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LEVER
FINAN
CARE
VAULT CAREER GUIDE TO
LEVERAGED
FINANCE
LEVER
FINAN
CARE
VAULT CAREER GUIDE TO
LEVERAGED
FINANCE
WILLIAM JARVIS
AND THE STAFF OF VAULT
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!
Table of Contents
INTRODUCTION
THE SCOOP
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Structuring/Origination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Credit/Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Ratings and Capital Structure Advisory . . . . . . . . . . . . . . . . . . . .47
Corporate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
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GETTING HIRED
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ON THE JOB
Chapter 8: Leveraged Finance Positions, Pay,
and Lifestyle
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Investment Banks: Structuring/ Origination . . . . . . . . . . . . . . . . .84
Investment Banks: Capital Markets/Loan Sales and Distribution 87
Investment Banks: Credit/Risk/Corporate Banking/Ratings
Advisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
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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
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Introduction
Right now, it seems like every other headline in The Wall Street Journal is 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.
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LEVER
AGED
FINAN
CHAPTER 1
THE SCOOP
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.
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.
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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, Dominos 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.
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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.
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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 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 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 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.
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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.
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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 deal
origination 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 investment
banking 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.
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
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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.
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Top firms
Bank of America
Citigroup
Deutsche Bank
JPMorgan Chase
Wachovia
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 banking
sideare 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
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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 under
the 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.
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Top firms
Credit Suisse
Goldman Sachs
Lehman Brothers
Merrill Lynch
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Top firms
ABN AMRO
Jefferies & Co
KeyBank
National City
PNC
SunTrust
Wells Fargo
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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.
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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 the
primary 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 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,
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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 the
size 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 junior
resources at top-tier leveraged finance shops are frequently contacted by
headhunters and other placement professionals for positions at top-tier buyside 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.
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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 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
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 industrys
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
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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
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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.
h) Investor commitment period: As these commitments trickle or flood in
(depending on how enthusiastic investors are) the book is built. From
here, the sales and capital markets teams meet on a regular basis to give
periodic syndication updates to the company. As the commitments are
finalized and the commitment deadline passes, the sales team, capital
markets group, and structuring team will sit down to review the
transaction. At this point in time, transactions often change in price and/or
structure.
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 wont 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
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
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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 noncallable 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
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 Burnhams Michael Milken, annual new issuance market volumes
in the high-yield bond market have grown to nearly $100 billion per year.
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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
When structuring a financing transaction, such as a high-yield bond or a
syndicated loan, it is not uncommon for a client to have prior outstanding
debt. Whether this consists of current liabilities from an accounts payable
system or other outstanding syndicated loans, existing debt can be
dramatically impacted when new debt is placed within a capital structure.
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.
A comprehensive capital structure would look like the following:
1st lien debt (Syndicated loans)
+ 2nd lien debt (2nd lien syndicated loans)
+ Other Senior Secured debt (Senior secured notes)
Total Senior Secured debt
+ Senior Notes (Senior notes)
+ Other Senior debt
= Total Senior debt
+ 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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Structuring/Origination
In a role that can be very closely compared to investment banking coverage,
those in leveraged finance structuring/origination functions are primarily
concerned with generating revenues for the firm. When a leveraged finance
organization has a specific group dedicated to structuring and origination, this
teams focus will be successfully closing as many transactions as possible, as
more deals equals more revenue. In this sense, these groups operate as welloiled machines: Pitch Win Execute Close Repeat.
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.
The structuring and origination function is the heart of leveraged finance.
Lifestyles are typically hectic, as different deals are managed in a variety of
stages. This lifestyle has been described as a zoo on fire, as the deal team
is constantly managing a very wide variety of people and processes.
However, with this significant and never-ending responsibility comes a sense
of pride, as this function is often recognized as leading the battle cry and
delivering financial results.
Credit/Risk
Whereas the main function of the structuring/origination deal teams is to
bring in deals, the credit/risk teams are focused on protecting the firms
balance sheet. Well before a deal ever goes to market and typically before it
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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.
In order to underwrite a transaction, a deal team works with a credit team
quite intensely during the structuring of a deal. This credit team sets
expectations for the deal team, in terms of the expected hold position the
firm will take, as well as the terms and conditions that the firm must have in
its legal documents. In order to meet these needs and assist with the credit
approval process, the deal teams generally put together credit decks, which
can range from 20 to more than 100 pages of analysis on a target company,
its industry, its peers, its financial performance, and the proposed transaction.
