Vault Career Guide to Leveraged Finance

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2006 Vault Inc.

LEVEFINACAR

VAULT CAREER GUIDE TO

LEVERAGEDFINANCE


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2006 Vault Inc.

LEVEFINACAR

VAULT CAREER GUIDE TO

LEVERAGEDFINANCE

WILLIAM JARVISAND THE STAFF OF VAULT


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Copyright 2006 by Vault Inc. All rights reserved.

All information in this book is subject to change without notice. Vault makes no claims as to

the accuracy and reliability of the information contained within and disclaims all warranties.

No part of this book may be reproduced or transmitted in any form or by any means,

electronic or mechanical, for any purpose, without the express written permission of Vault Inc.

Vault, the Vault logo, and the most trusted name in career informationTM are trademarks of

Vault Inc.

For information about permission to reproduce selections from this book, contact Vault Inc.,

150 West 22nd St, New York, New York 10011, (212) 366-4212.

Library of Congress CIP Data is available.

ISBN 1-58131-502-3

Printed in the United States of America


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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!


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Vault Career Guide to Leveraged Finance

Table of Contents

Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Syndicated Loan Sales & Trading (Primary and Secondary) . . . .51

High Yield Bond Sales & Trading . . . . . . . . . . . . . . . . . . . . . . . .53

Chapter 5: The Transactions 55

The Leveraged Buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55

The Corporate Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

Other Event-Driven Financings . . . . . . . . . . . . . . . . . . . . . . . . . . .59

The Debt Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

GETTING HIRED 63

Chapter 6: What Leveraged Finance Firms are

Looking For 65

Personality Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67

The Resume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

Chapter 7: The Hiring Process and Interview 71

The Standard On-Campus Interview/ Recruiting Process . . . . . .74

Lateral Hires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76

Typical Interview Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79

ON THE JOB

Chapter 8: Leveraged Finance Positions, Pay,

and Lifestyle 83

Investment Banks: Structuring/ Origination . . . . . . . . . . . . . . . . .84

Investment Banks: Capital Markets/Loan Sales and Distribution 87

Investment Banks: Credit/Risk/Corporate Banking/Ratings

Advisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

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Table of Contents

Commercial Banks and Commercial Finance Companies . . . . . .90

Chapter 9: The Leveraged Finance

Career Path 95

Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95

A Day in the life of a Leveraged Finance Structuring/

Origination Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96

Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102

A Day in the Life of a Leveraged Finance Structuring/

Origination Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103

Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106

Managing Director/Group Head . . . . . . . . . . . . . . . . . . . . . . . . .107

Final Analysis 111

About the Author 112

Visit the Vault Finance Career Channel at http://finance.vault.com with

insider firm profiles, message boards, the Vault Finance Job Board and more. xi R E E R

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Visit the Vault Finance Career Channel at www.vault.com/finance with

insider firm profiles, message boards, the Vault Finance Job Board and more. 1 R E E R

L I R R Y

Right now, it seems like every other headline in The Wall Street Journalis a

blockbuster M&A event, a multi-billion dollar LBO, or a rise from

bankruptcy by a fallen corporate angel. Much as they did in the late 1990s,

both investors and corporations have cash burning holes in their pockets

because of positive economic conditions, and are subsequently pushing the

financial markets near new heights. Like the late 90s, the result is record

M&A activity, a boom in hedge fund activity, a rise in venture capital

spending, a return to the buyout activity of the late 1980s, and a general

feeling of excitement on Wall Street. But unlike the late 1990s, this flurry of

financial activity is somewhat tempered, as today bankers distinctly

remember the subsequent massive economic downturn of only a few years

ago and its effects on global financial markets. Nevertheless, the major forces

that have spurred this investment activity, such as historically low interest

rates, low credit default rates, and healthy cash balances are making Wall

Street an exciting place to be.

Because of low interest rates, relatively few bankruptcies, and investors

hesitation to invest in the equity markets, no area has seen more activity than

debt markets. This activity has manifested itself into record global

borrowings, as global credit issuance is expected to exceed $7 trillion in

2006, dwarfing its $2 trillion level in 1995 and far surpassing its $4.5 trillion

level in 2005.

A vast majority of this activity has been spurred by the field of leveraged

finance. With financial institutions eager to lend money and borrowers

excited to capitalize on market conditions, the effects in just the past few

years are easily identified: the second, third, and fourth largest LBOs of all

time, record fundraising by hedge funds and private equity shops, M&A

activity levels reaching the highs of 1999/2000, all-time-low borrowing costs

for companies, and off-the-charts volume in the high-yield bond and

syndicated loan markets. For all of these reasons and many more that we will

discuss in this Vault Guide, leveraged finance is a good place to be.

Introduction


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CHAPTER 1

LEVEAGEFINA

THE SCOOP

Chapter 1: The Background of Leveraged Finance

Chapter 2: Major Industry Players

Chapter 3: The Products

Chapter 4: Leveraged Finance Groups

Chapter 5: The Transactions


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The Background of

Leveraged Finance

The financial markets can be divided into two major sections: debt and equity.

Under this overarching organization structure, think of leveraged finance as

the intersection of investment banking, commercial banking, hedge funds,

private equity, and sales & trading on the debt side of the financial markets.

Generally speaking, leveraged finance is a platform in all major investment

and commercial banks. It is a function that taps into two major financial

markets (the high-yield bond market and the leveraged loan marketmore on

those later), is accessed by nearly all private equity shops and hedge funds on

a regular basis, and has been one of the booming profit centers of Wall Street

for the past two decades. For analysts and associates, it has become a prime

training ground for the most elite private equity shops and hedge funds.

Subsequently, for careers on Wall Street, leveraged finance is one of the most

sought-after fields.

Why leveraged finance?

Along with its role as a potential springboard to careers in private equity and

hedge funds, leveraged finance is also unique from a career perspective

because it provides a vantage point into most of the other areas of investment

banking, as well as sales & trading. For analysts and associates, working in

leveraged finance allows one to see what else is out there career-wise in the

financial markets, without ever having to leave the field.

Another advantage of working in leveraged finance is that in general, it is an

area of investment banking that is focused on closing transactions. In a

corporate finance role within a coverage team in an investment bank (a team

that covers a specific industry and pitches deals to companies in that

industry), one analyst might close one or two deals a year in an investment

bank. By contrast, in leveraged finance, its feasible to close five to 10

transactions a year. Leveraged finance affords analysts and associates a

continually busy pace and good deal and client exposure along the way.



L I R R Y

CHAPTER 1


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L I R R Y


The Background of Leveraged Finance

Standard & Poors (S&P)

AAA

Moodys

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AA+

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Aa2

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A+

A

A-

A1

A2

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BBB+

BBB

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Hows your credit?

