8/10/2019 Vault Career Guide to Leveraged Finance
1/120
The medias watching Vault!
Heres a sampling of our coverage.
For those hoping to climb the ladder of success, [Vaults] insightsare priceless. Money magazine
The best place on the web to prepare for a job search. Fortune
[Vault guides] make for excellent starting points for job huntersand should be purchased by academic libraries for their careersections [and] university career centers. Library Journal
The granddaddy of worker sites. US News and World Report
A killer app. New York Times
One of Forbes 33 Favorite Sites Forbes
To get the unvarnished scoop, check out Vault. Smart Money Magazine
Vault has a wealth of information about major employers and job-searching strategies as well as comments from workers about their
experiences at specific companies. The Washington Post
A key reference for those who want to know what it takes to gethired by a law firm and what to expect once they get there. New York Law Journal
Vault [provides] the skinny on working conditions at all kinds ofcompanies from current and former employees. USA Today
8/10/2019 Vault Career Guide to Leveraged Finance
2/120
8/10/2019 Vault Career Guide to Leveraged Finance
3/120
2006 Vault Inc.
LEVEFINACAR
VAULT CAREER GUIDE TO
LEVERAGEDFINANCE
8/10/2019 Vault Career Guide to Leveraged Finance
4/120
8/10/2019 Vault Career Guide to Leveraged Finance
5/120
2006 Vault Inc.
LEVEFINACAR
VAULT CAREER GUIDE TO
LEVERAGEDFINANCE
WILLIAM JARVISAND THE STAFF OF VAULT
8/10/2019 Vault Career Guide to Leveraged Finance
6/120
Copyright 2006 by Vault Inc. All rights reserved.
All information in this book is subject to change without notice. Vault makes no claims as to
the accuracy and reliability of the information contained within and disclaims all warranties.
No part of this book may be reproduced or transmitted in any form or by any means,
electronic or mechanical, for any purpose, without the express written permission of Vault Inc.
Vault, the Vault logo, and the most trusted name in career informationTM are trademarks of
Vault Inc.
For information about permission to reproduce selections from this book, contact Vault Inc.,
150 West 22nd St, New York, New York 10011, (212) 366-4212.
Library of Congress CIP Data is available.
ISBN 1-58131-502-3
Printed in the United States of America
8/10/2019 Vault Career Guide to Leveraged Finance
7/120
ACKNOWLEDGMENTS
We are extremely grateful to Vaults entire staff for all their help in the
editorial, production and marketing processes. Vault also would like to
acknowledge the support of our investors, clients, employees, family and
friends. Thank you!
8/10/2019 Vault Career Guide to Leveraged Finance
8/120
8/10/2019 Vault Career Guide to Leveraged Finance
9/120
8/10/2019 Vault Career Guide to Leveraged Finance
10/120
Vault Career Guide to Leveraged Finance
Table of Contents
Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Syndicated Loan Sales & Trading (Primary and Secondary) . . . .51
High Yield Bond Sales & Trading . . . . . . . . . . . . . . . . . . . . . . . .53
Chapter 5: The Transactions 55
The Leveraged Buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
The Corporate Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
Other Event-Driven Financings . . . . . . . . . . . . . . . . . . . . . . . . . . .59
The Debt Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
GETTING HIRED 63
Chapter 6: What Leveraged Finance Firms are
Looking For 65
Personality Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
The Resume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Chapter 7: The Hiring Process and Interview 71
The Standard On-Campus Interview/ Recruiting Process . . . . . .74
Lateral Hires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
Typical Interview Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
ON THE JOB
Chapter 8: Leveraged Finance Positions, Pay,
and Lifestyle 83
Investment Banks: Structuring/ Origination . . . . . . . . . . . . . . . . .84
Investment Banks: Capital Markets/Loan Sales and Distribution 87
Investment Banks: Credit/Risk/Corporate Banking/Ratings
Advisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
2006 Vault Inc.x C R E E R
L I R R Y
8/10/2019 Vault Career Guide to Leveraged Finance
11/120
Vault Career Guide to Leveraged Finance
Table of Contents
Commercial Banks and Commercial Finance Companies . . . . . .90
Chapter 9: The Leveraged Finance
Career Path 95
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
Final Analysis 111
About the Author 112
Visit the Vault Finance Career Channel at http://finance.vault.com with
insider firm profiles, message boards, the Vault Finance Job Board and more. xi R E E R
L I R R Y
8/10/2019 Vault Career Guide to Leveraged Finance
12/120
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 1 R E E R
L I R R Y
Right now, it seems like every other headline in The Wall Street Journalis a
blockbuster M&A event, a multi-billion dollar LBO, or a rise from
bankruptcy by a fallen corporate angel. Much as they did in the late 1990s,
both investors and corporations have cash burning holes in their pockets
because of positive economic conditions, and are subsequently pushing the
financial markets near new heights. Like the late 90s, the result is record
M&A activity, a boom in hedge fund activity, a rise in venture capital
spending, a return to the buyout activity of the late 1980s, and a general
feeling of excitement on Wall Street. But unlike the late 1990s, this flurry of
financial activity is somewhat tempered, as today bankers distinctly
remember the subsequent massive economic downturn of only a few years
ago and its effects on global financial markets. Nevertheless, the major forces
that have spurred this investment activity, such as historically low interest
rates, low credit default rates, and healthy cash balances are making Wall
Street an exciting place to be.
