Vault Guide to Leveraged Finance

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LEVER FINAN CARE VAULT CAREER GUIDE TO

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LEVERAGED FINANCE

© 2006 Vault Inc.

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LEVER FINAN CARE VAULT CAREER GUIDE TO

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LEVERAGED FINANCE

WILLIAM JARVIS AND THE STAFF OF VAULT

© 2006 Vault Inc.

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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

ACKNOWLEDGMENTS

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We are extremely grateful to Vault’s 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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Table of Contents INTRODUCTION

1

THE SCOOP

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Chapter 1: The Background of Leveraged Finance

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Leveraged vs. Investment Grade: An Important Distinction . . . . .6 The History of Leveraged Finance . . . . . . . . . . . . . . . . . . . . . . . .10 Leveraged Finance vs. Corporate Finance/Investment Banking .13 Types of Leveraged Finance Deals . . . . . . . . . . . . . . . . . . . . . . . .15 Opportunities In Leveraged Finance . . . . . . . . . . . . . . . . . . . . . . .16 Chapter 2: Major Industry Players

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Investment Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Commercial Finance Companies . . . . . . . . . . . . . . . . . . . . . . . . . .26 Hedge Funds and Other Institutional Investors . . . . . . . . . . . . . . .28 Private Equity and Financial Sponsors . . . . . . . . . . . . . . . . . . . . .30 Chapter 3: The Products

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The Leveraged Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 The High-Yield Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Capital Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Chapter 4: Leveraged Finance Groups

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Structuring/Origination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Credit/Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Ratings and Capital Structure Advisory . . . . . . . . . . . . . . . . . . . .47 Corporate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 Visit the Vault Finance Career Channel at http://finance.vault.com — with insider firm profiles, message boards, the Vault Finance Job Board and more.

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Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 Syndicated Loan Sales & Trading (Primary and Secondary) . . . .51 High Yield Bond Sales & Trading . . . . . . . . . . . . . . . . . . . . . . . .53 Chapter 5: The Transactions

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The Leveraged Buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 The Corporate Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 Other Event-Driven Financings . . . . . . . . . . . . . . . . . . . . . . . . . . .59 The Debt Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

GETTING HIRED

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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

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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 x

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Commercial Banks and Commercial Finance Companies . . . . . .90 Chapter 9: The Leveraged Finance Career Path

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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

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Managing Director/Group Head . . . . . . . . . . . . . . . . . . . . . . . . .107 Final Analysis

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About the Author

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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.

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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

Chapter 1: The Background of Leveraged Finance Chapter 2: Major Industry Players Chapter 3: The Products

Chapter 4: Leveraged Finance Groups

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Chapter 5: The Transactions

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The Background of Leveraged Finance CHAPTER 1 The financial markets can be divided into two major sections: debt and equity. Under this overarching organization structure, think of leveraged finance as the intersection of investment banking, commercial banking, hedge funds, private equity, and sales & trading on the debt side of the financial markets. 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 market—more 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?

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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, it’s 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.

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Vault Career Guide to Leveraged Finance The Background of Leveraged Finance

Major deals One of the great advantages to working in leveraged finance is that you will typically work on notable transactions. As an analyst or associate in a major leveraged finance firm, you may even see at least one of your deals make the cover of The Wall Street Journal. Notable brands like RJR Nabisco, Burger King, United Airlines, Domino’s Pizza, and Sony MGM have all accessed the leveraged finance markets. From multi-billion dollar leveraged buyouts to major corporate restructurings, there are plenty of headline transactions across the field.

Leveraged vs. Investment Grade: An Important Distinction The difference between leveraged and investment grade debt is an extremely important concept to understand. By definition, “Leveraged finance” is debt issued for clients that are considered “leveraged,” not “investment grade” by the two major rating agencies, Standard & Poors and Moody’s. In other words, it is debt for clients considered a higher credit risk by the rating agencies.

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A typical rating agency grid appears on the next page. The solid bold lines denote the “investment grade” vs. “leveraged” threshold.

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Standard & Poors (S&P)

Moody’s

AAA

Aaa

AA+ AA AA-

Aa1 Aa2 Aa3

A+ A A-

A1 A2 A3

BBB+ BBB BBB-

Baa1 Baa2 Baa3

BB+ BB BB-

Ba1 Ba2 Ba3

CCC+ CCC CCC-

B1 B2 B3

B+ B B-

Caa1 Caa2 Caa3

CCC

Ca

C

D/C

D

C

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Vault Career Guide to Leveraged Finance The Background of Leveraged Finance

How’s 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 of the company’s credit risk. The rating agencies assess the quality of the company’s 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.”

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The words “leveraged” and “debt” normally have negative connotations. But this shouldn’t necessarily be the case. Millions of people have loans for their homes. In this sense, they are borrowing money and are “leveraged,” as most of them do not have the cash on hand to pay off their loans immediately. Just because someone has a home loan or a car loan, or does not have much cash on hand, does not mean they are not worth lending to. If that were the case, no college student would have a credit card. The more debt someone has in relation to their cash or future earnings potential, the more “leveraged” they are.”Investment grade” companies are the least risky of those in the debt markets. They are typically your long-standing, exceptionally stable companies, such as General Electric, Pfizer, John Deere, and ExxonMobil. Their credit history is outstanding and they have the ability to borrow large amounts of debt at any time, since they typically have the cash on hand to pay back those loans at any given time. Of these thousands of companies, only a handful have the highest debt rating (“Triple A”). 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. You’d probably not hesitate to give him $10 or so, because you know you’re likely to be paid back immediately (and probably without having to hound him for the money). That friend would be considered “investment grade.” Now consider the college buddy who always asks to borrow money for beer runs, yet amazingly can never “remember” to pay you back. That college buddy would be considered “leveraged.”

