you will be in their shoes.
Education
For the most part, investment bank corporate finance programs generally do
the hiring for the leveraged finance teams. At these banks, firms place
analysts and associates into industry coverage groups, M&A, or leveraged
finance based on the needs of these teams and how the analyst/associate has
prioritized his or her personal choices. However, some firms hire into these
teams directly during the recruiting process. Whether a firm hires directly
into the leveraged finance team or not is an important firm-by-firm distinction
that you should research during the recruiting process.
It’s an unavoidable fact that there are “target” undergraduate and graduate
programs for each bank. This does not necessarily mean that someone from
a non-target school cannot be hired into a program. Rather, these candidates
will not have the on-campus interviews and dedicated information sessions
that their peers’ target schools have during the fall undergraduate recruiting
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season. The target programs vary from firm to firm and lists of them can
often be found on each firm’s web site. But they typically do include a
common 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 Emory
for MBA recruiting.
For firms with a general recruiting process and a subgroup placement later,
targeting a leveraged finance team during this process, as opposed to just
targeting the firm, should not be a hindrance to getting hired. With a solid
need for analysts/associates every year due to the size of the team, it is very
possible for the interested student to make his way into leveraged finance by
expressing 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 not
originally placed into leveraged finance when you join the bank, you can
often switch from an industry coverage team to the leveraged finance
platform. Once you are at the firm, the rest is up to you.
The Resume
First things first—the world of investment banking often values form as much
as substance. This is also true when it comes to your resume. Not only should
your resume have great highlights about you, but it should be well-laid-out and
easy to read. Even for the most accomplished MBA, this still means one page
with decent-sized margins. If you are having trouble with formatting, buy a
resume book and study its layouts. Organize information into sections: contact
info, education, relevant experience, and activities/interests. Keep it simple.
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Also important: show, don’t just tell. Most jobs are self-explanatory, which is
why it is extremely important to show the interviewers what value-add you had
to your job. If you were a lifeguard, it’s easily to understand that you watched a
pool all day while working on your tan. But aside from stating the obvious, you
need 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 all
of their clients, leveraged finance bankers will not hesitate to do the same for
your background.
If you are unable to get an I-banking internship, you should spend your time
trying to get another internship or other relevant experience that you can
parlay into good conversation during the interview period. Working at
another financial services firm outside of corporate finance shows your
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dedicated interest in the industry. Even studying finance abroad will show
your interest in the global financial markets. These types of experiences do
help when you are being compared in a stack of resumes a mile deep.
• Quality of Life
Dame | Cardozo Law | Vanderbilt | University of Virginia
Hamilton | UC Berkeley | UCLA Law | Trinity | Bates
Carnegie Mellon | UCLA Anderson | Stanford GSB
•
Northwestern Law | Tufts | Morehouse | University of
Social Life
Michigan | Stanford Law | Thunderbird | Emory | Boalt
Hall | Pitt | UT Austin | USC | Indiana Law | Penn State
BYU | U Chicago Law | Boston College | Purdue MBA
Wisconsin-Madison | Tulane | Duke - Fuqua | UNC Chape
Hill | Wake Forest | Penn | CalTech | NYU Law | Stern MBA
| Harvard | Williams | Northwestern - Kellogg | Amherst
Princeton | Swarthmore | Yale | Pomona College
Wellesley | Carleton | Harvard Business School | MIT
Duke | Stanford | Columbia Law | Penn | CalTech
Middlebury | Harvard Law | Wharton | Davidson
Washington University St. Louis | Dartmouth | Yale Law
Haverford | Bowdoin | Columbia | Boalt School of Law
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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 top
programs 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 needs
of firms. While leveraged finance firms are somewhat stable, they are not
immune to this economic downturn. In bad economies, there will be less deal
flow, which means less revenue, and subsequently less need for resources.
The silver lining in this cloud is that with general debt refinancings being a
necessary part of millions of firms’ capital structures, there is a something of
a necessary need to always have leveraged finance bankers on hand.
Furthermore, in an economic downturn, this favors still hiring the cheapest
labor and finding ways to remove the expensive unnecessary labor. This
bodes well for those seeking to enter the field from undergraduate and MBA
programs in even the worst economic periods, as there should always be a
need for new and fresh talent. Every year, people retire, leave to pursue other
opportunities, and get promoted. However, it is in these years that having the
coveted corporate finance internship can give you a substantial leg up on your
competition. Just ask anyone who graduated in the dark years of 2001-2002.
Despite the fact that business school is a common route for analysts and
associates, the best analyst-to-associate professionals (junior bankers who
have been promoted from analyst to associate without going to business
school) generally have no immediate need for an MBA as they have already
learned the processes and procedures of leveraged finance. If you look at the
profiles of MDs and VPs, many of those within leveraged finance do not have
MBAs because there was less of a need for an MBA for advancement
purposes when they were promoted. This is where leveraged finance, with
its commercial banking roots, differs from traditional investment banking:
top-performing analysts are not pushed out to MBA programs. Rather, they
are kept in-house and groomed for management positions.
Aside from the personal and alumni network that MBA graduates bring
to the table (which can be immensely valuable), MBAs bring a unique
perspective to the table. With prior job experience, they view situations
very differently than their analyst-to-associate counterparts. Also, since
they have not spent three years on the same deals with the same clients,
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they usually are less in-the-weeds and bring fresh insight to deals. Quite
often, this fresh perspective is very much appreciated.