Because of low interest rates, relatively few bankruptcies, and investors
hesitation to invest in the equity markets, no area has seen more activity than
debt markets. This activity has manifested itself into record global
borrowings, as global credit issuance is expected to exceed $7 trillion in
2006, dwarfing its $2 trillion level in 1995 and far surpassing its $4.5 trillion
level in 2005.
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
activity levels reaching the highs of 1999/2000, all-time-low borrowing costs
for companies, and off-the-charts volume in the high-yield bond and
syndicated loan markets. For all of these reasons and many more that we will
discuss in this Vault Guide, leveraged finance is a good place to be.
Introduction
8/10/2019 Vault Career Guide to Leveraged Finance
13/120
8/10/2019 Vault Career Guide to Leveraged Finance
14/120
CHAPTER 1
LEVEAGEFINA
THE SCOOP
Chapter 1: The Background of Leveraged Finance
Chapter 2: Major Industry Players
Chapter 3: The Products
Chapter 4: Leveraged Finance Groups
Chapter 5: The Transactions
8/10/2019 Vault Career Guide to Leveraged Finance
15/120
8/10/2019 Vault Career Guide to Leveraged Finance
16/120
The Background of
Leveraged Finance
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.
Generally speaking, leveraged finance is a platform in all major investment
and commercial banks. It is a function that taps into two major financial
markets (the high-yield bond market and the leveraged loan marketmore on
those later), is accessed by nearly all private equity shops and hedge funds on
a regular basis, and has been one of the booming profit centers of Wall Street
for the past two decades. For analysts and associates, it has become a prime
training ground for the most elite private equity shops and hedge funds.
Subsequently, for careers on Wall Street, leveraged finance is one of the most
sought-after fields.
Why leveraged finance?
Along with its role as a potential springboard to careers in private equity and
hedge funds, leveraged finance is also unique from a career perspective
because it provides a vantage point into most of the other areas of investment
banking, as well as sales & trading. For analysts and associates, working in
leveraged finance allows one to see what else is out there career-wise in the
financial markets, without ever having to leave the field.
Another advantage of working in leveraged finance is that in general, it is an
area of investment banking that is focused on closing transactions. In a
corporate finance role within a coverage team in an investment bank (a team
that covers a specific industry and pitches deals to companies in that
industry), one analyst might close one or two deals a year in an investment
bank. By contrast, in leveraged finance, its feasible to close five to 10
transactions a year. Leveraged finance affords analysts and associates a
continually busy pace and good deal and client exposure along the way.
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 5 R E E R
L I R R Y
CHAPTER 1
8/10/2019 Vault Career Guide to Leveraged Finance
17/120
8/10/2019 Vault Career Guide to Leveraged Finance
18/120
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 7 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
Standard & Poors (S&P)
AAA
Moodys
Aaa
AA+
AA
AA-
Aa1
Aa2
Aa3
A+
A
A-
A1
A2
A3
BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BB+
BB
BB-
Ba1
Ba2
Ba3
CCC+
CCC
CCC-
B1
B2
B3
B+
B
B-
Caa1
Caa2
Caa3
CCC Ca
C D/C
D C
8/10/2019 Vault Career Guide to Leveraged Finance
19/120
Hows your credit?
How are these ratings assigned? A company is analyzed by the rating
agencies and is assigned a rating(s) based on these agencies assessment ofthe companys credit risk. The rating agencies assess the quality of the
companys operations, its future potential, past track record, and financial
health. Once this analysis is completed, the agencies assign ratings to the
company and monitor the company going forward. Anything under a certain
rating threshold is considered leveraged. A company that chooses not to get
rated is considered not rated. Also, companies that are rated investment
grade by one agency and leveraged by another are considered crossover
credits.
The words leveraged and debt normally have negative connotations. But
this shouldnt 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).
To illustrate the difference between investment grade and leveraged, consider
the following example. Suppose you have a rich friend who asks to borrow
money from you for lunch. Youd probably not hesitate to give him $10 or
so, because you know youre 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.
2006 Vault, Inc.8 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
20/120
Ratings determine access to financial markets
Of course, there are advantages to being investment grade. Since investment
grade companies are consider much less risky, they have the ability to accessa number of other financial markets, including the commercial paper market.