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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 access a 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.

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For companies that are not rated, their access to either market is determined by their financial ratios, while crossover companies typically access the market that plays to the better of their ratings. 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 dayto-day life of those working in leveraged finance.

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Vault Career Guide to Leveraged Finance The Background of Leveraged Finance

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 company’s 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.

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This type of lender-client relationship has existed for centuries. But in the past few years these lending institutions have evolved, as have the needs of their clients. In the late 1990s investment banks and commercial banks were able to once again legally merge due to the repeal of the Glass-Steagall Act. This means that investment banks are now not only able to provide financial advice to clients, but also utilize the know-how of their commercial banking division to deliver that financial solution. Together, this has allowed companies to access the financial markets even more readily and has fundamentally changed the investment banking relationships on Wall Street. During the past few decades, the fundamental loan product has also changed. The original loan between two parties, referred to as a bilateral loan, was becoming obsolete. Clients were becoming larger and their financing needs were growing. Subsequently, lending institutions started finding others to provide the loans alongside them. Instead of bearing the risk of an entire $1 billion loan, they found they could significantly diminish their risk by “syndicating” this loan exposure to others. With institutional investors also seeking new ways to place money into the financial markets, the syndicated loan became a prime source of investment. Subsequently, the syndicated loan market exploded in volume, so much in fact that a secondary loan trading market was created out of it. Today, as opposed to a bilateral relationship with a single lending institution, a company that “issues” a loan can have hundreds of investors in its syndicated loan. This investor interest not only 10

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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.

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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 nearguaranteed returns, the debt markets have seemed exceptionally more attractive 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, wouldn’t you put your money there, as opposed to buying shares in the equity Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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, they’ll 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

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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 middlemarket companies (middle market is generally defined as a company with less than $500 million in annual revenues and/or less than $50 million in annual EBITDA). For example, by raising $25 million for a company by assembling a syndicate of lending institutions hungry to put idle cash to work,

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small lending shops are finding themselves with a few million dollars in fees and profitable new relationships. In the future, this trend is expected to continue. Although interest rates have been rising over time, this will not deter companies from continuing to seek syndicated loans and high-yield bonds, which have become a necessary part of a firm’s capital structure. Although it will be unlikely that firms will want to refinance their existing debt with more expensive (higher interest) debt, many issuers will still turn to these financing sources for general corporate needs or to acquire other companies. Also, with the rise of interest rates has come a rise in M&A volume, which fuels the issuance of debt to make those mergers and acquisitions happen. Finally, to quote a tenet of basic corporate finance, the cost of debt is often substantially less than the cost of equity. So it seems likely that these leveraged finance shops will remain in business and profitable for many, many years to come.

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The leveraged finance markets are quite complex, but the underlying principle and motivation—providing financing for companies—is simple. Whether this financing involves a loan to refinance existing debt, or the issuance of a complex loan and high-yield bond package in order to execute the largest LBO of all time, these markets are quite often at the center of the action on Wall Street. Companies still call their banks and loan officers for advice on syndicated loans, but at the same time are now speaking to managing directors at investment banks that can provide a number of complex financing alternatives, tapping a variety of financial markets. With nearly $1 trillion of combined annual global volume in the U.S. in the leveraged loan and high-yield bond markets, these leveraged finance markets provide ample access for investors to put money to work.

Leveraged Finance vs. Corporate Finance/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 firm’s 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 group—it just depends on the volume of deals to determine how specific and/or large the groups will be.

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A common misperception is that traditional investment banking only involves providing 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 identical—just as an investment bank covers a company in an industry 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 don’t 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 you’re a treasurer of a multi-billion dollar company and you need a large loan for an acquisition, you’ll go to the firm with the best interest rate, regardless of whether it’s an investment bank or not. In this regard, leveraged finance is more similar to commercial lending (i.e., lending to a company so that they can buy copiers, printers, etc.) than it is similar to investment banking.

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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.

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This breadth vs. depth tradeoff is directly related to the amount of transaction experience offered in leveraged finance. For example, the day-to-day grind might be a little more hectic in a leveraged finance role, as a deal team could potentially be closing two multi-billion dollar transactions on the same day— something that would be quite unlikely in a coverage role. However, this transaction-oriented environment involves substantially less idea generation and pitching of ideas to clients than one would find in an investment banking industry coverage group. That is not to say that someone in leveraged finance will not do any pitching—quite the contrary. While the industry coverage group might come up with and pitch the idea of a syndicated loan or highyield bond to finance an M&A deal, they will surely bring along the appropriate people from the leveraged finance platform to comment on the markets, comparable transactions, and provide other relevant advice. If you are beginning your career in finance, it is important to think about your long-term career goals when considering a role in investment banking coverage versus leveraged finance. If your goal is to work in a specific industry—let’s say running a health care company—you would probably be better served in a health care coverage group at an investment bank. However, if you are interested in working at a hedge fund or private equity shop, working in leveraged finance will give you the opportunity to interact with many of these firms, as you close numerous deals of theirs. Furthermore, you will be trained in certain debt metrics (what’s typically called “credit” training), which are useful in understanding the industry and are not typically emphasized in the coverage side of the bank. This is not to say that moving from a coverage group to a private equity shop or hedge fund can’t happen—it certainly does, and even the top tier PE shops and hedge funds seek people with very specific industry knowledge. However, it’s Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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 you’ll also find leveraged buyouts, when private equity shops and financial sponsors use borrowed money to purchase companies. There are also corporate restructurings and DIP (Debtor-in-Possession) facilities, where companies are entering/exiting bankruptcy and are trying to avoid Chapter 7 bankruptcy (liquidation). In this case, the companies will work with both the financial institutions’ leveraged finance groups and the federal bankruptcy court to get financing packages in order to stay in business. Leveraged finance also covers dividend transactions, where loans/bonds are used to pay out the owners of a business, recapitalizations, where a company’s financial structure is changed, IPO/spin-off financings, where the proceeds of a loan/bond are in tandem with an IPO or a spin-off of a business unit, and even general debt refinancings, where an existing loan/bond is taken out with a new loan/bond. Examples of each of these types of deals is discussed in more detail in Chapter 5.