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commitment and your firm is willing to pay for the degree, the part-time
MBA can be a huge payoff. Not only will it give you the credentials you
are searching for, but having your firm pay for it lets you know that they
are genuinely interested in your career potential with them.
The interview process for the large leveraged finance firms is much like that of
investment banking corporate finance programs. An information session and
resume-drop, followed by an on-campus interview period, and later a “Super
Saturday” process (with a day full of interviews at the firm’s offices) is the norm
for all investment banks. These Super Saturdays often include multiple
interviews 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 from
leveraged finance, which is the perfect opportunity to express his or her serious
interest in the field. And if the firm hires directly into teams, you should be busy
expressing your interest in leveraged finance from the very get-go.
and/or interview feedback session will greatly increase your chances at a job offer.
Besides, most bankers enjoy meeting new people and talking about everything
from football to their most recent successful deal experience.
During the resume-drop period, these same people sort through hundreds of
resumes, eliminating candidates from the process for major spelling errors, low
GPAs, irrelevant job experience, silly cover letters, or putting the wrong firm
name in a cover letter. Narrowing down a field of talented candidates is not
easy, especially when they have limited interview slots. You must also present
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yourself on paper in the best light possible. Your cover letter and resume must
be to-the-point and polished. It is also at this point, during a resume review
session, 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 that
they will be working late to make up for the missed time. Their time is
immensely valuable, so be cognizant of this and come well-prepared.
After this process, the interviewers generally discuss among themselves, as they
rank candidates, whom to invite back to the firm for a Super Saturday. These
selected candidates will be invited back for a series of interviews at the firm with
multiple teams. After this grueling process, the interviewers sit down again in a
conference room to review the candidates, and then potentially extend job offers.
A sole voice of dissension from one person during the review process can be
detrimental to a candidate’s chances. Conversely, a voice of support could be
the edge needed to give that candidate an offer. So it’s critical to convey a
consistent message throughout the process, avoid controversial topics, and be
polished. Practicing for this only makes your chances better.
all is not lost. This is actually how many people end up working at investment
banks, by remaining persistent (but not overly pushy), working their way to an
interview. Many times, a selected candidate will miss his interview for
whatever reason, opening up an extra interview slot. Take the initiative to see
if 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 those
recruiters you met at the information session to ask if they can make time in
their schedule. If they have traveled to the school to meet candidates and
have some extra time, they generally will not mind. Also, if you come across
as just as polished as the best interview candidates, you might just have a leg
up on the competition, since you have shown your genuine interest in the
firm. Basically, you should make yourself known (in a positive light) at every
chance possible so that the firm will definitely want to interview you.
Nobody wants to turn down a qualified candidate who is sincerely interested
in working for them. At the same token, no firm wants to hire someone who
grovels 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 than
in many other areas of banking. Those with leveraged finance and other relevant
experience tend to change banks quite frequently. Like any ambitious
professionals in any field, leveraged finance professionals are always seeking to
better their lifestyle, pay, rank/title and/or amount of responsibility. But
leveraged finance and the rest of the credit world are somewhat unique because
their firm skillset of very transferable finance skills open up a wider variety of
careers, than say, someone in a specific industry coverage group at an investment
bank. This makes lateral hires a definite staple of the industry.
first-year analysts, these replacements are able to hit the ground running.
In order to find qualified applicants, a firm will likely hire a headhunter, such
as Glocap, to review and bring in candidates for interviews. Also, the firm
will seek out internal candidates to interview, as well as anyone else who
receives a recommendation from a current employee. At this point, the search
to fill an interview schedule might only take a week or so, while the firm
reviews resumes on a real-time basis.
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With a need to fill and a sense of urgency, firms will substantially abbreviate
their interview process. For every available slot, they might bring in five to
seven candidates for interviews and put them through a simulated “Super
Saturday” with interviews only by the leveraged finance team. After
conducting a day of these interviews, the firm will usually make their
decision 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 general
recruiting cycle, she or he will be put through an accelerated training course.
With previous credit backgrounds and a firm understanding of Microsoft
PowerPoint, Word, and Excel, these resources are usually cranking on deals
and adjusting to their environments in just a few days.
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, this
will definitely take initiative on your behalf. Here are some suggestions as to
how to get your name and credentials noticed:
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1) First, research the leveraged finance firms you are interested in joining. To
do this, find a set of league tables, which will list the rankings, by searching
through the WSJ, Thomson Financial, or Bloomberg for syndicated loans,
leveraged loans, and high-yield bonds. These league tables are produced
quarterly, generally with full articles for the annual rankings.
2) Drop your resume and cover letter online with the institutions that you are
interested in joining. If there is not an online site, mail these materials to
3) Contact headhunters, expressing your goals and interests. They are usually
paid for placement of professionals by firms seeking to fill staffing needs,
which automatically places you in good hands. To find lists of
headhunters, 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 target
firms. Contact friends and even friends of friends who work in corporate
finance. Even if they are not in the leveraged finance division, they might
have a friend or another colleague who would be willing to take a look at
your credentials and grant you at least an informational interview.
5) Contact your university’s career management office and see if you can get the
name and e-mails for the contacts at the firms for which you are interested.
After having followed their standard hiring procedures by dropping your
resume online (and/or mailing it to them), a follow-up absolutely betters your
chances. However, generally waiting a couple of days for them to reply is
advised, since thousands of resumes are generally dropped online.