Furthermore, these investment grade companies are typically able to get
much larger amounts of debt than their leveraged counterparts. For example,
as a triple-A rated company, General Electric has syndicated loan facilities of
over $20 billion, not to mention any other debt, such as bonds or commercial
paper. In contrast, the largest syndicated loan package for a leveraged
company is probably somewhere near $6 to 8 billion.
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 determinedby their financial ratios, while crossover companies typically access the
market that plays to the better of their ratings.
The field of leveraged finance is concerned with riskier companies that
typically seek funded debt as a necessary piece of their capital structures.
Because syndicated loans and high-yield bonds are necessary for these
companies operations, leveraged finance can be a little more exciting and
adventurous. In the leveraged finance world, you will encounter companies
that put together comprehensive financing packages to exit bankruptcy just
hours before a federal court would have forced them to liquidate, private
equity shops that push the limits of corporate finance by strapping nearly
incomprehensible amounts of debt on companies, multinational corporations
avoiding hostile takeovers by issuing large amounts of debt in order to
execute share repurchase plans, and well-known organizations that need
every single dollar available to them in order to keep their lights on and
factories working. These types of complex transactions are part of the day-
to-day life of those working in leveraged finance.
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 9 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
21/120
The History of Leveraged Finance
Loans for companies
Leveraged finance originated from what would historically be thought of as
commercial banking. As companies needed money, they would typically go
to the loan officer of their local bank to obtain financing. Much like you
might need a loan to buy a house or car, companies have always needed loans
to buy properties or even fleets of cars. Lending institutions generally
distributed these loans in certain sizes and interest rates to companies, based
on the companys risk and size. Very similar to how a JPMorgan Chase,Wachovia, Bank of America, or Citigroup would give a home loan with a
certain interest rate to someone based on their personal credit score, these
institutions structured loans for corporate clients. Typically, the less credit
risk a company presented, the more money these banks would lend.
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, wasbecoming 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
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 tradingmarket 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
2006 Vault, Inc.10 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
22/120
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.
The bond market
In addition to being able to take out loans from banks, companies that are
large and stable enough have historically also had access to public bond
markets. To do this, companies enlist investment banks to issue bonds to
investors that promise a set interest rate of return on investment. Investors
independently analyze the company issuing a bond and determine the interest
rate that makes it worthwhile for them to take on the risk of the company not
making its scheduled payments. If acceptable to enough investors, the bond
is issued; these investors have essentially lent the company money through
this bond issuance.
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.
The expanding market of debt
The bond and the syndicated loan markets have also evolved and expanded
over the past few decades. In 2005, the U.S. syndicated loan market reached
issuance volumes near $1.6 trillion, nearly doubling its $800 billion volume
in 1995. In 2005, the high-yield bond market also more than doubled in
volume in the past 10 years, reaching approximately $100 billion, versus $40
billion in 1995. A vast majority of this evolution is due to exceptional credit
conditions, fewer bankruptcies, record low issuance rates, and the relative
value of the asset classes as investment areas for institutional investors.
This relative attractiveness of the debt markets is especially strong in light of
the equity market downturn in the early 2000s. With security and near-
guaranteed returns, the debt markets have seemed exceptionally moreattractive from an investment standpoint. If you knew that you could get 7 to
10 percent annual return investing in the loan of a relatively stable company,
wouldnt you put your money there, as opposed to buying shares in the equity
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 11 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
23/120
markets, which present greater risk? Furthermore, if a company defaults on
the loans, they are typically secured by the assets of the company, whether
those be airplanes, property, or even hamburgers. In contrast, if the stock of
a company loses all of its value, there is little to no recourse. As for high-yield
bonds, although not typically as secure as investment grade bonds, theyll
typically offer investors a return of 8 to 12%. Also, just like investment grade
bonds, high-yield bonds are senior to the equity of a company, and thus are
paid off first in the event of a bankruptcy liquidation.
Good news for the banks
Also, it is important to note that these lending transactions are very profitable
for institutions that arrange them, not just the institutional investors. For the
largest deals, this can mean tens of millions of dollars in arrangement and
syndication fees. For example, it was estimated that the fees for the financing
of the famed 1989 leveraged buyout of RJR Nabisco by Kohlberg Kravis
Roberts (immortalized in the book Barbarians at the Gate) were somewhere
in the hundreds of millions of dollars. Thus, armed with large balance sheets
and subsequently the ability to lend money to numerous companies, the bulge
bracket investment banks with historically strong commercial banking arms(JPMorgan, Bank of America, Citigroup) have become the dominant players
of the leveraged finance industry. Not only do these banks have the money
to lend and the historical know-how to do so, but they also have the priceless
investment banking relationships which they can use to propose financings.
Increasingly, leveraged finance is attracting new and different players to the
industry. Competition for providing large financing solutions to companies
has become intense, with many companies even conducting auctions to see
who brings the best financing package to the table. Realizing that they might
be late to the game, large banks are rapidly bulking up their leveraged finance
platforms in order to take advantage of the abundance of fees for arranging
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,
2006 Vault, Inc.12 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
24/120
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 havebeen 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 firms 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 corporatefinance, 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 motivationproviding financing for companiesis 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.