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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 and conducting research about the market’s trends. For the person who enjoys the asset management aspect of managing a firm’s exposure to the syndicated loan/high yield bond markets, there are positions in internal credit/portfolio 16

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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 function—when 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 neighbor’s neighbors. This type of setup can make a substantial difference in the day-to-day enjoyment of someone’s 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 company’s 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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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Amortization, it measures a company’s earnings from its operations. What gets paid right after the costs of operating a company? The interest on debt—which is precisely why leveraged finance bankers and debt players care. EBITDA is a proxy of how much debt any one company, or individual, can afford. For example, let’s pretend you operate a lemonade stand. You probably bought lemons, water, cups, ice, a stand, and some poster board for advertising. Let’s also say you paid someone to help you operate the stand. Finally, let’s say you sold all of your lemonade. If you were to have paid these costs and come out positive, you would have made an operating profit. But you still have not paid interest on your credit card for the stand, nor have you paid the taxes on your income. Ignoring the depreciation on your lemonade stand (since you never factored that cost in because it was not a real cost to you) the amount of profit you have left is your EBITDA—before you pay either interest or taxes. EBITDA is your cash flow available for all sorts of things—buying another lemonade stand, paying off debt on your credit card, or even just paying your taxes and pocketing the rest.

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When comparing companies and evaluating their operating health, most leveraged finance bankers are concerned with a company’s adjusted EBITDA (the amount that can be considered “regular” EBITDA year-overyear, adjusted for abnormalities and one-time costs), as well as the company’s revenue. The EBITDA margin (EBITDA / Revenue) is a simple calculation of how adept a company is at converting its revenues into what really matters—EBITDA. 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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Major Industry Players CHAPTER 2 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, we’ll review some of the major players on both the sell-side and the buy-side. The specific firms we mention are chosen based on the league tables of the sell-side firms and on reputation for the buy-side firms and private equity shops. Although a good starting point for considering potential employers, these lists should be considered in light of a particular firm’s culture and the emphasis it places on its leveraged finance group versus its other operations.

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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 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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The bulge-bracket investment bank with a substantial commercial banking operation

Top firms • Bank of America • Citigroup • Deutsche Bank

• JPMorgan Chase • Wachovia

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These are truly the dominant players in the industry. These are firms that have been lending to companies for years; therefore, their relationships with issuers—both on the investment banking side and the commercial banking side—are very strong. In other words, they that not only have they been a client’s commercial bank (lending institution) for many years, but they also have a history of providing financial and M&A type advice to these corporations. Therefore, when one of their clients needs a loan or bond, these investment banks are typically called upon to provide their advice and expertise-as they have been for many years. These investment/commercial banks place a large amount of emphasis on their leveraged finance operations because of the substantial amount of fees generated from these transactions. Most of these firms have dedicated leveraged finance professionals in all of the major financial market locations: New York City, Chicago, Houston/Dallas, Los Angeles/San Francisco, London, and Hong Kong. Typically, these firms will have an entire leveraged finance platform under the “debt capital markets” heading within the corporate finance section of the investment bank. Some of these firms have entire teams dedicated solely to originating deals, while others will align this origination responsibility into their industry coverage groups. Regardless of how it chooses to structure these operations within their organization, the bulge-bracket investment bank with a substantial commercial banking operation will have resources 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.

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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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The standalone investment bank

Top firms • Credit Suisse • Goldman Sachs

• Lehman Brothers • Merrill Lynch

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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) seeks to 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 feerelated events. Without a commercial banking presence, these pure investment banks would rather allocate their balance sheets to larger feeevents 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 highyield 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 highyield 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 feerelated 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 22

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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.

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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 commentary will 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/associate’s job is less about managing a variety of processes and more about working through the nuances of a particular deal. This often translates into more complex financial modeling, more intense due diligence, more complicated Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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

Top firms • • • •

ABN AMRO Jefferies & Co KeyBank National City

• PNC • SunTrust • Wells Fargo

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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 commercial banking 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 of event-financings, drive their lending rationale. Furthermore, they seek to place their capital to work in other areas of the bank and opt not to enter the highly competitive large cap leveraged finance space. At any rate, the 24

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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 toptier 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.

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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 finance companies 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, and CapitalSource.

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These firms typically work very frequently with smaller mid-cap companies, providing everything from financing for heavy equipment to multi-million dollar revolving lines of credit. Due to the nature of these product offerings and the size of these clients, most of these firms’ leveraged finance teams play only in the syndicated loan market, and stay out of the high yield bond market. Naturally, if a firm is already providing smaller loans for other types of financing needs for a company, a syndicated loan makes sense to provide financing for a company’s larger financing need. However, it is not uncommon to find some of the larger players, such as GE Commercial Finance and CIT Group, to be co-leading a multi-billion dollar transaction alongside a large investment bank. These leveraged finance deals would be sourced from their large cap teams. On the whole, the leveraged finance platform at a commercial finance company would be smaller than that of an investment bank. Whereas the largest 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 four26

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person deal team. In contrast, at a large investment bank, there would undoubtedly be a team for each of the aforementioned responsibilities.