6) Use the Internet to search for recent transactions and the professionals
associated with them. If you can locate their e-mail information on the
internet, it never hurts to send them a quick e-mail note, expressing your
interest in their work and their field. Whereas this may not land you with
an interview, this person might be willing to help you out.
7) Search online at the major private equity shops and hedge funds for lists of
professionals. You may find people with leveraged finance backgrounds
who may even have worked in your current position, or have gone to your
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alma mater.
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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 has
gone out.
But make sure you do your homework. Read The Wall Street Journal regularly
and be sure to skim the headlines the day of your interview. Scour the company’s
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web site, making note of any recent major headlines. Showing a genuine interest
in the firm is much easier when you can ask questions about a recent deal or talk
about a recent organizational announcement. This also gives you a chance to
bond with your interviewer. After the interview is over, write a thank you e-mail
or even a handwritten note to all of your interviewers. Phone calls are
cumbersome, so avoid them. A simple “thank you” e-mail will not go unnoticed.
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LEVER
CHAPTER 1
FINAN
Chapter 8: Leveraged Finance Positions, Pay, and
Lifestyle
Chapter 9: The Leveraged Finance Career Path
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Leveraged Finance
Positions, Pay, and Lifestyle
CHAPTER 8
How much will I make and what will my lifestyle be like? These are probably
the two most frequently asked questions in the job search. Rumors continually
circle around how much the best-of-the-best in leveraged finance are paid, and
how these numbers are decided. Furthermore, just about every firm has its own
unique hierarchy, with different titles for every position, different pay scales
and compensation packages, and different barriers to promotion (covered in
Chapter 9). As someone at a commercial bank or finance company might be a
senior associate, a third-year analyst at a top-tier investment bank with the same
experience might have a lesser title, but command more compensation. Most
of 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, the
major titles at investment banks (from the most junior to the most senior) tend
to be analyst, associate, vice president, and managing director. Firms will
often break these into multiple roles, to add further title and pay stratification.
For example, some firms have junior analysts and analysts, associates and
senior associates, principals, directors, managing directors, and even senior
managing directors. The difference between the titles largely correlates to
compensation and experience.
However, once past the associate level, the pay scale tends to change based on
function, roles, and responsibilities. Whereas a senior managing director in a deal
origination function might earn multiple millions of dollars per year, that same
amount of experience in a credit/risk function might only pay a few hundred
thousand dollars. These financial rewards are aligned with revenue generation,
as well as the lifestyle of the position. Subsequently, the most lucrative of these
roles is typically the person generating the most fees for the bank.
Managing director: Sitting at the top of the leveraged finance food chain, the
MD generally spends most of his/her time speaking with treasurers and CFOs of
companies, in order to assess their financial status and need for debt facilities.
The MD is usually the key relationship manager for the bank because of
continuous dialogue with the client. As senior members of the deal team, MDs
have something of a sales role, and interact with a limited number of clients
whom they have worked with throughout the years. The top MDs are group
heads, who may have contracts outlining their compensation structure.
Managing directors will spend quite a bit of time pitching ideas to clients, as
their salary is typically determined based on the fees they earn from their deal
flow. In this sense, it is not uncommon for the best-of-the-best MDs to
command 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 leveraged
finance group that executes a high volume of exceptionally profitable LBOs,
DIP facilities, and recapitalizations. However, more often than not, the salary
of an MD is enough to support his/her basic lifestyle and the bulk of pay
comes in the form of a bonus paid with stock options that must vest over a
certain period of years. These “golden handcuffs” are usually incentive
enough for senior MDs to stay at their current firms for long periods of time,
which generally ensures consistency at the most senior ranks.
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Vice president: The vice president on a deal team is the right hand man of the
MD. Once a mandate has been won, the VP generally takes over and manages
the process going forward. From the negotiating and signing of legal documents
to the final signoff of the information memorandum, the VP’s role is to ensure
that everything in the deal goes smoothly. Throughout the deal lifecycle, a VP
will often act as the relationship manager, delivering the periodic client update
call and subsequently laying the future foundation for his promotion to MD.
Although, like MDs, VPs interact frequently with clients, VPs tend to be
salaried and not commission-based they way MDs typically are. The very
best VPs are paid extremely well, commanding salaries in the multiple
hundreds of thousands of dollars, like their other corporate finance
investment banking counterparts. In great years, it is not uncommon for a top
performing VP in a very active team to clear $1 million. However, in bad
economic times, or working in groups that do not originate many
transactions, 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 director
is a lower salary. VP titles are also quite often awarded to those who spend a
good amount of time interacting with clients.
financial modeling that came with the analyst lifestyle and subsequently, might
run the risk of becoming a micromanager. The deal lifecycle is so process-
oriented that this can easily become the downfall of an associate.
finance, there are typically quite a few projects needing to be completed at any
given time. This lifestyle lends itself to the never-ending workday.
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 as
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many, if not more hours than these investment banking peers. With a
BlackBerry firmly attached to them at all times and access to the their
computer nearby, analysts quite often find themselves in the office seven days
a week for their two-year contract. For the days where they are not in the
office, 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 projects
before they turn into all-nighters or weekend disasters.