Whereas a deal team in leveraged finance might have four members (MD, VP,
associate and analyst), it is generally uncommon for that deal team to 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 firms 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
invest in credits. During the investor commitment period in the deal
lifecycle, these credits are analyzed by those internal credit committees.
Even the rating agencies use a similar understanding of the deal to make a
ratings assessment. Because of the importance of being able to analyze credit
risk, thorough training in credit analysis can lead to many career options in
the world of leveraged finance.
Credit/risk also monitors a number of important trends throughout the firm.
The group generally works with the corporate banking team to understand the
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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.
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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 companys future.
Organizationally, these teams tend to be much smaller than their leveraged
finance counterparts. Whereas a firm might have 100+ professionals
dedicated to structuring and originating transactions, it might only have 10 to
15 ratings professionals. As these professionals are usually paired with deal
teams on transactions in the pitching and ratings process, they tend to work
the standard long hours of their corporate finance peers and can usually
expect the exact same compensation. With a position that affords intense
analysis of companies and many potential scenarios, this job tends to be both
quite analytical and thought-provoking in nature.
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 firms 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 clients 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.
When putting together pitches and internal credit presentations, leveraged
finance teams almost always include comparable transactions of industry
peers, as well as financial information about the client. This is where
corporate bankers come in. Not only do they know about the transactions of
industry peers, but they generally have a lot of industry knowledge about the
peers and can comment on them. As for financial information on the client,
the corporate banking team maintains updated financials based on quarterly
reporting associated with syndicated loan facilities and/or SEC filings.
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Capital Markets
Capital markets can be considered as sandwiched between corporate finance
investment banking and sales & trading. At most firms, this is the group that
will conduct research on a financial market, passing along this information to
deal teams in order to provide deal structuring advice. At smaller firms, this
role is partnered with sales responsibilitiescapital markets professionals at
these firms not only conduct research on financial markets, but also work
with investors in order to sell the product. However, at the most active
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leveraged finance shops, the capital markets role is more the former than 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.
Capital markets professionals are particularly important in the leveraged
finance field. A talented capital markets person will understand market
trends, be able to communicate these on an issuer-by-issuer basis, have a
thorough knowledge of recent transactions, and also have a broad
understanding of the financial markets in general. Professionals in capital
markets work very closely with leveraged finance deal teams in order to
generate ideas, provide advice on interest rates and structuring solutions, and
even give periodic market updates as requested by clients. A great capital
markets professional makes the life of the deal teams and sales teams
substantially easier.
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 dodeal teams are continually seeking guidance for the next
upcoming major transaction, or prepping for Monday morning firmwide
market update calls.
Capital markets professionals tend to be former structuring professionals who
rely on the breadth of their previous experience. Junior capital markets
resources generally serve something of an analytical and research-oriented
function. (This should not to be confused with equity or high-yield research
teams, which are totally different functions altogether. The type of research
capital markets performs is more trend-oriented and/or comparable
transaction-oriented, rather than the intense financial modeling of specific
companies or financial products that is the work of the other research
functions.) These capital markets teams also maintain league tables (industry
rankings), a variety of market update slides, and transaction case studies. As
deal teams are often asked by clients, what other transactions like this are out
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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.
The secondary loan market is arranged quite differently. As trading now
becomes a part of the equation, firms have organized platforms to meet the
needs of their investors. Secondary loan sales personnel work with investors,
as well as their own internal research teams, to generate trading transactions
and ideas. Once structured, this information is passed along to the trading
team, which executes the trade. In these markets, some credits are especially
active and pique the interest of investors on a regular basis. Other credits are
less active and investors take more of a buy-and-hold strategy. Naturally, the
firms that generate the most secondary trading volume are either the premier
players in the primary leveraged finance markets and/or are the big players in
sales & tradingJPMorgan, Credit Suisse, Citigroup, Deutsche Bank,
Goldman Sachs, Bank of America, Lehman Brothers, and Morgan Stanley.
When compared to other markets, movements in the secondary loan market
are not as extreme. For a loan to move 2 pts from 102 to 100 within a period
of a week would be considered a large event. Like their high-yield
counterparts, loans also move in 1/8ths. However, unlike their high-yield and
equity counterparts, loans are generally less volatile, since they are based on
the creditworthiness of a company, which, too, is less volatile. Furthermore,
investors in these loan markets typically take very large longer-term positions
in the multiple millions of dollars, which dwarfs the average hold size and
period of equity holders. With this hold position in mind, a simple 1/8th
movement can mean millions of dollars in loss or gain, which explains why
investors in this market are usually not interested in too much volatility.