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Culturally, these firms will be very different. Although generating millions of dollars of fees, these teams are still treated somewhat differently from those of an investment bank. Armed with corporate cards, BlackBerrys and expense accounts, the lifestyle is still more than adequate for those seeking corporate perks. However the basic pay scale tends to be different. For example, while a first-year analyst in an investment bank in a good year could expect to clear $100k, the first-year counterpart at a commercial finance company might expect $55-65k. A third-year analyst at an investment bank might expect to near $200k in compensation in a hot market, while his commercial finance peer could expect $75-85k. This discrepancy only becomes larger as the market remains hot and investment banks continue to pay accordingly. And at the upper ranks of managing director, where compensation is typically derived from the amount of revenues brought into the firm, this pay discrepancy between the two types of firms is further exacerbated. However, remember that compensation at the junior levels is related to office hours—those investment banking analysts earning $100k are typically earning about the same per hour as their counterparts at commercial finance companies. Most of the pay and lifestyle discrepancies tend to reflect the relative size of the firm and the atmosphere of the group. If you were working at a commercial finance company and every other division left at 5 p.m. sharp on Friday, you would have a tendency to do the same. With the 8 a.m. to 6 p.m. lifestyle somewhat more prevalent in greater Corporate America, it comes as little surprise that commercial finance shops do not expect all-nighters from their analysts. Also, working every weekend is not usually expected of analysts and associates at commercial financial companies and junior resources are certainly not “on call” on weekends the way their investment banking counterparts are. Still, while nobody will dispute that investment banking analysts and associates work completely insane hours, it should be noted that the hours in commercial finance are not a cakewalk either. When closing a deal or in the middle of a long-due diligence process, a commercial finance analyst can expect 80-hour workweeks. Commercial finance companies also boast an overall more relaxed atmosphere. Many former investment bankers come to these commercial finance shops to find a more relaxed collegial atmosphere, with khakis and Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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golf shirts as opposed to Hermes ties and Gucci loafers. Lunch outside the office, as opposed to at one’s desk, is a more typical occurrence at a commercial finance company. For many, this lifestyle tradeoff of a commercial finance atmosphere versus I-banking is worth every single penny, and more.

Hedge Funds and Other Institutional Investors

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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 credit—this 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 are investors 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.

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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, Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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.

Private Equity and Financial Sponsors

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Private equity firms are the final major player in the leveraged finance markets (aside from the companies that actually issue the high-yield bonds or leveraged loans). Typically using money from lending transactions in order to buy firms, private equity shops are clients of those arranging leveraged finance transactions. Often, their funds are also investors in their own and others’ transactions, further illustrating their dependence on the leveraged loan and high-yield bond markets. 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.

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No target is off-limits for private equity firms armed with such financing. These firms will even enlist the bank accounts of rival firms in order to execute mega-LBOs. Recent corporate divestitures and secondary buyout activity, where a firm is bought by one private equity shop and later sold to another, have also become a rapid source of expansion in the private equity markets. Cross-border transactions have also boomed in the past few years. Finally, “auctions,” where multiple private equity firms compete to win a “property” have become a market standard for corporations seeking to find the highest bidder. Needless to say, as the cash balances of these firms remain robust, buyout activity will only continue to become more innovative and aggressive. 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/spinoff financings, and M&A transactions. Career-wise, private equity shops tend to be another major career alternative for those in the leveraged finance field. An investment banking professional who has completed the analyst program at a top-tier leveraged finance group Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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 firm’s funds (a share of the firm’s profits). These are the typical reasons why some seek a change of pace into the private equity field.

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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 industry’s 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 nonpublic 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.

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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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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 issuer’s 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.

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At the end of their duration, the balance of a revolving credit facility is due, just as with a credit card. Also like a credit card, an RC can also be refinanced with a lower interest rate before the end of its duration. RC facilities are generally rated by the major rating agencies, which like the credit score of an individual in the credit card application process, typically plays a large role in determining loan sizes and interest rates. Unlike credit cards which have an essentially unending duration, RC facilities are issued in durations of 5 to 7 years, based on an issuer’s 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 loans The 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 34

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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 individual’s 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 are also 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 A’s (issued to higherrated credits with shorter durations, typical commercial bank investors, and larger amounts of amortization), term loan B’s (with longer durations, institutional investors, and less amortization), and 2nd lien term loans (with similar structures to term loan B’s, but with less security than other term loans).

Process

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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. Here’s a look at the standard process: a) The pitch: In this phase, a financing firm has proposed a leveraged finance product to an issuer (a company). Through regular dialogue with Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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 issuer’s 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 the financing idea to the client. In this phase of the process, the pitch has generally gone through many late night iterations in order to contain the most updated relevant market information, comparable company analysis, pro forma company financial models, financial product information, transaction timetables, cost analysis, and credential slides. The pitch is a rough idea of the projected financing structure and its cost to the issuers. As detailed private financial information has not been shared by the company with the financial institution at this point in the process, pitches are usually prepared with public information from the company’s web site, the SEC, and other publicly available sources.

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In a financial auction scenario, this part of the process would be when the sell-side or M&A advisory firm has held a management presentation on behalf of the corporation for sale, so that the bidders and their financing firms can attend. In a similar process to the standard pitch phase, the sellside firm will walk through the basics of the company, including the financial status, a history of the firm, a background of the management team, and a general overview of their idea of a potential transaction, including the size of potential debt tranches and even transaction timetables. b) Due diligence and transaction consideration: If the pitch process has gone well, and the company decides to further explore the possibility of issuing a loan, the company will release confidential financial and other information to the financing firm, in order to get a better idea of the specifics of the proposed transaction. At this same time, the financing firm readies a list of due-diligence questions, while working with its internal credit team. From here, the financing firm or firms will generally revisit the issuer in order to “kick the tires,” while asking questions probing the nature of the business. All of this is generally done to get a better feel for whether the transaction is possible and what hiccups could occur during the process.