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As is the practice in the rest of corporate finance, the best analysts will be
offered third-year contracts and the best of those third-year analysts will be
offered associate contracts. Whether an analyst receives a third year or
promotion to associate is determined by both the resource needs of the firm
and the analyst’s ranking compared to his/her peer class. In determining an
analyst and associate rankings, the analysts and associates are force-ranked
within their class and among the larger corporate finance junior resource
pool. With the market momentum in the past years, this trend towards
promotion has been more the rule than the exception. In recent years, about
50% of second-years were offered a third year and roughly 50% of those were
given the A-to-A offer. It is more common find managing directors who have
started as analysts and worked all the way to the top in leveraged finance
when compared to other areas of an investment bank.
vice presidents spend most of their time advising deal teams and clients on
market conditions, as well as delivering these deals to investors.
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 those
successful at originating many deals, it is generally very close. However,
because the pay for a capital markets MD does not depend as much on fee
generation as it does for an origination MD, this can lead to more consistent
earnings for the capital markets MD/VP year after year.
In this sense, the capital markets and loan sales teams are like head coaches of
professional sports teams: whereas the players (the deal team) are out winning the
games, the coach is directing the team during games, drawing up new plays
(adjusting the terms of the deal in market), conducting research on other
competition (market comparables), talking to fans (investors), and interacting
with the team’s owners (the client). While marquee players bring in extraordinary
financial 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 and
loan sales positions tend to work more “market” hours. In at 7am and out by
7pm is somewhat typical for these senior professionals. However, even the
senior capital markets professionals will commonly find themselves working
with origination teams and issuers to structure large deals well into the
evenings. Loan sales professionals often work late too, but in a different
capacity and outside of the office. Often, they are attending dinners/sporting
events with investors and/or clients. Regardless, the lifestyles of senior
professionals in both capacities tends to be quite hectic: following the markets,
talking to clients, answering questions from investors, and spending the day
attached to a BlackBerry. Weekends for these teams are typically freer than
they are for origination teams, but there is always occasional work that needs
to be done.
junior level, in capital markets these tend to be positions that are more geared
towards research, while in loan sales these roles are more focused on
investment-grade deals and coverage of smaller clients. Because they are paid
on the same scale as an origination associate/analyst, it appears on first glance
that the capital markets analyst or associate role would offer a better lifestyle
than in origination. However, because of the pace of the job, that’s not
necessarily true.
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Weekend work for capital markets associates and analysts is usually a regular
occurrence. While unlike the weekends of their origination counterparts,
weekends for capital markets analysts and associates are usually not spent
entirely in the office, the variety of the requests is less predictable than in
origination. In origination, there are usually projected deadlines for projects.
In capital markets, those deadlines are usually ASAP. As for sales, working
on a weekend would be quite out of the ordinary. A quick phone call or
BlackBerry message to a client might occur, but not the creation of market
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These functions are essential to the leveraged finance platform but are not
generally aligned with revenue generation. As such, they are typically
compensated on a lower payscale, and the lifestyle in these groups is better.
In terms of hours, the senior resources in these functions can expect to work
even more predictable hours than those senior professionals in origination.
Like their counterparts, weekends are usually free and you will not usually
find them in the office at 9 p.m. However, as with any other major leveraged
finance function, if a large or complex deal is coming to the market, everyone
on a deal team usually works well past their “normal” hours.
generally coincide with the entire corporate finance program. As for weekend
work, junior resources in all of these groups can definitely expect it. Usually
working intensely on one or two deals, as opposed to three to five in
origination, their weekend lifestyle is slightly more predictable.
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Compensation
On the whole, pay within a commercial bank’s leveraged finance platform tends
to be less than at a major investment bank. As commercial banks are not usually
leading the signature event-driven multi-billion-dollar financing transactions,
their leveraged finance platforms are not bringing in the same volume of revenues
as their investment banking counterparts. Assuming the same mix of event-
driven financings, as well as refinancings, this means, on average, the fees per
deal 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 the
commercial banks than the investment banks. As firms compensate their
senior managers relative to their revenue generation, these senior people often
earn less than those same managers at investment banks. Also, organizations
tend to pay relative to other functions and departments within its
organization, which benefits the leveraged finance investment bankers more
so than the commercial bankers.
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This is not to say that these professionals are not paid well. It simply means
that the scale is smaller at a commercial bank than at an investment bank. A
good rule of thumb is to assume that the same position at a commercial bank
is paid about 50-75% of what its peer at an investment bank is paid, up to a
certain point. As top performing first-year analysts at investment banks made
close to $150k in 2005 ($60k base salary, $10k signing bonuses, and $80k in
year-end bonus), the same top performing first-year analyst at a commercial
bank 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
This compressed pay scale continues through the ranks. While the top
performing managing directors in an investment bank’s leveraged finance
group can expect to earn millions of dollars in any given year, a counterpart
at a commercial bank might expect to earn only multiple hundreds of
thousands of dollars. A top performing vice president at a commercial bank
might make $300-500k in compensation, whereas top performing senior vice
presidents at investment banks can make $1 million.
Lifestyle
Of course, the greater pay at an investment bank’s leveraged finance group
versus at a commercial bank is related to a lifestyle tradeoff. Generally,
analysts in a commercial banking leveraged finance division can expect long
days of hard work and occasional weekends, but not the grueling hours and
weekend expectations of their counterparts in investment banking corporate
finance programs. Instead, their hours are typically 8 a.m. to 9 p.m. (and often
extending until midnight), but absent the expectations of all-nighters and
everyday weekend work. Associates and vice presidents also generally have
better hours than their investment banking peers, with fewer late nights. At a
managing director level, the consistency of hours for a commercial banking
MD tends to be better than for the I-banking MD, although the difference in
hours 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 commercial
finance companies when compared to the pressure at an investment bank.