How are these ratings assigned? A company is analyzed by the rating

agencies and is assigned a rating(s) based on these agencies assessment ofthe companys credit risk. The rating agencies assess the quality of the

companys operations, its future potential, past track record, and financial

health. Once this analysis is completed, the agencies assign ratings to the

company and monitor the company going forward. Anything under a certain

rating threshold is considered leveraged. A company that chooses not to get

rated is considered not rated. Also, companies that are rated investment

grade by one agency and leveraged by another are considered crossover

credits.

The words leveraged and debt normally have negative connotations. But

this shouldnt necessarily be the case. Millions of people have loans for their

homes. In this sense, they are borrowing money and are leveraged, as most

of them do not have the cash on hand to pay off their loans immediately. Just

because someone has a home loan or a car loan, or does not have much cash

on hand, does not mean they are not worth lending to. If that were the case,

no college student would have a credit card. The more debt someone has in

relation to their cash or future earnings potential, the more leveraged they

are.Investment grade companies are the least risky of those in the debt

markets. They are typically your long-standing, exceptionally stable

companies, such as General Electric, Pfizer, John Deere, and ExxonMobil.

Their credit history is outstanding and they have the ability to borrow large

amounts of debt at any time, since they typically have the cash on hand to pay

back those loans at any given time. Of these thousands of companies, only a

handful have the highest debt rating (Triple A).

To illustrate the difference between investment grade and leveraged, consider

the following example. Suppose you have a rich friend who asks to borrow

money from you for lunch. Youd probably not hesitate to give him $10 or

so, because you know youre likely to be paid back immediately (and

probably without having to hound him for the money). That friend would be

considered investment grade. Now consider the college buddy who always

asks to borrow money for beer runs, yet amazingly can never remember to

pay you back. That college buddy would be considered leveraged.

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Ratings determine access to financial markets

Of course, there are advantages to being investment grade. Since investment

grade companies are consider much less risky, they have the ability to accessa number of other financial markets, including the commercial paper market.

Furthermore, these investment grade companies are typically able to get

much larger amounts of debt than their leveraged counterparts. For example,

as a triple-A rated company, General Electric has syndicated loan facilities of

over $20 billion, not to mention any other debt, such as bonds or commercial

paper. In contrast, the largest syndicated loan package for a leveraged

company is probably somewhere near $6 to 8 billion.

It is important to note that entire financial markets exist for companies in both

of these buckets (investment grade and leveraged). When it comes to bonds,

there is a high grade market for investment grade companies, and a high-yield

market (also known as junk bonds) for leveraged companies. For loans, there

is a high grade syndicated loan market (also known as the investment grade

syndicated loan market) for investment grade issuers and a leveraged loan

market for those companies that are considered leveraged.

For companies that are not rated, their access to either market is determinedby their financial ratios, while crossover companies typically access the

market that plays to the better of their ratings.

The field of leveraged finance is concerned with riskier companies that

typically seek funded debt as a necessary piece of their capital structures.

Because syndicated loans and high-yield bonds are necessary for these

companies operations, leveraged finance can be a little more exciting and

adventurous. In the leveraged finance world, you will encounter companies

that put together comprehensive financing packages to exit bankruptcy just

hours before a federal court would have forced them to liquidate, private

equity shops that push the limits of corporate finance by strapping nearly

incomprehensible amounts of debt on companies, multinational corporations

avoiding hostile takeovers by issuing large amounts of debt in order to

execute share repurchase plans, and well-known organizations that need

every single dollar available to them in order to keep their lights on and

factories working. These types of complex transactions are part of the day-

to-day life of those working in leveraged finance.



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The History of Leveraged Finance

Loans for companies

Leveraged finance originated from what would historically be thought of as

commercial banking. As companies needed money, they would typically go

to the loan officer of their local bank to obtain financing. Much like you

might need a loan to buy a house or car, companies have always needed loans

to buy properties or even fleets of cars. Lending institutions generally

distributed these loans in certain sizes and interest rates to companies, based

on the companys risk and size. Very similar to how a JPMorgan Chase,Wachovia, Bank of America, or Citigroup would give a home loan with a

certain interest rate to someone based on their personal credit score, these

institutions structured loans for corporate clients. Typically, the less credit

risk a company presented, the more money these banks would lend.

This type of lender-client relationship has existed for centuries. But in the

past few years these lending institutions have evolved, as have the needs of

their clients. In the late 1990s investment banks and commercial banks were

able to once again legally merge due to the repeal of the Glass-Steagall Act.

This means that investment banks are now not only able to provide financial

advice to clients, but also utilize the know-how of their commercial banking

division to deliver that financial solution. Together, this has allowed

companies to access the financial markets even more readily and has

fundamentally changed the investment banking relationships on Wall Street.

During the past few decades, the fundamental loan product has also changed.

The original loan between two parties, referred to as a bilateral loan, wasbecoming obsolete. Clients were becoming larger and their financing needs

were growing. Subsequently, lending institutions started finding others to

provide the loans alongside them. Instead of bearing the risk of an entire $1

billion loan, they found they could significantly diminish their risk by

syndicating this loan exposure to others. With institutional investors also

seeking new ways to place money into the financial markets, the syndicated

loan became a prime source of investment. Subsequently, the syndicated loan

market exploded in volume, so much in fact that a secondary loan tradingmarket was created out of it. Today, as opposed to a bilateral relationship

with a single lending institution, a company that issues a loan can have

hundreds of investors in its syndicated loan. This investor interest not only


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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.

The bond market

In addition to being able to take out loans from banks, companies that are

large and stable enough have historically also had access to public bond

markets. To do this, companies enlist investment banks to issue bonds to

investors that promise a set interest rate of return on investment. Investors

independently analyze the company issuing a bond and determine the interest

rate that makes it worthwhile for them to take on the risk of the company not

making its scheduled payments. If acceptable to enough investors, the bond

is issued; these investors have essentially lent the company money through

this bond issuance.

Being able to issue bonds has made it possible for companies to raise money

for acquisitions, to invest in capital projects, or to refinance existing debt.

Together, the bond and loan represent the major financial instruments in the

world of leveraged finance.

The expanding market of debt

The bond and the syndicated loan markets have also evolved and expanded

over the past few decades. In 2005, the U.S. syndicated loan market reached

issuance volumes near $1.6 trillion, nearly doubling its $800 billion volume

in 1995. In 2005, the high-yield bond market also more than doubled in

volume in the past 10 years, reaching approximately $100 billion, versus $40

billion in 1995. A vast majority of this evolution is due to exceptional credit

conditions, fewer bankruptcies, record low issuance rates, and the relative

value of the asset classes as investment areas for institutional investors.