Leveraged Finance vs. CorporateFinance/Investment Banking
Are the leveraged finance and investment banking the same animal? Sort of.
As leveraged finance was originally a commercial banking function, most 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
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 13 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
25/120
groups dedicated to originating deals (proposing deals to existing or new
clients), following the capital markets, trading in and out of loan/bond
positions, selling these products to investors, and monitoring the firms
exposure to loans and bonds of issuers. Naturally, at pure investment banks
such as Goldman Sachs or Lehman Brothers that do not originate as many of
these types of debt transactions, there will typically be smaller groups
dedicated to following the markets, in more of a debt capital markets
generalist role. However, in both types of institutions, the leveraged finance
platform is typically part of a debt capital markets groupit just depends on
the volume of deals to determine how specific and/or large the groups will be.
A common misperception is that traditional investment banking only involvesproviding solutions and advice to companies (such as mergers and
acquisitions advice). In this regard, leveraged finance is different from
investment banking, since a leveraged finance bank is not only offering
advice for a financial problem, but also a product as a solution. However,
most people these days broaden their definition of investment banking to
include both offering advice to companies, as well as executing a financial
transaction, such as an initial public offering (IPO). In this sense, leveraged
finance is identicaljust as an investment bank covers a company in anindustry coverage group and works with its equity capital markets team to
structure an IPO, so does it provide the same service for leveraged finance
transactions. In the case of a leveraged finance transaction, the investment
bank also covers the company and works with people from its debt capital
markets team to structure a syndicated loan and/or high yield bond.
Unlike investment banking, however, there exist a number of other financial
institutions, such as General Electric or CIT Group, that arrange these similar
financing packages for companies, but do so without a coverage group or an
industry platform (which an investment bank would have). These financial
institutions still have relationships with companies, but they dont typically
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 youre a treasurer of a multi-billion dollar
company and you need a large loan for an acquisition, youll go to the firm
with the best interest rate, regardless of whether its 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.
2006 Vault, Inc.14 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
26/120
Different experiences: working in the coverage
group of an investment bank vs. leveraged
finance
Working in a coverage group or M&A at an investment bank differs greatly
from working in a debt capital markets (DCM) or equity capital markets
(ECM). As mentioned earlier (and will be discussed in more detail later),
there is more execution of deals in a DCM or ECM role. Whereas someone
in this role may not be as familiar with every facet of an industry like their
counterpart in a coverage group, they will generally have more breadth of
financial market knowledge.
This breadth vs. depth tradeoff is directly related to the amount of transactionexperience offered in leveraged finance. For example, the day-to-day 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 pitchingquite the contrary. While the industry coveragegroup might come up with and pitch the idea of a syndicated loan or high-
yield bond to finance an M&A deal, they will surely bring along 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
industrylets say running a health care companyyou 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
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 (whats 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
cant happenit certainly does, and even the top tier PE shops and hedge
funds seek people with very specific industry knowledge. However, its
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 15 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
27/120
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.
Types of Leveraged Finance Deals
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 youll 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 companys 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.
Opportunities In Leveraged Finance
There are so many different areas within leveraged finance and so many
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 andconducting research about the markets trends. For the person who enjoys the
asset management aspect of managing a firms exposure to the syndicated
loan/high yield bond markets, there are positions in internal credit/portfolio
2006 Vault, Inc.16 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
8/10/2019 Vault Career Guide to Leveraged Finance
28/120
management work. Finally, there is a sales & trading function for both
syndicated loans and high yield bonds.
However, very generally speaking, leveraged finance refers to the dealorigination functionwhen a team goes out to pitch a client, wins the
mandate, structures the loan/bond, markets it to investors, sells it, and then
closes and funds the transaction. This role as an analyst or associate caters to
the individual who enjoys managing numerous deals throughout this process,
who is a jack-of-all-trades from financial modeling to talking to investment
firms, and who thrives in the pace of a seemingly never-ending day.
Furthermore, when considering if leveraged finance is/is not the field for you,
it is important to realize that some firms are organized in a typical investmentbanking cubicle/office atmosphere, whereas some are organized like
trading floors. Some people feed off the energy from a football field-sized
area crammed with people chatting all day long, while others would prefer the
quieter nature of a cube or an office, where personal phone calls are not heard
by your neighbors and neighbors neighbors. This type of setup can make a
substantial difference in the day-to-day enjoyment of someones role in
leveraged finance.
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.
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 17 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
EBITDA
In leveraged finance, there are some common terms and phrases, from
revolving credit facility to senior debt, that you will learn as you 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.