This is partially due to the risk/reward fluctuation of salary and the ebb and
flow of hiring/firing that comes with the general economy.
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than requiring that they make that leap after a certain time periods. These
firms 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 it
comes to promotions and firing.
When it comes to lifestyle and pay in leveraged finance, the mot important
factor is consistency. This goes for everything including hours, weekend
work, 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 these
investment banks, as they are subject to the volatility of the markets and the
effects the economy has on an organization. At a commercial bank or finance
company, the stability of the company has less to do with the financial
markets and, subsequently, so do all of these pay/lifestyle elements—a certain
amount of career stability exists during bad economies at commercial banks,
much more so than at investment banks.
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Analyst
Generally the lowest ranking tier on the leveraged finance totem pole, this
role usually involves all of the “grunt” work on a deal. At the major
investment banks, the analyst is either hired straight from an undergraduate
university or is a lateral hire from another firm. From here, they are placed
into a rigorous training program, where they are taught the basics of corporate
finance. After successful completion of the program, they are placed into
their leveraged finance groups. At commercial finance companies, analysts
are direct hires from undergraduate universities, are lateral hires from other
firms, 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 bonus
compensation and promotion. At the end of this two-year period, the
analyst’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 can
expect to be promoted, but this depends on hiring needs, the economy, and the
general performance of the analyst talent pool. In some situations, this can
be as low as 25% and in others, as high as 90%.
After their first year, investment banking analysts are given a base pay
increase of $10k and a July year-end bonus. In good years, this bonus is
typically more than the analyst’s salary. Also, this bonus is indicative of the
analyst’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 an
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Aside from the typical routes, some investment banks will have junior
analysts matriculate into their corporate finance program. These talented
individuals often were not targeted (or did not apply) during the regular
recruiting process for one reason or another. They generally pre-line for a
year before joining the corporate finance analyst program, giving them the
unique opportunity to see different groups over the course of a year before
signing the two-year analyst contract. Paid salaries and bonuses, they too are
considered analysts and often are the top performers in the corporate finance
program when they matriculate.
At the commercial banks and finance companies, analysts are generally either
from a rotational management program or are hired directly from
undergraduate universities. However, they tend not to be on a “contract”
basis, which means that they are employed without the option for the firm to
discontinue their employment after two or three years. At most of these
firms, analysts are paid on a January-to-January bonus cycle. These bonuses
are not as large as those of their investment banking counterparts. Naturally,
if hired from a two-year rotational program, analysts at commercial finance
companies can expect a quicker path to promotion to associate (a year or so
is not uncommon), a higher base salary, and a larger annual bonus.
7:30 a.m.: It’s Thursday morning and you are just waking up from a late night
of 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 you
already printed and bound 25 copies of the refinancing pitch last night. You
check your BlackBerry to make sure that the deal didn’t dramatically change
while 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 yet
another markup on your chair of the pitch from your associate. Thankfully
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it’s only a few minor errors that you overlooked, but it means that you’re
going to spend the next few hours racing around, making changes, and
substituting new pages. At any rate, it is better that you all caught the
mistakes before you were actually in the pitch. Usually you are not in the
office until 9:30 or 10, but with an important client pitch, you knew you had
to 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
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lawyers. You ignore a voice mail from your buddies, knowing that you’ll
need all of the next two hours. You put everything else that was on your chair
into 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 change
and update this slide.” After you quickly do so and incorporate the other
changes, you send the pitch over to your production group, with instructions
on which slides to replace in your 30-page presentation.
9:30 a.m.: After sending the presentation, you walk over to find that the
presentations group is slammed with last minute requests. You call up your
associate, who comes over to help. For the next 30 minutes, you are printing
and swapping out pages while checking your BlackBerry. You also return to
your 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 throw
them in a bag and call your car service to make sure that a car is ready and
waiting to leave at 10:15.
10:00 a.m.: You’ve returned to your desk, only to have a flurry of messages
on your desk for other deals. Ignoring them, you grab your suit jacket, check
yourself over once in the mirror, and stop by the VP’s desk, books and laptop
in hand. The associate is right behind you and now you’re just waiting on
your 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’s
office. The VP flips through the presentation only to temporarily freak out at
the last minute addition. The MD assures the VP that she made the change
and everyone reviews their speaking points for the presentation. Being
exceptionally diligent, you have printed out the latest news about the client
from the company web site, as well as online finance sites. You pass copies
around. Even though it’s a refinancing, it’s multiple billions of dollars in
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financing for one of the firm’s most prominent clients, which means that if all
goes 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 their
boardroom. 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 the
presentation and establish a dial-in line, as your capital markets expert was
not able to make it in person. From a presentation standpoint, everything is
good to go, which is your primary responsibility. You check for any last
minute BlackBerry messages before the presentation begins.
11:00 a.m.: The client arrives and the pitch begins. Business cards are passed
out, pleasantries are exchanged, and the slides are discussed. Occasionally
stopping for questions, the MD and VP tag-team the presentation while you
and the associate stay alert for any financial modeling questions. As it
happens, the CFO poses a brief question to you about the assumptions in the
financial 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, yet
wants to discuss internally and get back to you with questions before arriving
at a final conclusion.