This relative attractiveness of the debt markets is especially strong in light of

the equity market downturn in the early 2000s. With security and near-

guaranteed returns, the debt markets have seemed exceptionally moreattractive from an investment standpoint. If you knew that you could get 7 to

10 percent annual return investing in the loan of a relatively stable company,

wouldnt you put your money there, as opposed to buying shares in the equity



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markets, which present greater risk? Furthermore, if a company defaults on

the loans, they are typically secured by the assets of the company, whether

those be airplanes, property, or even hamburgers. In contrast, if the stock of

a company loses all of its value, there is little to no recourse. As for high-yield

bonds, although not typically as secure as investment grade bonds, theyll

typically offer investors a return of 8 to 12%. Also, just like investment grade

bonds, high-yield bonds are senior to the equity of a company, and thus are

paid off first in the event of a bankruptcy liquidation.

Good news for the banks

Also, it is important to note that these lending transactions are very profitable

for institutions that arrange them, not just the institutional investors. For the

largest deals, this can mean tens of millions of dollars in arrangement and

syndication fees. For example, it was estimated that the fees for the financing

of the famed 1989 leveraged buyout of RJR Nabisco by Kohlberg Kravis

Roberts (immortalized in the book Barbarians at the Gate) were somewhere

in the hundreds of millions of dollars. Thus, armed with large balance sheets

and subsequently the ability to lend money to numerous companies, the bulge

bracket investment banks with historically strong commercial banking arms(JPMorgan, Bank of America, Citigroup) have become the dominant players

of the leveraged finance industry. Not only do these banks have the money

to lend and the historical know-how to do so, but they also have the priceless

investment banking relationships which they can use to propose financings.

Increasingly, leveraged finance is attracting new and different players to the

industry. Competition for providing large financing solutions to companies

has become intense, with many companies even conducting auctions to see

who brings the best financing package to the table. Realizing that they might

be late to the game, large banks are rapidly bulking up their leveraged finance

platforms in order to take advantage of the abundance of fees for arranging

these transactions. Although the big firms continue to dominate the industry

issuance in loans and bonds, smaller firms have realized they can make an

exceptional return on their money and time by providing financing to middle-

market companies (middle market is generally defined as a company with

less than $500 million in annual revenues and/or less than $50 million in

annual EBITDA). For example, by raising $25 million for a company by

assembling a syndicate of lending institutions hungry to put idle cash to work,


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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 havebeen rising over time, this will not deter companies from continuing to seek

syndicated loans and high-yield bonds, which have become a necessary part

of a firms capital structure. Although it will be unlikely that firms will want

to refinance their existing debt with more expensive (higher interest) debt,

many issuers will still turn to these financing sources for general corporate

needs or to acquire other companies. Also, with the rise of interest rates has

come a rise in M&A volume, which fuels the issuance of debt to make those

mergers and acquisitions happen. Finally, to quote a tenet of basic corporatefinance, the cost of debt is often substantially less than the cost of equity. So

it seems likely that these leveraged finance shops will remain in business and

profitable for many, many years to come.

The leveraged finance markets are quite complex, but the underlying

principle and motivationproviding financing for companiesis simple.

Whether this financing involves a loan to refinance existing debt, or the

issuance of a complex loan and high-yield bond package in order to execute

the largest LBO of all time, these markets are quite often at the center of the

action on Wall Street. Companies still call their banks and loan officers for

advice on syndicated loans, but at the same time are now speaking to

managing directors at investment banks that can provide a number of

complex financing alternatives, tapping a variety of financial markets. With

nearly $1 trillion of combined annual global volume in the U.S. in the

leveraged loan and high-yield bond markets, these leveraged finance markets

provide ample access for investors to put money to work.

Leveraged Finance vs. CorporateFinance/Investment Banking

Are the leveraged finance and investment banking the same animal? Sort of.

As leveraged finance was originally a commercial banking function, most of

the premier leveraged finance shops can be found within the investment

banks of the largest finance institutions, such as JPMorgan Chase, Bank of

America, and Citigroup. Because of the sheer amount of leveraged finance

deal volume at these institutions, there will typically be entire floors and



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groups dedicated to originating deals (proposing deals to existing or new

clients), following the capital markets, trading in and out of loan/bond

positions, selling these products to investors, and monitoring the firms

exposure to loans and bonds of issuers. Naturally, at pure investment banks

such as Goldman Sachs or Lehman Brothers that do not originate as many of

these types of debt transactions, there will typically be smaller groups

dedicated to following the markets, in more of a debt capital markets

generalist role. However, in both types of institutions, the leveraged finance

platform is typically part of a debt capital markets groupit just depends on

the volume of deals to determine how specific and/or large the groups will be.

A common misperception is that traditional investment banking only involvesproviding solutions and advice to companies (such as mergers and

acquisitions advice). In this regard, leveraged finance is different from

investment banking, since a leveraged finance bank is not only offering

advice for a financial problem, but also a product as a solution. However,

most people these days broaden their definition of investment banking to

include both offering advice to companies, as well as executing a financial

transaction, such as an initial public offering (IPO). In this sense, leveraged

finance is identicaljust as an investment bank covers a company in anindustry coverage group and works with its equity capital markets team to

structure an IPO, so does it provide the same service for leveraged finance

transactions. In the case of a leveraged finance transaction, the investment

bank also covers the company and works with people from its debt capital

markets team to structure a syndicated loan and/or high yield bond.

Unlike investment banking, however, there exist a number of other financial

institutions, such as General Electric or CIT Group, that arrange these similar

financing packages for companies, but do so without a coverage group or an

industry platform (which an investment bank would have). These financial

institutions still have relationships with companies, but they dont typically

provide M&A or IPO advice like an investment bank. The loan market is a

private market, and as such is not limited in terms of what type of firm can

provide lending solutions. If youre a treasurer of a multi-billion dollar

company and you need a large loan for an acquisition, youll go to the firm

with the best interest rate, regardless of whether its an investment bank or

not. In this regard, leveraged finance is more similar to commercial lending

(i.e., lending to a company so that they can buy copiers, printers, etc.) than it

is similar to investment banking.


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Different experiences: working in the coverage

group of an investment bank vs. leveraged

finance

Working in a coverage group or M&A at an investment bank differs greatly

from working in a debt capital markets (DCM) or equity capital markets

(ECM). As mentioned earlier (and will be discussed in more detail later),

there is more execution of deals in a DCM or ECM role. Whereas someone

in this role may not be as familiar with every facet of an industry like their

counterpart in a coverage group, they will generally have more breadth of

financial market knowledge.