In the past decade the secondary loan trading market has truly expanded.
With annual trading volume increasing every year and nearing $200 billion
(versus just $30 billion in 1995), this market continues to flourish. In 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 dont mind early mornings.
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The Transactions
CHAPTER 5
Leveraged finance teams work with a wide variety of types of transactions,
including very high-profile event-driven financings, such as LBOs, corporate
restructurings, and spin-off financings, as well as the routine debt
refinancings. However, each type plays a key role in the debt capital markets,
as well as the field of leveraged finance. Just as many individuals have debt
in multiple forms like credit card loans and house mortgages, so do most large
companies.
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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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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 companys 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.
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 equationthe 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.
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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.
A prime example of a recent event-driven financing is the $400M million
dividend recapitalization for Burger King. In this transaction, the private
equity owners who bought Burger King a few years earlier in an LBO
structured a dividend financing, which subsequently added more debt to
Burger Kings capital structure. This transaction was completed in order to
take part of their financial investment off the table. Dividend financings
are quite common among financial sponsor-owned firms, where they have
invested substantial sums of money and are seeking to reap the financial
rewards for doing so.
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, youll find the
pure investment banks such as Goldman and Lehman Brothers, and other
large players, such as Deutsche Bank and Credit Suisse.
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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.
Although not the most glamorous transactions, leveraged finance teams
generally enjoy working on these refinancing and debt tender deals every so
often, as they are the most predictable in terms of hours, expectations, and
general impact on lifestyle. Without the need for so much of the process
(such as visiting the rating agencies) a standard refinancing, tender offer, or
drive-by financing could take 4 weeks from pitch to close, whereas an LBO
could take eight to 12 weeks from pitch to close, maybe more, depending on
regulatory approval. The easier a deal process is to manage, the more
enjoyable it typically is for everyone involved from a leveraged finance
perspective.
However, because loan refinancings are so much more standard in nature,
they also are not as profitable for the firm to arrange. Generally arranged as
best-efforts (refinancings are underwritten in only the rarest of transactions),
these deals command arrangement fees of only a few hundred thousand
dollars, unlike the multimillion dollar fees for underwritten event-driven
financings. On the other hand, high-yield tender offers and drive-by
financings still command somewhat large fees (although not what a first-time
issuance would bring in). Whereas a $500 million loan issuance for a debt
refinancing might earn a few hundred thousand dollars in fees, the same highyield bond will likely earn a couple of million dollars. This also speaks
volumes in terms of the complexity of an issuance in the high-yield market,
as well as the frequency of high-yield versus syndicated loan issuance.
In this sense, the pure investment banks are on the quality side of the
quantity versus quality fence, generally leading very few loan refinancings,
while sticking to tender offers and drive-by high-yield bond issuance.
However, when financial markets hit rough times and the event-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.
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LEVER
AGED
FINAN
CHAPTER 1
GETTING HIRED
Chapter 6: What Leveraged Finance Firms are
Looking For
Chapter 7: The Hiring Process and Interview
Personality Type
A few personality traits are standard across leveraged finance platforms.
Leveraged finance shops are interested in people who are trustworthy,
intelligent, friendly, and detail-oriented team players, with exceptional people
skills. In order to land a position in leveraged finance, you must show these
characteristics both on your resume and in your interview.
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
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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.
Its 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
season. The target programs vary from firm to firm and lists of them can
often be found on each firms 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.
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The Resume
Inundated by thousands of resumes, hiring managers find it very easy to
distinguish who is genuinely interested in the business. In a business driven
by absorbing and understanding a large amount of information very quickly,
a well-crafted resume speaks volumes about an individual. A poorly puttogether resume, on the other hand, will get you rejected before you have a
chance to even interview. In order to make the most of this opportunity to
shine, you should prepare a resume that is specific to leveraged finance and
investment banking, and that also conveys all of the personality traits
discussed above. Then tie these into a solid cover letter.
First things firstthe 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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Admissions
Academics
Career Opportunities
Quality of Life
Social Life
Hiring Trends
As of this books 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 dotcom 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.
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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.