1:30 p.m.: The car you scheduled for the trip drops you off at the office and
you return to your desk exhausted. You grab another analyst and head out to
a 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 already
got a sit-down with Credit at 4 p.m. to discuss an auction financing for an LBO
by a major private equity firm, which Credit already does not like. Also, you have
a conference call at 6 p.m. to discuss closing dinner slides with your coverage
counterparts for your most recent transaction. Naturally, the associate from your
4 p.m. deal has been eagerly awaiting your arrival from your pitch, ready to tweak
the financial model and credit package with the newest changes from that VP and
MD. With a bid deadline on Tuesday, the financial sponsor coverage group wants
to get approval before the weekend, in order to put together some financing slides
for 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 a
phone call or two, you realize that these “tweaks” are going to take every
minute of the next hour and a half. You grab the most recent financial model
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from the share drive, throw on your headphones and start cranking. If you are
lucky, 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’t
called in a few weeks. You tell them that you’ll have to call them later, but
everything is alright. Now, back to cranking on your financial model…
3:30 p.m.: The model is complete with the newest assumptions and you drop
these new numbers into the credit package. You scan through it to make sure
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nothing else needs updating. Doing this, you notice that financing scenario is
better, but still somewhat unlikely to get approved. The associate and VP stop
by your desk to take a look and make sure they don’t want to make any other
changes.
3:40 p.m.: The financial sponsor coverage team called and wants to check on
the conference room for the meeting with credit. You double-check, get back
to them, and call up the credit executive. The associate and VP made their
minor changes to the presentation, so you click print on 10 copies on the
presentation and the financial model. The printer is busy, but you’ve got two
backups. Clicking print on both of these printers, you and the associate grab
five binder clips each and wait for the printing to finish. At 50 pages each,
this could take a little while.
3:59 p.m.: Nearly out of breath, but right on time, you pass out the credit
packages to everyone in the room: the financial sponsor’s coverage team, your
origination/structuring team, the corporate banker, the credit executive, the loan
capital 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 both
decided early on to adopt these sections of the presentation. Somewhere during
the presentation, you notice two or three minor errors, but since they’re buried
in 50 pages of work, nobody can blame you.
Surprisingly, at the end of the meeting, the credit executive gives signoff, but
asks for some minor information, which you make note of and promise to
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5:00 p.m.: With so much racing around, you avoid your desk in order to grab
a quick cup of coffee with an associate friend of yours. A recent business
school grad, she talks about how much you would enjoy the two-year break
from this lifestyle. A third-year analyst up for the analyst-to-associate
promotion next year, you recognize that you have a lot on your plate to
consider. However, bonus talk has already come out for the first-year
associates, and with numbers that high, it looks quite enticing to stay around
for a few more years.
5:15 p.m.: You return to your desk, scan your list of things to do, and knock
out the low-hanging fruit, as well as those things needing to get done before
6 p.m. The MD with your deal team from the morning pitch has just talked
with the client, who accepts your firm’s financing offer. He fires around an
e-mail, with congratulations, as well as a first-thing deal team sitdown in the
morning to get started on drafting the info memo and launching the
transaction. In the meantime, he tells everyone to go home soon, since there’s
plenty of work to do tomorrow. Although exciting, you know that you will
spend the majority of your weekend cranking on an info memo and prepping
for a deal launch. Thank goodness this transaction is a standard loan
refinancing from a prior deal, otherwise you would be up all night worrying
about a high-yield roadshow and/or rating agency presentation.
5:50 p.m.: You finish up some e-mails and phone conversations, so that you
can check out what is needed for the 6 p.m. conference call. Planning a
closing dinner is somewhat enjoyable, as it is a chance to reminisce about the
deal. You quickly review the deal toy choices, which were sent over to you
from 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 phase
with the team, but you have already written down memorable quotes, made a
reservation at a high-end restaurant, sent out invites, and put together a slide
of transaction highlights.
6:00 p.m.: The conference call only last 30 minutes and everyone is given a
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6:30 p.m.: You start thinking about ordering dinner for the evening, while
you check CNN and ESPN to see what happened in the world today. Since
you will definitely be at work late, you place an order with your team from
the local Chinese restaurant.
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6:45 p.m.: You make a quick call to the parents, who are happy to hear that
all is well and that you are still alive.
7:45 p.m.: You get back to your desk to find a markup of the credit package
from the VP on your second deal. The credit package markups are needed by
first thing in the morning, as the financial sponsor coverage team wants to
switch up the transaction structure entirely. Of course, this will require
another meeting with credit tomorrow, which means all chances of a
reasonable Friday departure are ruined. Also, it is about right now that you
realize you’ll be cranking most of this weekend to update slides in the
financing pitch for Monday. However, since it is not the final round of the
auction, this will be a relatively easy task. Realizing that you also have a first
thing meeting with the MD of your live deal, which will likely take all day to
finish, 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 over
the credit package and model to the financial sponsor coverage team. They
take your information, review it, and will undoubtedly call you with
questions. However, it is time for a quick water break and then time to crank
on the new info memo, for your live deal. You start by preparing the
essentials: 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, which
makes you nervous. However, they call to say thank you and to ask about some
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quick modeling assumptions you have made. You walk them through your
changes and plan on touching base with them tomorrow. Since you have
everything 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 the
car service to go home. Knowing that you have a chance to save at least a few
hours of your weekend time, you decide to crank for a little bit longer on the info
memo. Since tomorrow will be busy, this also might be all of the good cranking
time you’ve got in the next 24 hours. Also, you know the deal team will be
impressed 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 on
the 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 company
for the past few hours. Since you live in Manhattan, you do not need to call
a car service. Instead, you will just hop in a taxi waiting outside. To finish
up 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 the
weekend is getting close.