This breadth vs. depth tradeoff is directly related to the amount of transactionexperience offered in leveraged finance. For example, the day-to-day grind

might be a little more hectic in a leveraged finance role, as a deal team could

potentially be closing two multi-billion dollar transactions on the same day

something that would be quite unlikely in a coverage role. However, this

transaction-oriented environment involves substantially less idea generation

and pitching of ideas to clients than one would find in an investment banking

industry coverage group. That is not to say that someone in leveraged finance

will not do any pitchingquite the contrary. While the industry coveragegroup might come up with and pitch the idea of a syndicated loan or high-

yield bond to finance an M&A deal, they will surely bring along the

appropriate people from the leveraged finance platform to comment on the

markets, comparable transactions, and provide other relevant advice.

If you are beginning your career in finance, it is important to think about your

long-term career goals when considering a role in investment banking

coverage versus leveraged finance. If your goal is to work in a specific

industrylets say running a health care companyyou would probably be

better served in a health care coverage group at an investment bank.

However, if you are interested in working at a hedge fund or private equity

shop, working in leveraged finance will give you the opportunity to interact

with many of these firms, as you close numerous deals of theirs.

Furthermore, you will be trained in certain debt metrics (whats typically

called credit training), which are useful in understanding the industry and

are not typically emphasized in the coverage side of the bank. This is not to

say that moving from a coverage group to a private equity shop or hedge fund

cant happenit certainly does, and even the top tier PE shops and hedge

funds seek people with very specific industry knowledge. However, its



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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.

Types of Leveraged Finance Deals

There are a wide variety of deals executed within leveraged finance. Most

common are syndicated loans and high-yield bonds for working capital or

general corporate purposes (day-to-day financing needs). However, in

leveraged finance youll also find leveraged buyouts, when private equity

shops and financial sponsors use borrowed money to purchase companies.

There are also corporate restructurings and DIP (Debtor-in-Possession)

facilities, where companies are entering/exiting bankruptcy and are trying to

avoid Chapter 7 bankruptcy (liquidation). In this case, the companies will

work with both the financial institutions leveraged finance groups and the

federal bankruptcy court to get financing packages in order to stay in

business. Leveraged finance also covers dividend transactions, where

loans/bonds are used to pay out the owners of a business, recapitalizations,

where a companys financial structure is changed, IPO/spin-off financings,

where the proceeds of a loan/bond are in tandem with an IPO or a spin-off of

a business unit, and even general debt refinancings, where an existing

loan/bond is taken out with a new loan/bond. Examples of each of these types

of deals is discussed in more detail in Chapter 5.

Opportunities In Leveraged Finance

There are so many different areas within leveraged finance and so many

related to the field that there is place for almost everyone. For example, there

is deal origination, for the person who enjoys managing numerous processes

such as putting together presentations, financial modeling, and pitching.

There is also capital markets work (for both syndicated loans and high yield

bonds) for the person who enjoys understanding the flow of the markets andconducting research about the markets trends. For the person who enjoys the

asset management aspect of managing a firms exposure to the syndicated

loan/high yield bond markets, there are positions in internal credit/portfolio


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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 dealorigination functionwhen a team goes out to pitch a client, wins the

mandate, structures the loan/bond, markets it to investors, sells it, and then

closes and funds the transaction. This role as an analyst or associate caters to

the individual who enjoys managing numerous deals throughout this process,

who is a jack-of-all-trades from financial modeling to talking to investment

firms, and who thrives in the pace of a seemingly never-ending day.

Furthermore, when considering if leveraged finance is/is not the field for you,

it is important to realize that some firms are organized in a typical investmentbanking cubicle/office atmosphere, whereas some are organized like

trading floors. Some people feed off the energy from a football field-sized

area crammed with people chatting all day long, while others would prefer the

quieter nature of a cube or an office, where personal phone calls are not heard

by your neighbors and neighbors neighbors. This type of setup can make a

substantial difference in the day-to-day enjoyment of someones role in

leveraged finance.

The culture of leveraged finance depends almost entirely on the culture of the

firm in general. At a pure investment bank such as Goldman Sachs, you

might find the culture to be almost entirely opposite from that of the

commercial lending arm of a larger financial institution, such as General

Electric Commercial Finance. Whereas one might be very rigid and

hierarchical, the other might be golf-shirt and khakis on Fridays, where an

analyst can chat it up with any managing director at any time. This kind of

specific nuance is covered in the next chapter.



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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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Amortization, it measures a companys earnings from its operations.

What gets paid right after the costs of operating a company? The

interest on debtwhich is precisely why leveraged finance bankers anddebt players care. EBITDA is a proxy of how much debt any one

company, or individual, can afford.

For example, lets pretend you operate a lemonade stand. You probably

bought lemons, water, cups, ice, a stand, and some poster board for

advertising. Lets also say you paid someone to help you operate the

stand. Finally, lets say you sold all of your lemonade. If you were to

have paid these costs and come out positive, you would have made an

operating profit. But you still have not paid interest on your credit card

for the stand, nor have you paid the taxes on your income. Ignoring thedepreciation on your lemonade stand (since you never factored that cost

in because it was not a real cost to you) the amount of profit you have

left is your EBITDAbefore you pay either interest or taxes. EBITDA is

your cash flow available for all sorts of thingsbuying another lemonade

stand, paying off debt on your credit card, or even just paying your taxes

and pocketing the rest.

When comparing companies and evaluating their operating health, most

leveraged finance bankers are concerned with a companys adjusted

EBITDA (the amount that can be considered regular EBITDA year-over-

year, adjusted for abnormalities and one-time costs), as well as the

companys revenue. The EBITDA margin (EBITDA / Revenue) is a simple

calculation of how adept a company is at converting its revenues into

what really mattersEBITDA. From EBITDA, one can determine how

much debt a company can support (leverage ratios), as well as how

much interest it can pay (interest coverage ratios). This, in turn,

determines purchase prices for LBOs, the size of bond/loan offerings,

and even the size of exit financings. In the world of leveraged finance,

no other financial term is as significant.


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In order to understand the leveraged finance industry and determine where

you would like to work within it, it is important to understand the different

players in the industry and the markets they serve. As in investment banking,

in leveraged finance there are typically three types of players: those that

originate and structure deals (called the sell-side), those that invest into

those deals (called the buy-side), and the clients that receive the financing.