Basically, EBITDA is a relative measure of a companys financial health.It can be compared across industries and company sizes. Even you, as
an individual, can calculate your own EBITDA. Called EBITDA, because
it represents Earnings Before Interest, Taxes, Depreciation, and
8/10/2019 Vault Career Guide to Leveraged Finance
29/120
2006 Vault, Inc.18 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Background of Leveraged Finance
Amortization, it measures a companys earnings from its operations.
What gets paid right after the costs of operating a company? The
interest on debtwhich is precisely why leveraged finance bankers anddebt players care. EBITDA is a proxy of how much debt any one
company, or individual, can afford.
For example, lets pretend you operate a lemonade stand. You probably
bought lemons, water, cups, ice, a stand, and some poster board for
advertising. Lets also say you paid someone to help you operate the
stand. Finally, lets 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 thedepreciation 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 EBITDAbefore you pay either interest or taxes. EBITDA is
your cash flow available for all sorts of thingsbuying another lemonade
stand, paying off debt on your credit card, or even just paying your taxes
and pocketing the rest.
When comparing companies and evaluating their operating health, most
leveraged finance bankers are concerned with a companys adjusted
EBITDA (the amount that can be considered regular EBITDA year-over-
year, adjusted for abnormalities and one-time costs), as well as the
companys revenue. The EBITDA margin (EBITDA / Revenue) is a simple
calculation of how adept a company is at converting its revenues into
what really mattersEBITDA. From EBITDA, one can determine how
much debt a company can support (leverage ratios), as well as how
much interest it can pay (interest coverage ratios). This, in turn,
determines purchase prices for LBOs, the size of bond/loan offerings,
and even the size of exit financings. In the world of leveraged finance,
no other financial term is as significant.
8/10/2019 Vault Career Guide to Leveraged Finance
30/120
In order to understand the leveraged finance industry and determine where
you would like to work within it, it is important to understand the different
players in the industry and the markets they serve. As in investment banking,
in leveraged finance there are typically three types of players: those that
originate and structure deals (called the sell-side), those that invest into
those deals (called the buy-side), and the clients that receive the financing.
The sell-side is comprised of investment banks and commercial finance
companies, the buy-side is comprised of investment firms such as hedge
funds and insurance companies, and the clients include both large
corporations and private equity shops. It is important to note that even though
one firm might be a particularly large player (buyer, seller or client) in the
leveraged loan market, it might not so be in the high-yield bond market.
In this chapter, well 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
firms 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.
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 typicallyprovides advisory solutions for clients; and third, the investment bank that
does have a commercial presence, but is considered boutique or regional.
Major Industry Players
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 19 R E E R
L I R R Y
CHAPTER 2
8/10/2019 Vault Career Guide to Leveraged Finance
31/120
The bulge-bracket investment bank with a
substantial commercial banking operation
These are truly the dominant players in the industry. These are firms that have
been lending to companies for years; therefore, their relationships with
issuersboth on the investment banking side and the commercial bankingsideare very strong. In other words, they that not only have they been a
clients 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
specifically dedicated to:
Originating transactions
Following the capital markets
Monitoring the client portfolio and outstanding exposure to certain clients
and financial markets Interacting with the rating agencies
Selling and trading both the syndicated loan and the high yield bond
2006 Vault, Inc.20 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
Top firms
Bank of America
Citigroup
Deutsche Bank
JPMorgan Chase
Wachovia
8/10/2019 Vault Career Guide to Leveraged Finance
32/120
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.
Also, generally speaking, because the leveraged finance operations of these
firms started as part of their commercial banking operations, the leveraged
finance groups in these types of investment banks will typically have more of
a commercial banking feel: a little more laid-back and a little bit less
hierarchical than their M&A counterparts. However, they still all fall underthe same corporate finance umbrella within the investment bank and they
interact with their corporate finance colleagues just about every minute of
every day.
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
working through the night, there tends to be more of a fire-drill, non-stop
nature to the leveraged finance work environment. Working on multiple deals
and managing numerous processes from pitch to close is a non-stop, full-time
job.
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 21 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
33/120
The standalone investment bank
Also players in the leveraged finance industry, albeit on a significantly
smaller scale, these firms have quite a different approach. Whereas an
investment bank with a strong commercial banking presence (such as
JPMorgan Chase and the other banks discussed in the previous section) seeksto maximize the number of companies it lends to in order to broaden its
commercial banking presence, a standalone investment bank such as
Goldman Sachs seeks to use its balance sheet in order to drive other fee-
related events. Without a commercial banking presence, these pure
investment banks would rather allocate their balance sheets to larger fee-
events for revenue generation, such as proprietary trading, rather than
investing and structuring syndicated loans or high-yield bonds for their
clients.
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
JPMorgan Chase or Bank of America will arrange a syndicated loan or high-
yield bond for just about any client of the investment or commercial bank for
any reason, whether it be as part of an LBO, IPO (or other larger deal), or
something simpler like a debt refinancing that is not related to another fee-
related event.