Associate
Graduates coming from MBA programs are also given the same signing
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bonus, base salary, corporate finance training, and stub bonus as their A-to-A
peers. These MBA hires in many cases interned during their summer between
program years, giving them the ability to lock up their career path well in
advance of graduation. They, like A-to-A associates, are also given very large
year-end bonuses, pay increases for each successful year of employment, and
force-rankings against their peers. These associates are almost all older than
their A-to-A counterparts, but they bring a different point of view and career
experience to the table.
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7:00 a.m.: It’s a little bit early for you to be up, but you want to get a head
start on the day. Since it’s a Friday and your analyst has been cranking late
on an info memo for a new deal, you definitely want to get into the office and
review it ASAP. Also, your MD has called a 9 a.m. meeting for this deal and
you 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 early
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morning hours, which follow long evenings. Although you were at work until
11 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 is
in market with a lenders’ meeting on Tuesday morning. There’s always
plenty 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 analyst
worked on late last night. That kid is definitely going places.
8:40 a.m.: Realizing that you’ve got 20 minutes until your meeting, you run
downstairs 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, and
head over to the meeting, where the MD outlines the next tasks for the
transaction. The MD is exceptionally pleased to know that the info memo was
already started and you all talk about the next steps. You set a firm deadline for
the info memo to be distributed to lenders, for a lenders’ meeting to be held, and
for sitdowns with the sales and capital markets teams. The MD, always on the
BlackBerry, forwards you all a note from senior management, which says how
proud they are that the deal team pulled off another successful pitch. As you
have been on quite a number of deals, you recognize that this is the calm before
the storm and the crunch time before the deal launches.
10:00 a.m.: With some clear deadlines in hand, you quickly debrief with the
analyst, dividing up responsibilities. You all agree to meet at the office at 10
a.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 all
of the help on this deal possible. With two live deals in market, things are busy
right now. Thankfully your auctions have gone radio-silent, while the owners
review bids from the private equity shops and financing firms.
10:15 a.m.: You return to your desk to find some investors have already
called about the new transaction, even before the lenders’ presentation has
gone out. You call them back, giving them some information, and passing the
word 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 over
to your desk, checking in with you about the presentation. Almost on cue, the
client 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 on
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Tuesday, 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 your
newest update to the presentation. You discuss talking points, where you all
should meet, and any other changes. The client suggests updates to a few slides
and you make note of them. Knowing these changes will be made to the info
memo, you make note to change those as well. You promise to send them a soft
copy of the slides by 4 p.m., so they can print them out before they leave for home.
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12:30 p.m.: Immediately after you get off the phone, you begin reviewing the
changes. Recognizing that this will take you a few hours, you decide to grab
a bite to eat from the cafeteria downstairs, since you know that you can get
back to your desk quickly.
12:50 p.m.: Eating lunch at your desk, you start cranking on changes. The
VP stops by periodically to ask questions, but otherwise you spend most of
the afternoon cranking on the changes and double-checking everything.
Since hundreds of investors will be scrutinizing this deck of slides, you want
it to be as perfect as possible. Also, since this is going back to the client, you
want the work to be top-notch.
3:00 p.m.: With the changes made, you circulate this presentation to the VP
and MD to show them what you are sending. Often, the CFO and treasurer
will call you directly and vice versa, but you still like to touch base with your
deal team. Once you have final approval from them, you send over a copy of
the lenders’ meeting slides.
3:30 p.m.: Your e-mail to the client has been sent, so now it is time to check
in with your other deal team. Meanwhile, the analyst is cranking on the
transaction overview section of the info memo and making good progress.
You both grab some coffee to take a break, while you discuss the weekend
and career stuff.
4:00 p.m.: Once back to your desk, you check e-mails and voice mails. You
make some calls to friends, check CNN and the WSJ, and catch-up on the rest
of your day. About this time, the analyst from your deal has arrived back in
the office from the high-yield bond roadshow, completely exhausted. You
both 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 been
given, you are really in a holding pattern on that front. Yet, updates need to
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5:00 p.m.: Before your MDs leave for the weekend, you check in with each
of them to make sure they know where everything stands. The lenders’ slides
for the first transaction look great, the shell of the info memo for the
refinancing transaction is underway, and your auctions still remain quiet with
no news. From the looks of it, you might actually have something of a
weekend. You also make sure to check in with the VPs, since they are leaving
6:00 p.m.: You stop by both analysts’ desks to see how they are doing. You
divide 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 a
7 p.m. departure on a Friday, you have seen a lot worse!