The sell-side is comprised of investment banks and commercial finance

companies, the buy-side is comprised of investment firms such as hedge

funds and insurance companies, and the clients include both large

corporations and private equity shops. It is important to note that even though

one firm might be a particularly large player (buyer, seller or client) in the

leveraged loan market, it might not so be in the high-yield bond market.

In this chapter, well review some of the major players on both the sell-side

and the buy-side. The specific firms we mention are chosen based on the

league tables of the sell-side firms and on reputation for the buy-side firms

and private equity shops. Although a good starting point for considering

potential employers, these lists should be considered in light of a particular

firms culture and the emphasis it places on its leveraged finance group versus

its other operations.

As this book is more focused on sell-side firms than those on the buy-side, in

Chapter 4 you will find a more detailed discussion of the sell-side-an

overview of the typical groups/departments within those organizations. For

a more comprehensive overview of buy-side firms and private equity shops,

check out the Vault Career Guide to Hedge Funds and the Vault Guide to the

Top Private Equity Employers.

Investment Banks

There are a few distinct types of investment banks in the world of leveraged

finance: first, the bulge bracket investment bank with a large commercial

banking operation; second, the standalone investment bank that typicallyprovides advisory solutions for clients; and third, the investment bank that

does have a commercial presence, but is considered boutique or regional.

Major Industry Players



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The bulge-bracket investment bank with a

substantial commercial banking operation

These are truly the dominant players in the industry. These are firms that have

been lending to companies for years; therefore, their relationships with

issuersboth on the investment banking side and the commercial bankingsideare very strong. In other words, they that not only have they been a

clients commercial bank (lending institution) for many years, but they also

have a history of providing financial and M&A type advice to these

corporations. Therefore, when one of their clients needs a loan or bond, these

investment banks are typically called upon to provide their advice and

expertise-as they have been for many years. These investment/commercial

banks place a large amount of emphasis on their leveraged finance operations

because of the substantial amount of fees generated from these transactions.Most of these firms have dedicated leveraged finance professionals in all of the

major financial market locations: New York City, Chicago, Houston/Dallas,

Los Angeles/San Francisco, London, and Hong Kong.

Typically, these firms will have an entire leveraged finance platform under

the debt capital markets heading within the corporate finance section of the

investment bank. Some of these firms have entire teams dedicated solely to

originating deals, while others will align this origination responsibility into

their industry coverage groups. Regardless of how it chooses to structure

these operations within their organization, the bulge-bracket investment bank

with a substantial commercial banking operation will have resources

specifically dedicated to:

Originating transactions

Following the capital markets

Monitoring the client portfolio and outstanding exposure to certain clients

and financial markets Interacting with the rating agencies

Selling and trading both the syndicated loan and the high yield bond


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Top firms

Bank of America

Citigroup

Deutsche Bank

JPMorgan Chase

Wachovia


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Because of the vast expansion of the field of leveraged finance, as well as the

increase in size and scope of the financial markets, these types of firms are

redefining stereotypical investment banking: they are becoming one-stop

shops for clients. As the commercial banking operations of these firms have

become more integrated with their investment banking operations, a client

can rely on one banker to get nearly everything it needs, including M&A

advice, a syndicated loan, a high-yield bond, an IPO, or even savings and

checking accounts. Furthermore, clients can now count on one banker to

know everything about their companies, which creates a very trusting

relationship. Since most of these clients started at one point or another with

a small loan from one of these banks, it comes as little surprise that leveraged

finance contacts are very often the managers of these extremely valuable

relationships. Needless to say, this is very good exposure for a young

leveraged finance analyst or associate.

Also, generally speaking, because the leveraged finance operations of these

firms started as part of their commercial banking operations, the leveraged

finance groups in these types of investment banks will typically have more of

a commercial banking feel: a little more laid-back and a little bit less

hierarchical than their M&A counterparts. However, they still all fall underthe same corporate finance umbrella within the investment bank and they

interact with their corporate finance colleagues just about every minute of

every day.

Typically, these firms will place analysts and associates directly from their

corporate finance investment banking programs into their leveraged finance

division, just as they would place analysts/associates into any other industry

coverage group. Furthermore, analysts and associates are treated exactly the

same as their other corporate finance peers in just about every aspect.

However, unlike at a coverage group, where an analyst or associate might

have a substantial amount of down time during the afternoons before

working through the night, there tends to be more of a fire-drill, non-stop

nature to the leveraged finance work environment. Working on multiple deals

and managing numerous processes from pitch to close is a non-stop, full-time

job.



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The standalone investment bank

Also players in the leveraged finance industry, albeit on a significantly

smaller scale, these firms have quite a different approach. Whereas an

investment bank with a strong commercial banking presence (such as

JPMorgan Chase and the other banks discussed in the previous section) seeksto maximize the number of companies it lends to in order to broaden its

commercial banking presence, a standalone investment bank such as

Goldman Sachs seeks to use its balance sheet in order to drive other fee-

related events. Without a commercial banking presence, these pure

investment banks would rather allocate their balance sheets to larger fee-

events for revenue generation, such as proprietary trading, rather than

investing and structuring syndicated loans or high-yield bonds for their

clients.

This is not to say that these firms do not arrange syndicated loans and high-

yield bonds. On the contrary, they do and they are quite good at it. As just a

pure matter of transaction volume, however, they just do not have the breadth

of experience or leveraged finance market presence. However, they will seek

to do this type of arranging of financing for firms where an obvious M&A

relationship, or other type of fee relationship, exists. For this reason, a much

larger portion of the leveraged finance deals handled by a standalone

investment bank will be LBO, IPO, spin-off, or M&A-related. (The firms

bankers in other departments will be generating fees for work on these larger

deals that have a leveraged finance component.) In contrast, a firm such as

JPMorgan Chase or Bank of America will arrange a syndicated loan or high-

yield bond for just about any client of the investment or commercial bank for

any reason, whether it be as part of an LBO, IPO (or other larger deal), or

something simpler like a debt refinancing that is not related to another fee-

related event.

Also, as a syndicated loan tends to require more of a capital commitment than

a high-yield bond due to the sheer size of the loans, these standalone

investment banking firms tend to be more active in the high-yield bond


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Top firms

Credit Suisse

Goldman Sachs

Lehman Brothers

Merrill Lynch


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market than in the syndicated loan market. Furthermore, on average,

syndicated loans tend to be less profitable than their high-yield bond

counterparts, especially those that are not event-driven. Where a firm might

earn $1 to $2 million for arranging a $100 million syndicated loan for an LBO

financing, raising that same amount using high-yield bonds could earn the

bank anywhere from $3 to $5 million, possibly more. In this situation, the

standalone investment bank has made a quantity vs. quality tradeoff, opting

for the market with substantially less volume but a high rate of return for its

own money and time. This is especially true in the event of a general

refinancing, when these bonds and loans tend to earn substantially less.