Also, as a syndicated loan tends to require more of a capital commitment than
a high-yield bond due to the sheer size of the loans, these standalone
investment banking firms tend to be more active in the high-yield bond
2006 Vault, Inc.22 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
Top firms
Credit Suisse
Goldman Sachs
Lehman Brothers
Merrill Lynch
8/10/2019 Vault Career Guide to Leveraged Finance
34/120
market than in the syndicated loan market. Furthermore, on average,
syndicated loans tend to be less profitable than their high-yield bond
counterparts, especially those that are not event-driven. Where a firm might
earn $1 to $2 million for arranging a $100 million syndicated loan for an LBO
financing, raising that same amount using high-yield bonds could earn the
bank anywhere from $3 to $5 million, possibly more. In this situation, the
standalone investment bank has made a quantity vs. quality tradeoff, opting
for the market with substantially less volume but a high rate of return for its
own money and time. This is especially true in the event of a general
refinancing, when these bonds and loans tend to earn substantially less.
Every firm has internal metrics for the rate of return it must earn for its own
balance sheet, for these firms, that rate is typically much lower than the
investment banks with commercial banking divisions.
Organizationally, these firms typically place their leveraged finance platform
into the debt capital markets portion of the corporate finance division of their
investment banks. Unlike their counterparts with commercial banking
operations, they typically do not have full teams dedicated to originating
transactions. Most of the deal origination at standalone investment banks
comes from an investment bank client coverage team; the market commentarywill from a debt capital markets group. Although a profit center for the
investment bank, the leveraged finance group at a standalone investment bank
will have substantially less transaction volume than the same groups at I-banks
with a commercial banking presence. Also, absent this presence, these
leveraged finance groups typically have a culture nearly identical to the rest of
the investment bank.
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
leveraged finance group at a standalone I-bank and a similar group at an
investment bank with commercial banking operations is the pace of the day,
since teams at standalone firms are generally working with fewer leveraged
finance deals. However, the deals are also generally more complex, as they
are event-driven (as discussed earlier). Subsequently, the analyst/associates
job is less about managing a variety of processes and more about working
through the nuances of a particular deal. This often translates into more
complex financial modeling, more intense due diligence, more complicated
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 23 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
35/120
presentations for lenders, and more intricate offering memorandums. Also,
since this type of leveraged finance platform might span multiple debt
markets, it is also possible that an analyst/associate here might see other types
of debt transactions, including high-grade bonds, private placements,
investment grade syndicated loans, and even mezzanine debt tranches.
The regional or boutique investment bank with
a commercial banking presence
These firms, which do have both investment and commercial banking
presences, are also players in the leveraged finance market. However, they
typically arrange financings in the large cap space for clients where they
have a distinct relationship, or they compete in the exceptionally profitable
middle market space. Larger firms in this category (such as ABN AMRO,
Barclays, and SunTrust) often have full-scale leveraged finance platforms,
but they might find themselves investing in these loans and bonds more often
than actually arranging them. The same is somewhat true of the smaller
lending operations, such as Jefferies, yet they generally compete for
financings in the middle market space.
A substantial difference between the large investment banks with commercialbanking arms and the smaller investment and commercial banks is the
seemingly limitless balance sheet ability the larger firms have to invest and
seek to put to work. Although they still have tens or maybe even hundreds of
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 ofevent-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
2006 Vault, Inc.24 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
Top firms
ABN AMRO
Jefferies & Co
KeyBank
National City
PNC
SunTrust
Wells Fargo
8/10/2019 Vault Career Guide to Leveraged Finance
36/120
financing packages are still comprised of leveraged loans and high-yield
bonds and are structured for the same clients and for the same purposes as are
the large investment and commercial banks.
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.
Junior resources at these firms are also sometimes considered part of
corporate finance programs as investment bankers, and sometimes they are
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
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 25 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
37/120
Commercial Finance Companies
If you were to take a brief look at the descriptions of commercial financecompanies on their web sites, you would find that these firms pride
themselves on providing lending, leasing, and other types of financial
solutions for clients. This is quite a different approach from a standalone
investment bank that provides advisory work and securities products to its
clients. Subsequently, for the leveraged finance platform of a commercial
finance company, everything from the client base to the product offerings is
different from the investment banking firms. In no specific order, major
players in this field include GE Commercial Finance, CIT Group, andCapitalSource.
These firms typically work very frequently with smaller mid-cap companies,
providing everything from financing for heavy equipment to multi-million
dollar revolving lines of credit. Due to the nature of these product offerings
and the size of these clients, most of these firmsleveraged 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 companys 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.