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In a best-efforts financing, this due diligence is typically not as intense as an underwritten financing would be. This is because in a best-efforts financing, the financing firm would not be on the hook for the cash in the event the firm releases damaging information or misses its projected financial targets and the loan cannot be sold to investors. Also, because best-efforts financings are usually done for investment-grade clients or as routine refinancings for leveraged clients, the financing firm’s reputation is generally not on the line in a best-efforts financing, while that can be in the case of an underwritten financing. The vast majority of transactions that make it through the pitch phase generally make it through this due diligence phase.

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c) Internal credit approvals: In order for any financial institution to complete a leveraged finance transaction, an internal credit committee must review and sign off on the proposed transaction. Also referred to as an underwriting committee, this internal credit team is responsible for protecting the firm from ill-advised deals and overly aggressive structures. If it were entirely up to deal teams, deals of all sorts would be mandated and would either struggle to find investors or get entirely “hung” in market. Therefore, before signing any sort of financing agreement, the leveraged finance origination teams must get the approval and sign-off of their internal credit committee. In order to get this approval, a credit deck outlining the company, its market risks, the transaction, detailed financial models, and the potential investors for the proposed transaction is assembled and brought to committee, which reviews it in great detail. This process requires a lot of back-and-forth between all parties, as the credit committee generally asks probing questions that require the deal team to work with the issuing company to figure out. Often, this includes revising financial models with different scenarios, as well as conducting more outside market research into competitors and similar deals that have been done. Once the credit committee has approved a deal, a summary of terms and conditions will be drafted by the financing firms’ lawyers and sent over to the company. d) Winning the mandate: At this point in time, the company is usually reviewing financing proposals from a variety of firms. With no clarity into what any of the other firms have proposed and the idea of millions of dollars of fees from a transaction, the deal teams will work very hard to Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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push their credit committee to the extremes of what is acceptable. In some cases, this means that a credit committee will not allow the transaction. But the majority of transactions that do get approved by credit typically end up being reviewed by the company. From here, the company has the option of choosing one of the financing proposals, choosing none of them, choosing multiple financing proposals, or choosing a subset of the proposals and continuing to negotiate. In the case of the large leveraged financings, clients will in most instances choose more than one financing firm and make them all come to the same terms. This creates a scenario in which the financial institutions involved are referred to as “joint bookrunners.” Having multiple financing firms involved is quite common for deals larger than $1 billion. For deals less than $250 million, it is typical that one firm will win a mandate and become a sole bookrunner.

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It is difficult to estimate what percentage of the deals that make it to mandate phase are won. For the very best large firms in non-auction scenarios, a good majority of deals are won, say 60-75%. However, in the auction scenario, this could be a 1 out of 10 hit rate for any firm, if not worse. Auctions, in this sense, are much tougher to win. As a financial sponsor seeks to bid on an issue, not only is it competing with other firms, but the firm itself also finds the best financing source. As a result, there might be 10 financial sponsor firms competing for a property and, if each of them had three financing sources competing for their business, there could be 30 different possible scenarios. Therefore, the auction process might entail multiple rounds of bidding before a suitable suitor is chosen and a mandate awarded. Once a financing source has been chosen, the mandate is given. This typically means that the financing firm and the company review the terms and conditions and execute the financing papers. Underwritten financings are typically long documents outlining the financial commitment given by the financing firm, as well as the fees associated with the transaction. These executed docs have time limits, so execution of the transaction at this point is pretty imminent. From here, nearly all transactions are launched, closed, and funded. e) Transaction launch: Prior to the transaction going “live,” a number of processes must be completed. A list of investors must be circulated, a

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confidential information memorandum outlining the company and the transaction must be drafted, a sheet of terms must be readied for lenders to review, and the formalities of those leading the transaction must be decided. Each of these events is rather time-consuming; the entire transaction launch period typically takes two to four weeks. Once these processes are completed, the transaction goes live, which begins the period where a transaction is “in market.”

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At this point, the financial institution’s salespeople begin making calls to investors, while marketing materials about the transaction are circulated to those interested in the transaction. The most important part these materials is the confidential information memorandum (“info memo”). The info memo is a large book outlining most everything about the transaction and the company in great detail. The book often takes a few weeks to write and rewrite with the help of company management. Once completed and circulated, it becomes an investor’s primary source of investment information. The info memo contains general guidance regarding the indicative size, structure, pricing, and ratings of the new debt facilities. This book also serves as a key starting point for the lenders’ presentation. f) External presentations (rating agencies and lenders’ meetings): If necessary, immediately before or after the launch of the transaction the company will go to the rating agencies (Moody’s and Standard & Poor’s) to have its new facilities reviewed. This process typically entails a severalhour presentation (prepared by the financing firm or firms) by the company management to the rating agencies. The rating agencies will take this information into consideration, spend a few days digesting the presentation while requesting additional information from the company, and come to a conclusion about the ratings of the company’s debt. This process is definitely closed-door— rating agencies do not reveal their methodologies for arriving at ratings. However, with a substantial amount of experience in this field, it is not uncommon for the seasoned leveraged finance firms to be able to predict these ratings with great accuracy beforehand. The ratings of the company are probably the most crucial part of the loan structuring and syndication process. Investors look to these ratings to see what similarly rated credits exist and whether or not this is a safe and/or favorable investment. As CLOs and CDOs must meet certain investment criteria in ratings categories, the ratings outcome can determine whether or not they can invest in a credit. Even the financing firm waits in Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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anticipation of the ratings decisions, as this will absolutely affect the indicative structure and pricing of the facilities. A poor rating can dramatically alter the attractiveness of a certain credit and its potential success in the market. Because this is such a crucial piece of the process for its clients, the largest firms have a rating agency team to help with the process. This team is also intricately involved with the leveraged finance team when proposing capital structures and advising the most optimal debt transactions for clients. Quite often, their expertise and assistance in the process saves clients millions of unnecessary dollars.