Every firm has internal metrics for the rate of return it must earn for its own

balance sheet, for these firms, that rate is typically much lower than the

investment banks with commercial banking divisions.

Organizationally, these firms typically place their leveraged finance platform

into the debt capital markets portion of the corporate finance division of their

investment banks. Unlike their counterparts with commercial banking

operations, they typically do not have full teams dedicated to originating

transactions. Most of the deal origination at standalone investment banks

comes from an investment bank client coverage team; the market commentarywill from a debt capital markets group. Although a profit center for the

investment bank, the leveraged finance group at a standalone investment bank

will have substantially less transaction volume than the same groups at I-banks

with a commercial banking presence. Also, absent this presence, these

leveraged finance groups typically have a culture nearly identical to the rest of

the investment bank.

At the standalone investment bank, the overall lifestyle will be similar to the

investment bank with a large commercial banking presence. Analysts and

associates are also part of the investment banking corporate finance program

and are expected to work long hours. The only difference between a

leveraged finance group at a standalone I-bank and a similar group at an

investment bank with commercial banking operations is the pace of the day,

since teams at standalone firms are generally working with fewer leveraged

finance deals. However, the deals are also generally more complex, as they

are event-driven (as discussed earlier). Subsequently, the analyst/associates

job is less about managing a variety of processes and more about working

through the nuances of a particular deal. This often translates into more

complex financial modeling, more intense due diligence, more complicated



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presentations for lenders, and more intricate offering memorandums. Also,

since this type of leveraged finance platform might span multiple debt

markets, it is also possible that an analyst/associate here might see other types

of debt transactions, including high-grade bonds, private placements,

investment grade syndicated loans, and even mezzanine debt tranches.

The regional or boutique investment bank with

a commercial banking presence

These firms, which do have both investment and commercial banking

presences, are also players in the leveraged finance market. However, they

typically arrange financings in the large cap space for clients where they

have a distinct relationship, or they compete in the exceptionally profitable

middle market space. Larger firms in this category (such as ABN AMRO,

Barclays, and SunTrust) often have full-scale leveraged finance platforms,

but they might find themselves investing in these loans and bonds more often

than actually arranging them. The same is somewhat true of the smaller

lending operations, such as Jefferies, yet they generally compete for

financings in the middle market space.

A substantial difference between the large investment banks with commercialbanking arms and the smaller investment and commercial banks is the

seemingly limitless balance sheet ability the larger firms have to invest and

seek to put to work. Although they still have tens or maybe even hundreds of

billions of dollars to potentially lend, these large regional banks will arrange

financing typically only for local companies where they can leverage the

power of their relationship for future ancillary business, such as

checking/savings accounts or other treasury business, such as hedging and

foreign exchange. In this sense, their relationships, rather than the fees ofevent-financings, drive their lending rationale. Furthermore, they seek to

place their capital to work in other areas of the bank and opt not to enter the

highly competitive large cap leveraged finance space. At any rate, the


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Top firms

ABN AMRO

Jefferies & Co

KeyBank

National City

PNC

SunTrust

Wells Fargo


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financing packages are still comprised of leveraged loans and high-yield

bonds and are structured for the same clients and for the same purposes as are

the large investment and commercial banks.

Even further down the scale of size, many smaller boutique investment banks

have formed lending units by raising a specific amount of funds (typically $1 to

$5 billion) for the sole purpose of arranging financing packages for clients. Like

the pure investment banks, they too are not chasing a quantity of transactions;

instead, they are typically seeking event-driven deals. In order to distribute their

capital wisely, these firms tend to work with smaller companies in the middle

market space. However, they still arrange financing for the same variety of

transactions that the larger players do and they tend to interact with the same top-tier private equity shops and hedge funds. On occasion, they will even work

with venture capital firms, which is something that the larger leveraged finance

shops very rarely do. Also, these smaller lending institutions tend to own a

larger piece of the financing package than their larger leveraged finance

counterparts and they tend to syndicate to a much smaller investor universe.

At these firms, the workplace culture is typically more laid-back than at the pure

investment banks and in general is more similar to a commercial banking

operation. Also, with less deal volume than their larger counterparts, one can

generally expect to close fewer transactions at these firms, yet be much more

acutely involved in every piece of the leveraged finance process. With much less

transaction volume, analysts and associates at these shops typically become even

more involved in every aspect of the process and this will add to the depth of

their working experience. . Also, with generally fewer people in the leveraged

finance groups, analysts/associates have an opportunity to take on a substantial

amount of responsibility and even truly develop client relationships.

Junior resources at these firms are also sometimes considered part of

corporate finance programs as investment bankers, and sometimes they are

not. This distinction depends entirely on the firm, as do the culture and hours.

Hours tend to fluctuate with the peak times of a deal, such as the closing and

funding of a transaction



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Commercial Finance Companies

If you were to take a brief look at the descriptions of commercial financecompanies on their web sites, you would find that these firms pride

themselves on providing lending, leasing, and other types of financial

solutions for clients. This is quite a different approach from a standalone

investment bank that provides advisory work and securities products to its

clients. Subsequently, for the leveraged finance platform of a commercial

finance company, everything from the client base to the product offerings is

different from the investment banking firms. In no specific order, major

players in this field include GE Commercial Finance, CIT Group, andCapitalSource.

These firms typically work very frequently with smaller mid-cap companies,

providing everything from financing for heavy equipment to multi-million

dollar revolving lines of credit. Due to the nature of these product offerings

and the size of these clients, most of these firmsleveraged finance teams play

only in the syndicated loan market, and stay out of the high yield bond

market. Naturally, if a firm is already providing smaller loans for other types

of financing needs for a company, a syndicated loan makes sense to provide

financing for a companys larger financing need. However, it is not

uncommon to find some of the larger players, such as GE Commercial

Finance and CIT Group, to be co-leading a multi-billion dollar transaction

alongside a large investment bank. These leveraged finance deals would be

sourced from their large cap teams.

On the whole, the leveraged finance platform at a commercial finance

company would be smaller than that of an investment bank. Whereas thelargest investment banks might have a few hundred individuals in the U.S.

dedicated solely to sourcing and structuring deals, even the largest

commercial finance companies might have fewer than 100. With somewhat

less volume, these professionals typically have more all-encompassing roles,

as compared to their investment banking counterparts. Where someone could

expect to find both a capital markets team and a sales team at a large

leveraged finance shop, these functions are typically combined in the

commercial finance companies and the smaller investment banks.Furthermore, at the smallest commercial finance shops, the deal origination,

structuring, credit, capital markets work, rating agency presentation, and

closing responsibilities might all fall on the shoulders of a three- or four-


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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.