On the whole, the leveraged finance platform at a commercial finance
company would be smaller than that of an investment bank. Whereas thelargest investment banks might have a few hundred individuals in the U.S.
dedicated solely to sourcing and structuring deals, even the largest
commercial finance companies might have fewer than 100. With somewhat
less volume, these professionals typically have more all-encompassing roles,
as compared to their investment banking counterparts. Where someone could
expect to find both a capital markets team and a sales team at a large
leveraged finance shop, these functions are typically combined in the
commercial finance companies and the smaller investment banks.Furthermore, at the smallest commercial finance shops, the deal origination,
structuring, credit, capital markets work, rating agency presentation, and
closing responsibilities might all fall on the shoulders of a three- or four-
2006 Vault, Inc.26 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
38/120
8/10/2019 Vault Career Guide to Leveraged Finance
39/120
golf shirts as opposed to Hermes ties and Gucci loafers. Lunch outside the
office, as opposed to at ones 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.
Hedge Funds and Other InstitutionalInvestors
Hedge funds and institutional investors represent the buy-side of leveraged
finance. Responsible for a large amount of the growth in the leveraged loan
and high-yield bond markets, these investors are now placing billions of
dollars in the markets. As investors have chased places to put idle funds to
work, the markets have responded with more liquidity than ever, increasingly
complex products, and more innovative financial structures. Subsequently,
these investors have put the supply/demand equation into a serious
imbalance, thus making this an issuers market. Now, companies that would
ordinarily find themselves bankrupt in any other market are finding
themselves with multi-million dollar syndicated loans and high-yield bonds
at all-time record low interest rates.
One of the primary reasons institutional investors are interested in the
syndicated loan market and high-yield bond market is the relative value these
products offer to other asset classes. Furthermore, the products in these
markets trade off the underlying value of the creditthis means that a firm
typically only has to do their due diligence on a firm once, with the ability to
invest in multiple places in the capital structure of a firm. No longer areinvestors limited to playing in either the equity of a company or the bond
debt; instead, they have a variety of options. Whereas one investor might be
interested in debt of a company, it might find the risk/reward tradeoff of the
security of a syndicated loan more appropriate to its risk appetite, as opposed
to an unsecured, higher-interest-paying senior note.
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,
2006 Vault, Inc.28 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
40/120
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.
Reflecting the global financial markets, institutional investors tend to be
located all across the globe. It is not uncommon for an investor to be located
in Miami Beach, FL, Los Angeles, CA, or Greenwich, CT. Organizationally,
these firms tend to run fairly lean, only hiring individuals that can add
immediate value to their firm. As a growing number are playing in both theprimary and secondary leveraged loan and high-yield bond markets, they are
seeking individuals with prior credit experience. Individuals working in
leveraged finance have become a highly sought after commodity for hedge
funds. Some of these funds play entirely in the leveraged finance markets,
while most of the large firms typically have a set amount of their assets under
management invested into the markets.
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.
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 theroadshow 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,
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 29 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
41/120
Van Kampen, and SAC Capital. All of these investors, and more, are targeted
in the loan syndication process.
Culturally, it is tough to stereotype the institutional investor universe, as thesize and investment nature of the firm can have a dramatic impact on their
organization. (The Vault Career Guide to Hedge Funds is a good resource for
anyone seeking to understand more about these firms.) However, because
hedge funds generally represent an improvement in hours and, in some cases,
also represent a step up in pay, many former leveraged finance analysts and
associates seek careers at hedge funds. With a firm understanding of credit,
interaction with the leveraged finance markets, a wide arsenal of
relationships, and an understanding of a variety of transactions, the juniorresources at top-tier leveraged finance shops are frequently contacted by
headhunters and other placement professionals for positions at top-tier buy-
side shops. In these positions, these junior resources now become clients of
their former leveraged finance peers, investing in transactions they very well
might have structured when on the other side of the fence.
Private Equity and Financial SponsorsPrivate 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.
When a private equity shop seeks to purchase a company through a leveraged
buyout, it typically attains a syndicated loan and/or a high yield bond from a
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.
2006 Vault, Inc.30 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
42/120
Whether large or small, leveraged finance firms typically line up in droves to
provide this financing, as it is generally a very large fee event for a firm. The
approximately $25 billion LBO of RJR Nabisco by KKR in 1989 (still the
most notable private equity transaction in the leveraged finance market
historically), generated hundreds of millions of dollars of fees for the lending
institutions. Since those early LBO days, with the rapid expansion of the
leveraged loan and high-yield bond market, there has been a flurry of buyout
activity. Numerous private equity firms have raised multi-billion dollar
investment funds in the past few years in order to continue to execute
multibillion dollar LBOs, such as the $15 billion purchase of Hertz, or the
$11.3 billion purchase of SunGard. With LBO volume nearly $150 billion
annually, up from $40 billion in 2000, and private equity fundraising volume
nearing $500 billion, up from approximately $200 billion in 2000, LBO
activity is only expected to continue long into the near future. Needless to
say, the field of leveraged finance is eagerly anticipating this activity.
No target is off-limits for private equity firms armed with such financing.
These firms will even enlist the bank accounts of rival firms in order to
execute mega-LBOs. Recent corporate divestitures and secondary buyout
activity, where a firm is bought by one private equity shop and later sold toanother, have also become a rapid source of expansion in the private 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.