More so in leveraged finance than in investment banking as a whole, MDs and
VPs who worked from analyst to associate to VP to MD had very little to gain
from leaving the field, getting the MBA, and returning back to leveraged
finance. As the old saying goes, the proof is in the pudding. If the most
senior MDs do not have MBAs, then there was likely very little need for it to
advance to their level when they were being promoted. The same holds very
true for commercial banks and finance companies.
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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.
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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 candidates chances. Conversely, a voice of support could be
the edge needed to give that candidate an offer. So its critical to convey a
consistent message throughout the process, avoid controversial topics, and be
polished. Practicing for this only makes your chances better.
As for the commercial banks and non-investment banking platforms, their
recruiting process is largely the same, yet generally more focused on a
position within leveraged finance, not just the firm in general. They often
recruit from a wider set of target schools, with emphasis on location and
region. Also, their interviews tend to be a little bit less competitive, as people
are interviewing for a specific group, within a specific division of a firm,
rather than just for a division of the firm in general, like the investment banks.
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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.
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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.
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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.
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LEVER
AGED
FINAN
CHAPTER 1
ON THE JOB
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 heres an indepth view of what you generally can expect.
Well 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.
Pay is fairly consistent among the different corporate finance programs of
investment banks-these programs generally pay analysts and associates in
line with their peers for fear of losing top talent to other shops. These
programs pay analysts on a July-to-July cycle, which is definitely against-thegrain of the industry. However, once promoted to associate, firms tend to pay
on the calendar year, with bonuses hitting bank accounts in mid-February.
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.
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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 VPs 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
directorthe 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.
Associate: Either fresh out of a top-tier MBA program or recently promoted
from third-year analyst, the associate role is highly sought after. For those topperforming analysts fortunate enough to land the analyst-to-associate (A-to-A)
promotion, this position has a lot of upside. Able to hit the ground running more
quickly than their just-out-of-B-school counterparts, these associates stand a
much higher chance to be ranked near the top of their class. The downside is
that an A-to-A might have trouble separating herself from the day-to-day
financial modeling that came with the analyst lifestyle and subsequently, might
run the risk of becoming a micromanager. The deal lifecycle is so processoriented that this can easily become the downfall of an associate.
Associates generally have a very similar lifestyle to that of an analyst. Eager to
be promoted to VP, they arrive in the office early. They typically leave late,
reviewing work with their analysts to get projects completed. It is not
uncommon for even the most senior associates to work 80+ hour workweeks,
including nearly every weekend. As is the case with the deal cycle in leveraged
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finance, there are typically quite a few projects needing to be completed at any
given time. This lifestyle lends itself to the never-ending workday.
However, associates are paid accordingly with other corporate finance
investment banking associates, which tends to reward them handsomely for
their work ethic. With base salaries as high as $95k, signing bonuses in the
$25-45k range, and full-year bonuses well in excess of $150k, the first-year
associate gets paid well for his efforts. The more experienced associates can
expect to be compensated very well in the good economic years. This can
translate into bonuses near $300k, with salaries clearing $150-200k. However,
in slower years, this bonus amount can easily be cut in half. Whereas analysts
are generally very excited to make their base salary in their bonus in a good
year, senior associates are hoping to double their salary amount.
Analyst: Hired either straight out of an undergraduate program, or as a
lateral hire from another firm, the analyst is the workhorse of leveraged
finance. A fantastic analyst can make an associates life much easier, whereas
a sub-par analyst can make a deal team miserable. Responsible for
everything from financial modeling to handling all of the details on a roadshow, an analyst in leveraged finance is a jack-of-all-trades. The best analysts
have an unending source of energy, a positive attitude, attention to
presentation detail, a solid understanding of financial modeling, a list of
outstanding tasks always with them, the foresight to predict the next step in
the process, and most important, the ability to be trusted with anything.
Outstanding analysts will be given even more work, more responsibility, and
the best deals. In leveraged finance, those deals are often the most
complicated and the highest-profile.
Analysts are paid like their peers in corporate finance investment banking,
which means they stand to earn $100k+ in their first year on the job.
However, on the whole, leveraged finance analysts typically work just as
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 analysts 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.
Generally staffed by a VP in their team, analysts and associates are usually
placed on a variety of deals, which means that they should not all be live or
closing at the same time. Inevitably, this is never actually the case. This deal
variety helps to ensure that these junior resources will be able to work with
different issuers, deal teams, and financial products. At first, most junior
resources are staffed alongside other seasoned ones.
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line (they are not directly responsible for generating revenues for a firm),
and this means that their pay scale might not be quite the same as 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 teams owners (the client). While marquee players bring in extraordinary
financial contracts, the very best coaches are generally not too far behind.