Hedge Funds and Other InstitutionalInvestors

Hedge funds and institutional investors represent the buy-side of leveraged

finance. Responsible for a large amount of the growth in the leveraged loan

and high-yield bond markets, these investors are now placing billions of

dollars in the markets. As investors have chased places to put idle funds to

work, the markets have responded with more liquidity than ever, increasingly

complex products, and more innovative financial structures. Subsequently,

these investors have put the supply/demand equation into a serious

imbalance, thus making this an issuers market. Now, companies that would

ordinarily find themselves bankrupt in any other market are finding

themselves with multi-million dollar syndicated loans and high-yield bonds

at all-time record low interest rates.

One of the primary reasons institutional investors are interested in the

syndicated loan market and high-yield bond market is the relative value these

products offer to other asset classes. Furthermore, the products in these

markets trade off the underlying value of the creditthis means that a firm

typically only has to do their due diligence on a firm once, with the ability to

invest in multiple places in the capital structure of a firm. No longer areinvestors limited to playing in either the equity of a company or the bond

debt; instead, they have a variety of options. Whereas one investor might be

interested in debt of a company, it might find the risk/reward tradeoff of the

security of a syndicated loan more appropriate to its risk appetite, as opposed

to an unsecured, higher-interest-paying senior note.

These same investors also have the option to play in the increasingly growing

bond and loan secondary markets, as these markets have also boomed due to

the rapid expansion of their primary markets. Investors tend towards the

leveraged loan and high-yield bond markets since they typically move

together. For example, if a company is downgraded by the rating agencies,


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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 theprimary and secondary leveraged loan and high-yield bond markets, they are

seeking individuals with prior credit experience. Individuals working in

leveraged finance have become a highly sought after commodity for hedge

funds. Some of these funds play entirely in the leveraged finance markets,

while most of the large firms typically have a set amount of their assets under

management invested into the markets.

For these institutional investors, the gateway to entry into the leveraged loan

and high-yield bond market comes from either the firm originating the

transactions, or the firm administrating the transactions. When a leveraged

loan deal is structured, marketed, and syndicated many of these investors are

given the chance to invest in the loan. Similarly, when the high-yield bond is

marketed, these institutional investors are given the opportunity to buy into

these bonds. On the secondary side, as a firm finds an interest in the

outstanding leveraged loan or high-yield bond of a firm, it would call its

relationship manager at its investment bank to place a trade. When placing

such a trade, it is not atypical for the order amount to be multiple millions of

dollars. So a one-point move in the trading level of a position can have a

major financial impact on a firm.

Without league tables to rank the buy-side firms, it should be noted that the

major institutional investors in the high-yield bond market are typically

insurance corporations, money managers, and investment corporations, such

as Fidelity, PIMCO, and AIG. Though hedge funds play in this financial

market quite frequently, only the large ones are generally targeted in theroadshow offering process. In contrast, on the leveraged loan side,

institutional investors tend to include all of the above players, as well as quite

a few hedge funds, including large firms like Highland Capital, Eaton Vance,



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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 thesize and investment nature of the firm can have a dramatic impact on their

organization. (The Vault Career Guide to Hedge Funds is a good resource for

anyone seeking to understand more about these firms.) However, because

hedge funds generally represent an improvement in hours and, in some cases,

also represent a step up in pay, many former leveraged finance analysts and

associates seek careers at hedge funds. With a firm understanding of credit,

interaction with the leveraged finance markets, a wide arsenal of

relationships, and an understanding of a variety of transactions, the juniorresources at top-tier leveraged finance shops are frequently contacted by

headhunters and other placement professionals for positions at top-tier buy-

side shops. In these positions, these junior resources now become clients of

their former leveraged finance peers, investing in transactions they very well

might have structured when on the other side of the fence.

Private Equity and Financial SponsorsPrivate equity firms are the final major player in the leveraged finance

markets (aside from the companies that actually issue the high-yield bonds or

leveraged loans). Typically using money from lending transactions in order

to buy firms, private equity shops are clients of those arranging leveraged

finance transactions. Often, their funds are also investors in their own and

others transactions, further illustrating their dependence on the leveraged

loan and high-yield bond markets.

When a private equity shop seeks to purchase a company through a leveraged

buyout, it typically attains a syndicated loan and/or a high yield bond from a

leveraged finance firm. Like individual homeowners who will pay 25% of

the purchase price from his or her own pocket and borrow the remaining 75%,

private equity shops also borrow money when executing an LBO (this

process is covered in greater detail in Chapter 5). With these borrowed funds,

private equity shops are able to leverage their own money and execute

market-changing transactions. At the center of this execution is the leveraged

finance firm, lining up this necessary financing.


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Whether large or small, leveraged finance firms typically line up in droves to

provide this financing, as it is generally a very large fee event for a firm. The

approximately $25 billion LBO of RJR Nabisco by KKR in 1989 (still the

most notable private equity transaction in the leveraged finance market

historically), generated hundreds of millions of dollars of fees for the lending

institutions. Since those early LBO days, with the rapid expansion of the

leveraged loan and high-yield bond market, there has been a flurry of buyout

activity. Numerous private equity firms have raised multi-billion dollar

investment funds in the past few years in order to continue to execute

multibillion dollar LBOs, such as the $15 billion purchase of Hertz, or the

$11.3 billion purchase of SunGard. With LBO volume nearly $150 billion

annually, up from $40 billion in 2000, and private equity fundraising volume

nearing $500 billion, up from approximately $200 billion in 2000, LBO

activity is only expected to continue long into the near future. Needless to

say, the field of leveraged finance is eagerly anticipating this activity.

No target is off-limits for private equity firms armed with such financing.

These firms will even enlist the bank accounts of rival firms in order to

execute mega-LBOs. Recent corporate divestitures and secondary buyout

activity, where a firm is bought by one private equity shop and later sold toanother, have also become a rapid source of expansion in the private equity

markets. Cross-border transactions have also boomed in the past few years.

Finally, auctions, where multiple private equity firms compete to win a

property have become a market standard for corporations seeking to find

the highest bidder. Needless to say, as the cash balances of these firms remain

robust, buyout activity will only continue to become more innovative and

aggressive.

Leveraged finance firms execute many other types of transactions for

financial-sponsor owned companies other than LBOs. Very common in

strong financial markets, many private equity shops will seek to take some of

their money off the table though leveraged loans or high-yield bond

dividend transactions. Financial sponsors also will execute the same

leveraged finance transactions for their portfolio companies as any other

corporation would, including debt refinancings, recapitalizations, IPO/spin-

off financings, and M&A transactions.