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The lenders’ meeting is also a major part of the in-market process. These meetings generally take place for new debt facilities and event-driven financings (in other situations, a conference call with lenders, rather than a meeting usually suffices). The lenders’ meeting is organized by the financing firm at a local hotel or conference venue where all of the relevant company and transaction information will be discussed. Investors who have been invited into the transaction attend the presentation, where they are able to evaluate the company, the management team, and the transaction more accurately. Scheduled a week or so after the transaction has been in market, this is often the first time investors truly take a look at the information and is a good way to get everyone excited about it. During the presentation at the lenders’ meeting (which has been prepared by the financing firm and the company management), the management team will speak in depth about the company, its future, and its financial status. The financing firm will then talk about the financial transaction and will direct Q&A accordingly. g) Investor evaluation process: For one to two weeks following the lenders’ meeting (or conference call), armed with all of the relevant information related to the loan, investors will review the transaction with their internal credit committees and decide whether or not to invest. They will perform their own due diligence, calling the financing firm and the company in order to ask questions. They will build their own financial models based on the financial information given in the information memorandum and the lenders’ presentation. This part of the process is generally a quiet period for the financing firm. However, investors will call the analyst or associate from the leveraged

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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.

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In the event that the commitments greatly exceed the amount of the facilities (what is commonly referred to as oversubscription), the pricing will commonly be reduced or the structure will be altered to be more favorable for the issuer. This oversubscription happens for a variety of reasons, including when ratings come out more favorable than expected, the management team “wows” investors, the company is a popular credit, or even just when the market is hot and investors are sitting on idle cash balances. Price “reverse-flexing” is quite common to adjust the pricing to what the market will accept. At this time, the new terms are recirculated and investors are given a chance to alter their commitment amounts. It is not common that the commitments won’t meet the amount of the facilities, since the sales team is constantly in touch with investors and will be able to predict if/when a transaction might struggle. Subsequently, the 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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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basis points (.25% in interest) on a $1.0 billion facility can mean an incremental cost of $2.5 million in interest annually over a 5 to 7 year facility life, these flex terms are often heavily scrutinized. In a worst-case scenario—an underwritten financing that has come up short—the financing firm will use the commitments it has from other firms in the syndicate and will foot the rest of the bill. Much like splitting a check at dinner, the person holding the check might be left with the balance of the bill if it is not able to syndicate the entire amount. Naturally, after the transaction has closed, the financing firm might try to sell its position in the secondary market at a discount, in order to rid itself of any unnecessary exposure. i) Credit agreement finalization: After the transaction has been finalized, a credit agreement summarizing all of the terms of the transaction is sent to lenders, where it is reviewed, signed, and sent back to the financing firm. This is the master document to all syndicated loans and is absolutely necessary for a syndication to exist.

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j) Closing and funding: After the credit agreement has been signed, the deal closes and, in the case of a term loan, is funded. Appropriate fees are paid to the financing firm and the lenders from the company. The financing firm collects all of the funds-flow information from the lenders and organizes all of this documentation for its back-office administration team. From here, the funds are wired from the lenders into a bank account for the company. In the case of the revolving credit facility, these accounts are set up and ready to be drawn upon in the event that the funds are needed. At this point in time, if the transaction is a landmark deal or a major corporate event, it is typical for the financing firm to design and distribute deal toys commemorating the successful execution of the deal. These deal toys often take the form of something unique to the company. For example, in the case of an NFL football team, the toy might be a player’s helmet or actual NFL football with the deal information inscribed right on the front. If truly a celebratory occasion, a closing dinner might be held at a nice restaurant for all of the major players involved in the transaction. Both are ways that the financing firm expresses its appreciation for the financing business.

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The High-Yield Bond What it is A high-yield bond, like a leveraged loan, is a funded financial instrument issued by a corporation for a variety of purposes (acquisitions, capital improvements, etc.). Unlike the leveraged loan market, the high-yield bond market is a public market and the high-yield bond is a registered security with the Securities and Exchange Commission. Because investors in public markets have restrictions on the amount of confidential information about a company they can have, the fact that the high-yield bond market is a public market can prevent a firm from investing in the same company in both the leveraged loan and the high-yield bond markets, unless it utilizes only publicly available information when deciding to invest in the high-yield bond. If a bond is issued privately, with private financial information, it is referred to as a “private placement” and is marketed and sold to a smaller set of financial institutions.

Key characteristics

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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 Burnham’s 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)

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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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Leveraged Finance Groups CHAPTER 4 This chapter provides an overview of each major group within the world of leveraged finance and each group’s purpose, role and lifestyle, as well as where each group fits into their larger organizations.

Structuring/Origination 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 team’s 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.

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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 firm’s balance sheet. Well before a deal ever goes to market and typically before it Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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.