As the firms 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.
Associate/analyst: As part of the corporate finance program, the associate and
analyst role within these teams is much like their peers in other groups. On a
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, thats not
necessarily true.
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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.
Managing director/vice president: Similar to other senior resources, the
lifestyles of the managing director and vice president roles within these teams
is less intense than their coverage counterparts. With the exception of corporate
banking, these roles are not usually the primary client contacts for the firm.
Also, since they are not usually aligned with revenue generation, they are
compensated on a different scale. Whereas an all-star managing director in
origination might get the credit for bringing in $25 million of fees for a deal and
will be paid in-line with this fee generation (or lack thereof in a bad year),
someone in a non-revenue generation role will have more stable earnings. This
means that the top-tier ratings advisory managing director will most likely not
earn as much as the top-tier origination managing director. However, when it
comes to compensation for group/department heads, all bets are off.
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.
Associate/analyst: Much like the origination/structuring and capital markets
junior resources, these individuals are part of the corporate finance program
at the investment banks. However, the ebb-and-flow of workload in these
positions tends to be more similar to origination than to capital markets.
Their day-to-day will fluctuate based on their group and or deal-flow, but will
generally be long hours, marked with long-term projects and firm deadlines,
such as the creation of a ratings agency presentation. Also, the pay will
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 banks 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 eventdriven 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.
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
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Lifestyle
Of course, the greater pay at an investment banks 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.
In a bad economy, no job is safe at the investment bank. Investment banks
follow an up-or-out policy when it comes to scheduled promotions, such as
the promotion from second-year analyst to third-year analyst. These hurdles
can be very hard to overcomeregardless of an individuals performance
when a firm finds it has over-hired or the economy turns south. Considering
A-to-A promotions are only 50% in a good economy, this is definitely a major
issue to take into account. In contrast, commercial banks and finance
companies, such as GE and CIT, do not follow the same rigor and structure
these firms typically promote people into jobs when they are ready, rather
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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 elementsa 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
analysts contract is either extended for another year, making them a thirdyear 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 analysts salary. Also, this bonus is indicative of the
analysts rank in comparison to his peers. As you might expect, the secondyear bonus is larger than the first, and is indicative of whether or not an
analyst can expect a promotion. If promoted to third-year analyst, the
individual can also expect another $10k bump in base pay and a larger yearend July bonus. Finally, as rumored across Wall-Street, there is the
occasional bonus well-below the class range, which is basically a signal to an
analyst that she is not wanted at a firm.
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
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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.
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lawyers. You ignore a voice mail from your buddies, knowing that youll
need all of the next two hours. You put everything else that was on your chair
into the stack of stuff thatll get done later.
8:50 a.m.: Youre already cranking into the changes, saving the presentation,
when your MD drops by your desk and says, Lets 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.: Youve 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 VPs desk, books and laptop
in hand. The associate is right behind you and now youre just waiting on
your MD, who is on the phone with another client.
10:30 a.m.: Now in the car, youre only 10 minutes away from the clients
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 its a refinancing, its multiple billions of dollars in
financing for one of the firms 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 clients 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
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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 emails to determine what you need to conquer in the afternoon. Youve 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 youve 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
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. Theyre worried about you, since you havent
called in a few weeks. You tell them that youll 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 dont 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 youve 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.
3:55 p.m.: The printing is complete. Promising to meet the VP and MD in
the conference room three floors down, you and the associate grab your
notepads, financial calculators, binders of company information, and the
credit packages. You should make it with a minute to spare.
3:59 p.m.: Nearly out of breath, but right on time, you pass out the credit
packages to everyone in the room: the financial sponsors 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 theyre 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
deliver. The financial sponsor coverage team schedules another sitdown on
Tuesday morning to discuss the sponsors reaction to the financing proposal,
since they will be with the client all day on Monday. However, at this point, your
firm is just trying to remain competitive with the other financing firms and its
expected that there are many rounds of bidding and credit approval remaining,
if your private equity group also remains competitive with its overall bid.
5:00 p.m.: With so much racing around, you avoid your desk in order to grab
a quick cup of coffee with an associate friend of yours. A recent business
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school grad, she talks about how much you would enjoy the two-year 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 firms 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 theres
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, youre 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
task to complete before Monday morning. Your task is to start sketching
PowerPoint slides with the associate. Enjoyable? Somewhat. Time
Consuming? Very.