Vice President
The vice president role is the point at which firms tend to depart from each
other with respect to how they organize their hierarchy. At some firms there are
junior/senior vice presidents and even principals/directors, before the final
promotion to managing director. At other firms, the managing director title is
Customized for: Daniel (dewise@emory.edu)
only used to signify a group head, which means someone could be a VP for
quite some time and might not ever make managing director. Finally, at other
firms, 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 grouped
into classes based on when they joined the firm. However, it is at this level
where pay tends to vary from firm to firm and group to group. A few firms will
pay their vice presidents bonuses based on their individual fee generation, while
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most will pay based on forced class-ranking, much like the analyst/associate
model. Since VPs are not usually responsible for client relationships, the latter
tends to be the norm, but revenue-generating VPs tend to be paid quite
differently than non-revenue generating VPs. At the same firm, a VP in risk
might expect to earn $250k including bonus, whereas a top-tier VP in
origination might expect $1 million a year or more in total compensation.
Finally, VP pay can be remarkably different from firm to firm. VPs within
origination groups at the top-tier investment banking leveraged finance shops are
the highest paid, whereas risk/credit VPs at middle market leveraged finance
shops with significantly less deal volume and fee generation are probably the
least. Therefore, when choosing a firm for a career in leveraged finance, it is
important 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.
Unlike the A-to-A and associate-to-VP promotion cycles, VPs are not necessarily
on a specific timeline when it comes to MD promotion. It is common that a VP
will spend five to 10 years employed at a firm (potentially longer), without getting
the MD nod. Some firms only reserve the MD title for group heads, thus leaving
a large number of VPs in the mix and the need for both senior and junior VPs.
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The managing director title is the pinnacle of leveraged finance, and banking
in general. Managing client relationships is the key to this job and, in the case
of origination/structuring, generating fees for the firm comes with this
responsibility. That being said, there are usually more MDs in
origination/structuring roles than there are in credit/risk/underwriting roles.
But being an MD also usually signifies having direct reports in the banking
hierarchy. Group heads are often just MDs with more responsibilities. They
are 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 a
firm from associate to VP to MD. Usually promoted after a thorough review
by the firm’s management team, this role is reserved not only for someone who
has put in years of service to the firm, but also shows the potential for many
more. As mentioned earlier, promotion to MD does not just happen after three
or four years at the VP level. Like Hall of Fame inductions for professional
sports, there are numerous qualified people, but only a certain handful of these
candidates 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, and
rainmaking origination/structuring MDs often find themselves in similarly
lucrative 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 for
outstanding performance. Conversely, an MD in risk might only earn $500-$750k
in comparison, which is less than his/her peers at the same firm. At commercial
banks and finance companies, origination/structuring compensation for MDs tends
to be in line with the risk/credit functions at the investment banks.
Because this compensation is paid nearly entirely in bonuses, each January can
be quite an intense month for a managing director. MDs tend to scrutinize the
salaries of their peers at other firms, making sure they are paid in line with the
Street. Due to this scrutiny, it is not uncommon for The Wall Street Journal or
New York Post to publish compensation studies, which break down the typical
pay of firms for analyst/associate/VP/MD. With compensation such a hot topic,
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big-name players will often move from firm to firm in order to seal the best deal
possible.
Managing directors often spend the remaining portion of their careers with a
particular firm, in part due to the sheer value of their stock options, and then
usually leave these firms once they have reached their mid/late 50s, unless they
have been promoted to group head positions. However, due to the nature of the
lifestyle and the pressure, it is not uncommon for an MD to retire by 55 in order
to collect all of her stock options. From here, many MDs go on to start their own
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businesses, join charitable foundations, and even serve on the boards of directors
of their former clients.
More often than not, those working in leveraged finance seeking careers in
private equity tend to make the career switch after their analyst years. Most
of the big name PE shops hold recruiting seasons in the early fall for their
expected incoming July class. Much like the traditional investment banks,
these PE shops tend to hire analysts for two-year periods and then send them
along to the top-tier business schools: Wharton, Harvard, and Stanford. In
many cases, these analysts return to their PE shops as associates after
completing their MBA. This means that PE shops are reasonably able to
predict 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-crop
investment banks and leveraged finance shops very early in the year.
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 employees
as needed, without a formal recruiting cycle. Hedge funds also tend to
place less emphasis on an MBA. With less hierarchy and less formality,
this means that analysts/associates/VPs/MDs are all targets of hiring, if
their skills are needed. Headhunters tend to play a large role in this
process, finding candidates with the right backgrounds, in order to find
a good “fit” for a firm. Quite often, those in leveraged finance tend to
have the right background and experience for this career path.
Private equity and hedge funds offer a very different experience for the
leveraged finance analyst/associate. While closing a deal (private equity)
or modeling a transaction (hedge fund) might require quite a bit of time
and effort, the general lifestyle of the junior resource is more predictable
and less hectic than in leveraged finance. These resources are paid
comparably to their investment banking peers, if not more favorably. It
is not until they reach the senior level where they usually get “carry” (the
ability to invest) in the firms’ transactions or fundraising. When this
happens, compensation is often taken to the next level.
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Final Analysis
A dynamic and ever-changing industry, until the past decade or so, leveraged
finance truly was the sleeping giant of investment banking. But as financing
firms realized its potential, as the financial markets expanded, and as
investors realized its vast opportunity, this giant awoke. Now a premier
training ground for those crème de la crème private equity shops and hedge
funds, 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, so
leveraged finance is not only a good place to be now, but will continue to be
for the foreseeable future. From its origins with junk bonds and commercial
banking, leveraged finance has truly come a long way.
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