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Whereas a deal team in leveraged finance might have four members (MD, VP, associate and analyst), it is generally uncommon for that deal team to have more than one credit executive working with the deal team. Along with the deal team, the credit executive will take the deal to “committee” where it is given the final seal of approval before any legally binding contracts are signed. This credit committee has the ultimate responsibility for the transaction. As the firm’s internal balance sheet “police,” they serve an often thankless but exceptionally important role, primarily because a deal team often views them as yet another hurdle they must overcome in the pursuit of fees; these credit teams are rarely recognized when deals are successful, yet are often scrutinized when deals fail. All investors have internal credit teams or executives who make decisions to 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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Ratings and Capital Structure Advisory Ratings are a major function of the leveraged finance process. A slight upgrade in a rating can mean an issuer is considered investment grade rather than high yield, and thus has access to wider range of financial markets. A slight downgrade in its ratings and that same issuer could be spending millions of unnecessary dollars in interest expense. Therefore, many large leveraged finance shops have groups solely dedicated to working with deal teams to help engineer the most financially optimal transactions at the least possible expense to the client. These teams have a thorough understanding of the rating agencies’ methodologies and how simple changes in a company’s capital structure can change the issuers’ cost of debt. These teams are generally part of the corporate finance investment banking platform, but are not always organized under the leveraged finance umbrella. However, because of the sheer volume of capital structure work that originates from the leveraged finance group, the ratings and capital structure advisory teams work quite frequently with their leveraged finance colleagues. Typically, a dedicated ratings specialist will attend client pitches, playing a major role in delivering the firm’s financing proposal. This same professional Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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 company’s 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.

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Corporate Banking While the coverage and leveraged finance groups pitch and execute deals, the corporate banking team keeps tabs on the industry and monitors clients. Professionals in this group maintain relationships with each of the borrowers and collect information in order to monitor the credit profile of a typical client. At any given moment, a corporate banker should be able to tell you their firm’s outstanding and potential financial exposure to a specific client. In terms of leveraged finance, a corporate banker should be able to tell a deal team the current outstanding balance of a client’s revolving credit facility and/or term loan. This sort of knowledge, as well as their industry understanding, makes corporate bankers valuable to both deal teams and credit/risk teams. 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. 48

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The corporate banking role extends into a client management relationship. For example, if a company wants to draw money on their syndicated loan facilities, it will generally call its corporate banker. Once a deal is completed, it is generally the corporate banker who manages the non-pitching relationship. While the coverage and leveraged finance teams often call the client in order to generate fees for the firm, the corporate banking group works to maintain the existing relationship. However, this boundary can be blurry-the best investment bankers will maintain an open dialogue with a client to temper the sales nature of pitching. In order to best maintain these client relationships, many investment banks place their corporate banking teams in appropriate regional offices so that they can be geographically close to their clients. Organized into industry coverage teams, the corporate banking group is usually a part of corporate finance investment banking. However, without pitching and deal execution defining as much of their job, junior resources in corporate banking generally have a better lifestyle than their corporate finance peers. Although they do work on various parts of the deal process, including the pitches, revenue generation is not the corporate banking group’s primary function, and thus, analysts and associates typically do not pull allnighters for a deck of slides. The lifestyle tends to be a little less hectic and involves a more steady and predictable workflow.

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However, it should be noted that workload in corporate banking becomes heavier when clients report quarterly financial performance. Also, corporate banking teams in “hot” sectors tend to be quite busy. For example, as Ford and GM underwent substantial erosion in the financial performance recently, transportation corporate banking teams became very active, following the industry events and assisting deal teams with pitches.

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 responsibilities—capital 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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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.

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Because they have their hands in nearly all aspects of the deal process, capital markets professionals often experience their jobs as daylong firedrills. As it requires gathering a vast amount of knowledge from a wide variety of people, the job is a seemingly never-ending rollercoaster of events. A capital markets professional might give a market update to a client in the morning, attend a lenders’ presentation over lunch, and get dialed in to multiple pitches or attend numerous deal-team sit-downs for upcoming deals in the afternoon. The pace of the job is furious, but it generally slows down after the markets close and clients have gone home. As for weekend work, there is always plenty to do—deal teams are continually seeking guidance for the next upcoming major transaction, or prepping for Monday morning firmwide market update calls. 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 50

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there,” a capital markets professional will try to already have a slide of comparables ready and waiting. The lifestyle of capital markets appeals to those who enjoy having diverse job responsibilities. With an endless list of requests from teams, presentations to attend, and conference calls to take part in, time and priority management are critical in order to maintain sanity. Also, as the gateway to the financial markets, this person needs to be an encyclopedia of past transactions in order to give the best guidance possible to deal teams. Capital markets is definitely not the place for those seeking a quiet cubicle with intense financial modeling. It is also generally not a career path for those junior resources interested in moving to private equity. However, it is definitely a place for someone seeking a springboard into sales & trading or even an opportunity at a hedge fund.

Syndicated Loan Sales & Trading (Primary and Secondary)

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Syndicated loan sales & trading is a fairly complicated operation. How it is structured and set up varies from firm to firm. As the syndicated loan market is a private market (issuers need not register with the SEC when issuing securities), investors can find themselves in an interesting predicament: if they receive private information such as forward-looking company financials, they are not able to use this information to invest in other markets and/or other products of an issuer (such as the company’s stock or bonds issued by the company). However, if they remain public-side investors, they are not able to gain the insight into a credit that their peers are. Because leveraged loan origination teams sit on the private side of the wall, how a firm organizes its sales & trading operation can dictate a lot about its potential success. Most firms organize their syndicated loan sales & trading platform into two groups: primary and secondary. The primary team works closely with the capital markets team (and is often considered one and the same) on a daily basis. As deals are proposed, the sales team will have insight into investor feedback, helping their capital markets counterparts understand market trends for future transactions. As deals are structured, the sales team is responsible for distributing and allocating these syndicated loans to investors. Like any other sales force, these relationships define their success. These primary loan

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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 & trading—JPMorgan, Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, Bank of America, Lehman Brothers, and Morgan Stanley.