Leveraged finance firms execute many other types of transactions for
financial-sponsor owned companies other than LBOs. Very common in
strong financial markets, many private equity shops will seek to take some of
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.
Career-wise, private equity shops tend to be another major career alternative
for those in the leveraged finance field. An investment banking professional
who has completed the analyst program at a top-tier leveraged finance group
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 31 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
43/120
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 firms funds (a share of the firms
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 stablecompanies (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
Madison Capital.
2006 Vault, Inc.32 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
Major Industry Players
8/10/2019 Vault Career Guide to Leveraged Finance
44/120
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 industrys
transactions.
The Leveraged Loan
What it is
A leveraged loan is a loan arranged by a financial institution for an issuer,
which is syndicated to a broader set of investors. Leveraged loans range 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
financial institution on a best-efforts basis, where there is no guarantee that
a certain amount of financing will be raised, or they are arranged on an
underwritten basis, where the arranger provides the entire financing upfront
and syndicates its exposure to other firms. The former example can be
likened to the good old college try, whereas the latter example is a
guarantee to an issuer that it will receive a certain amount of funding.
Underwritten financings typically occur when a financing is necessary to a
certain event (such as an acquisition). Because of the large commitments of
The Products
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 33 R E E R
L I R R Y
CHAPTER 3
8/10/2019 Vault Career Guide to Leveraged Finance
45/120
capital from financial institutions that are required for underwritten
financings, and because the arrangers of underwritten financings assume the
risk of syndicating the loan to investors, they are typically more expensive for
an issuer (the organization borrowing the loan) than a best-efforts loan. In
the best-efforts case, the financing firm is only responsible for the amount it
has itself committed to the transaction, not the entire amount.
Structure: Syndicated loans typically come in one of two forms: Revolving
credit (RC) facilities and term loans. They are generally issued together and
comprise the different tranches (pieces) of what is known as a loan
package. RC facilities are similar to credit cards, while term loans are
similar to a standard car loan:
The revolving credit facility: similar to credit cards
A revolving credit facility is an unfunded financial instrument that can be
drawn upon at the issuers discretion, just like a credit card. Also like a credit
card, RC facilities have annual administration costs, a fee for drawing on
them (similar to an APR for holding a balance) or an annual fee if unused.
RC facilities are usually provided by standard commercial banks, much like
the credit card industry.
At the end of their duration, the balance of a revolving credit facility is due,
just as with a credit card. Also like a credit card, an RC can also be 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.
Unlike credit cards which have an essentially unending duration, RC facilities
are issued in durations of 5 to 7 years, based on an issuers needs. Also,
companies typically have only one revolving credit facility, whereas many
people have multiple credit cards. RC facilities are dominated in a specific
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.
The term loan: similar to car loansThe term loan is a fully funded instrument, which is drawn from the moment
it is issued, much like a car loan. In this case, there are no undrawn or drawn
fees, but annual administration fees do exist. Like a regular car loan, the term
2006 Vault, Inc.34 C R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Products
8/10/2019 Vault Career Guide to Leveraged Finance
46/120
loan is issued for a duration of anywhere from 5 to 7 years, depending on the
needs of the issuer. Also like the car loan, the term loan is paid off over time
(amortization) with a balloon-payment at the end of its duration. However,
typically this annual rate of amortization is 1% of the loan, as opposed to
much higher rates for car payments. Finally, the term loan is also a rated
instrument by the rating agencies, which like an individuals credit score in
the car loan application process, will play a large role in determining loan
sizes and interest rates.
Unlike a car loan, term loans are generally invested in by institutional
investors, rather than commercial banks, hence why they are typically
referred to as institutional tranches. As with the RC facility, term loans arealso floating-rate instruments with a fixed rate paid above LIBOR (London
Interbank Offered Rate), as opposed to a fixed interest rate for a car payment.
There are a variety of term loans, including term loan As (issued to higher-
rated credits with shorter durations, typical commercial bank investors, and
larger amounts of amortization), term loan Bs (with longer durations,
institutional investors, and less amortization), and 2nd lien term loans (with
similar structures to term loan Bs, 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
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. Heres a look at the standard process:
a) The pitch: In this phase, a financing firm has proposed a leveraged
finance product to an issuer (a company). Through regular dialogue with
Visit the Vault Finance Career Channel at www.vault.com/finance with
insider firm profiles, message boards, the Vault Finance Job Board and more. 35 R E E R
L I R R Y
Vault Career Guide to Leveraged Finance
The Products
8/10/2019 Vault Career Guide to Leveraged Finance
47/120
the company, either a coverage team or a leveraged finance relationship
manager has found that a syndicated loan and/or high-yield bond might be
the right financial solution to the issuers needs. In such a case, the
coverage investment banker will bring along the appropriate people from
leveraged finance, including a senior member of an origination team and
a capital markets expert to pitch t