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.
7:15 p.m.: Dinner arrives, so you go downstairs to pick it up. Carrying it
upstairs, you locate an unsuspecting conference room, which will now smell
like General Tsos chicken for the next two days. Most of the analysts and
associates from your group eat dinner together, talking about anything and
everything.
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 youll 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
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
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time youve got in the next 24 hours. Also, you know the deal team will be
impressed when youve made good progress by tomorrow on the outline.
2:00 a.m.: Realizing that youre 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
At an investment bank, the first-year associate role tends to be filled either by
someone who was promoted from a third-year analyst to associate, or by
someone who was hired from an MBA program. Lateral hires into associate
roles are not uncommon, but they do not comprise the vast majority of firstyear hires.
The A-to-A step (from third-year analyst to associate) is a very significant
promotion, as it recognizes that an analyst has the skills necessary to manage
a larger portion of a deal. This promotion often comes with the annual July
bonus, a re-signing bonus of $30-40k, a month for incoming associate
training (or a month off), a base pay increase to $95-$105k, and a stub bonus
in January ($40-50k), in order to formally switch to the Jan-to-Jan pay cycle.
Not only are these promotions somewhat rare, but usually promoted analysts
choose to go other routessuch as business school, private equity, or hedge
fundsat this time.
Graduates coming from MBA programs are also given the same signing
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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8:40 a.m.: Realizing that youve 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
Tuesday, theyd 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 Tuesdays 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
be made to that info memo, so that it can be sent to investors immediately
after the meeting. This will definitely be your weekend work.
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
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Vice President
The promotion to vice president signifies a shift in responsibilities to more deal
management and client interaction. At investment banks, this promotion is often
very formal and is reviewed by a management committee, as well as the leveraged
finance group heads and the teams managing directors. This review is necessary
because it generally means an employee will be paid bonuses in company stock,
will be assuming client relationships, and will likely spend the majority of her
remaining career with the firm. At commercial banks and finance companies, the
promotion process is still rigorous, but usually not as intense and can generally be
approved by a single group head. Also, without the typical investment banking
stratification or class system, a promotion to VP is not usually dependent on
years of service with the firm at a commercial bank or finance company.
The vice president role is the point at which firms tend to depart from 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
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 firms 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 firms deal flow, and your team,
as this could have a very substantial impact on compensation in the future.
It is also at the VP level where compensation tends to be paid mostly in stock
options, as bonuses well exceed base salaries. (In good years, this can even
be true at the senior associate level.) At any rate, most firms will choose to
reward a certain amount (lets say $250k, for example) of compensation in
cash, with the remaining portion in stock options that must vest over a period
of time. This tends to encourage the top performers to spend the majority of
their careers with firms so that they do not leave cash on the table. Most firms
also structure a formula into the equation that makes all of your options vest
immediately once you reach a certain age, enabling you to leave the firm at
that time without leaving money on the table.
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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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 firms 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 firms needs. The best-of-thebest performers might find themselves in an MD role in their early/mid 30s,
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,
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.
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As for hedge funds, analysts within leveraged finance are highly soughtafter 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.
As for senior professionals, the lifestyle tends to be similar to leveraged
finance in terms of hours. However, there tends to be less of a sales
nature to the positions at PE firms or hedge funds when compared to
leveraged finance or investment banking, as compensation at both PE
shops and hedge funds hinges on the performance of financial assets,
not selling a firms service. At the highest level, there is still a sense of
networking and client interaction at private equity shops, in order to buy
firms and maintain relationships. At hedge funds, the portfolio manager
is less engaged with this social aspect of working, but still is wined-anddined at the expense of the investment banks.
Instead of the process-oriented deal environment of leveraged finance,
these private equity shops and hedge funds tend to employ a buy-and-hold
strategy. Where the leveraged finance firm holds the underwrite exposure
of a company for a few weeks until a syndication is complete, a hedge
fund might hold a position for months, and a private equity shop for years.
Both firms seek value in the underlying asset, not the completion of a
transaction. Due to this buy and hold mentality, this lends a more
normal lifestyle, with more predictable hours for those in private equity
and at hedge funds. These firms also tend to reward based on the
financial performance of the transaction, which can be extremely profitable
for the senior management of the firms. Although leveraged finance can
be very lucrative for an individual, the sky is the limit when it comes to
compensation at the highest ranks of private equity and hedge funds.
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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 crme de la crme 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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