Career-wise, private equity shops tend to be another major career alternative

for those in the leveraged finance field. An investment banking professional

who has completed the analyst program at a top-tier leveraged finance group



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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 stablecompanies (whose earnings can be used to pay of the loans used to purchase

the company), there tends to be more activity in the large cap space when it

comes to LBOs. The major leveraged finance players in the industry also

have the ability to offer their financial sponsor clients a wide variety of

financing solutions across both debt and equity markets, which is not typical

of a large commercial finance operation.

Still, though they do not generally compete in the large cap LBO space

because they place less emphasis on serving private equity shops, commercial

finance companies are active in the middle market LBO arena. Examples of

these include GE Antares, CIT Group, CapitalSource, Ableco-Dymas, and

Madison Capital.


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As discussed earlier, there are two major financial products that drive the

leveraged finance industry: the leveraged loan and the high-yield bond. In

this chapter, we take a detailed look at the key characteristics and the issuing

process for the leveraged loan, and compare it to the high-yield bond.

It should also be noted that mezzanine capital also plays a part in the

leveraged finance industry, yet they are not typical of 99% of the industrys

transactions.

The Leveraged Loan

What it is

A leveraged loan is a loan arranged by a financial institution for an issuer,

which is syndicated to a broader set of investors. Leveraged loans range in

size from $1 million to $5-$7 billion and are generally arranged as part of a

financing package for an issuer. This instrument is almost always considered

senior secured debt (secured by the assets of the company), but on rare

occasions can be senior unsecured debt. Due to the need for material non-

public information (such as forward-looking company financials) in order to

structure and complete a deal, the syndicated loan market is a private market.

Exceptionally large, the U.S. leveraged loan sees nearly half a trillion dollars

in annual new issuance volume, representing thousands of transactions.

Key characteristics

Underwritten vs. arranged: Leveraged loans are either arranged by a

financial institution on a best-efforts basis, where there is no guarantee that

a certain amount of financing will be raised, or they are arranged on an

underwritten basis, where the arranger provides the entire financing upfront

and syndicates its exposure to other firms. The former example can be

likened to the good old college try, whereas the latter example is a

guarantee to an issuer that it will receive a certain amount of funding.

Underwritten financings typically occur when a financing is necessary to a

certain event (such as an acquisition). Because of the large commitments of

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capital from financial institutions that are required for underwritten

financings, and because the arrangers of underwritten financings assume the

risk of syndicating the loan to investors, they are typically more expensive for

an issuer (the organization borrowing the loan) than a best-efforts loan. In

the best-efforts case, the financing firm is only responsible for the amount it

has itself committed to the transaction, not the entire amount.

Structure: Syndicated loans typically come in one of two forms: Revolving

credit (RC) facilities and term loans. They are generally issued together and

comprise the different tranches (pieces) of what is known as a loan

package. RC facilities are similar to credit cards, while term loans are

similar to a standard car loan:

The revolving credit facility: similar to credit cards

A revolving credit facility is an unfunded financial instrument that can be

drawn upon at the issuers discretion, just like a credit card. Also like a credit

card, RC facilities have annual administration costs, a fee for drawing on

them (similar to an APR for holding a balance) or an annual fee if unused.

RC facilities are usually provided by standard commercial banks, much like

the credit card industry.

At the end of their duration, the balance of a revolving credit facility is due,

just as with a credit card. Also like a credit card, an RC can also be refinanced

with a lower interest rate before the end of its duration. RC facilities are

generally rated by the major rating agencies, which like the credit score of an

individual in the credit card application process, typically plays a large role in

determining loan sizes and interest rates.

Unlike credit cards which have an essentially unending duration, RC facilities

are issued in durations of 5 to 7 years, based on an issuers needs. Also,

companies typically have only one revolving credit facility, whereas many

people have multiple credit cards. RC facilities are dominated in a specific

currency, whereas credit cards can be used across currencies. Finally, the RC

is a floating-rate instrument with a fixed rate spread above LIBOR (London

Interbank Offered Rate). Typically, the credit card has a fixed APR

percentage that does not fluctuate with any other interest rates.

The term loan: similar to car loansThe term loan is a fully funded instrument, which is drawn from the moment

it is issued, much like a car loan. In this case, there are no undrawn or drawn

fees, but annual administration fees do exist. Like a regular car loan, the term


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loan is issued for a duration of anywhere from 5 to 7 years, depending on the

needs of the issuer. Also like the car loan, the term loan is paid off over time

(amortization) with a balloon-payment at the end of its duration. However,

typically this annual rate of amortization is 1% of the loan, as opposed to

much higher rates for car payments. Finally, the term loan is also a rated

instrument by the rating agencies, which like an individuals credit score in

the car loan application process, will play a large role in determining loan

sizes and interest rates.

Unlike a car loan, term loans are generally invested in by institutional

investors, rather than commercial banks, hence why they are typically

referred to as institutional tranches. As with the RC facility, term loans arealso floating-rate instruments with a fixed rate paid above LIBOR (London

Interbank Offered Rate), as opposed to a fixed interest rate for a car payment.

There are a variety of term loans, including term loan As (issued to higher-

rated credits with shorter durations, typical commercial bank investors, and

larger amounts of amortization), term loan Bs (with longer durations,

institutional investors, and less amortization), and 2nd lien term loans (with

similar structures to term loan Bs, but with less security than other term

loans).

Process

There is a somewhat standard process involved when a company attempts to

issue a leveraged loan. In many cases, loans do not make it through this

process. Also, in many cases the terms of the loan are fundamentally altered

during the deal lifecycle.

A backup in a financial market can also keep a product from being executed.

During the high-yield market back-up of 2005, JPMorgan became notorious

for structuring and executing syndicated loan transactions that would take the

place of high-yield bonds for issuers. In this case, the process of issuing a

product must be somewhat flexible, as must be both the arranger and the

issuer.

For syndicated loans, the standard issuance process generally takes anywhere

from 8 to 12 weeks from pitch to close. Heres a look at the standard process:

a) The pitch: In this phase, a financing firm has proposed a leveraged

finance product to an issuer (a company). Through regular dialogue with



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the company, either a coverage team or a leveraged finance relationship

manager has found that a syndicated loan and/or high-yield bond might be

the right financial solution to the issuers needs. In such a case, the

coverage investment banker will bring along the appropriate people from

leveraged finance, including a senior member of an origination team and

a capital markets expert to pitch t

Documents

Vault Career Guide to Leveraged Finance