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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 don’t mind early mornings.

High-Yield Bond Sales & Trading High-yield bond sales & trading is a fast-paced day of market-making, bringing clients together and executing multi-million dollar transactions. Like the equity markets, the high-yield bond market is public, exceptionally liquid, and moves at a rapid pace. (For more information on sales and trading careers, see the Vault Career Guide to Sales & Trading.) Because the high-yield bond market is public, leveraged finance teams rarely interact with the high-yield sales & trading platform. Much of the information related to the market can be gained from online information sources, there is little need to call a sales-trader for current market trading levels. Furthermore, by the time current market information is delivered to a client, it runs the risk of being somewhat stale.

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As with primary loan sales, typically the only times deal teams interact with sales teams is during a new offering (either a new issuance or a tender offer), when trying to gauge investor feedback to a new issuance. Aside from this interaction, most leveraged finance teams simply work with their capital markets colleagues, as opposed to the sales teams. Because the capital markets teams are very up-to-date on the markets, most of the information that leveraged finance teams need can be obtained from this team.

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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.

The Leveraged Buyout The leveraged buyout is widely considered the premier leveraged finance transaction. Ever since the landmark RJR Nabisco LBO, very few other transactions command as much respect on Wall Street as the LBO. Firms have built leveraged finance platforms and coverage teams for the sole purpose of servicing the needs of their high-profile LBO/private equity fund clients. There are even specific league tables that rank the firms that provide the most financing for these deals. In short, the LBO is the flagship leveraged finance deal.

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To the leveraged finance firm, an LBO represents a potentially extremely profitable transaction and a chance to interact with the firm’s most profitable clients: financial sponsors. To the financial sponsor, the leveraged finance shops represent access to financing markets and the cheapest form of capital: debt. To the LBO targets, a properly executed LBO can represent millions of dollars in interest saved over the already burdensome proposed debt. For all parties involved, the LBO is a big deal. Either referred to as a “go private” (when a publicly traded company is acquired via an LBO and subsequently taken private), an “MBO” (management buyout, where the company is taken private by the management of a firm) or just an LBO, the transaction generally involves a mixture of roughly 25% equity and 75% debt. Equity typically takes the form of a large check written by a financial sponsor and debt takes the form of syndicated loans and high-yield bonds. As financial sponsors are always seeking to reduce the amount they are spending to purchase a company and

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financing firms are seeking the exact opposite, there is always a struggle between the two when it comes to the debt/equity ratio. With hundreds of LBOs executed every year, the competition among leveraged finance firms for these deals is intense. As the financial sponsor coverage teams from investment banks maintain relationships with their clients, the leveraged finance teams are busy negotiating and executing the transactions their coverage teams have provided. Because of the sheer volume of business, leveraged finance divisions will often have their own financial sponsor subgroups that work exclusively with these LBO/private equity clients. The biggest players in the financings of LBOs tend to be a mixture of the biggest leveraged finance operations, as well as the pure investment banks with topnotch financial sponsor coverage teams. The top firms in terms of providing LBO financings are: JPMorgan, Credit Suisse, Deutsche Bank, Lehman, and Bank of America. Since the RJR deal, there have been quite a few notable LBOs. Since 2004, the second (Hertz), third (SunGard), and fourth (Boise Cascade) largest LBOs have been executed by premier private equity shops. LBO volume continues to surge, with private equity cash balances and interest rates as the only potentially limiting factors in buyout activity. Furthermore, almost every stable firm is a target; household names that have been purchased in the last few years through LBOs include Dunkin Brands, Burger King, Sealy, MGM, and Wyndham International.

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The LBO: Like Buying and Renting a House On a very simplistic level, the LBO can be compared to purchasing a house for the purpose of renting it. Sounds easy, right? Well, it is. Say that you decide to purchase a 5-bedroom $400,000 house on a college campus with the idea that you are going to rent it to college students to cover the mortgage payment. Your idea is that these students will pay for the mortgage payment and you will own the home, once they have paid it off for you. In order to execute the transaction, typically you (the financial sponsor) would go to a bank (leveraged finance firm) to get a loan in order to purchase the house (target company). You would put in about 25% of your money into the deal; the other 75% would be the loan (analogous to a leveraged loan or a high-yield bond) from your bank. You would pay your real estate broker (the M&A buy-side firm) for helping you value the company and the current owner would pay its real estate broker (M&A sell-side firm). Finally, upon closing, you would pay the bank the closing

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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.

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Even in the case that it takes you 20+ years to complete this transaction, this $300k gain is a phenomenal return on your investment. However, it is also likely that the property has appreciated and your financial gain is even larger. In the case of financial sponsors, they too will seek this appreciation in the form of improving the company’s existing operations and “juicing” their return even more. They will reduce costs, improve sales, and unlock as much value from the company as possible. They will often be able to pay off the debt sooner than expected and refinance the loan with a lower interest rate, while executing a dividend transaction to reduce the money they have on the table. Now, imagine if you were able to do that for billion dollar companies, not just $400,000 houses. Take it one step further: your firm allows you to invest some of your own money in the fund. The returns would be outstanding and so would your personal financial situation. Welcome to the world of private equity and leveraged buyouts. The leveraged finance platform plays a key role in financing these targets. As regular clients to the firm, financial sponsors interact with the premier leveraged finance shops on a daily basis, for both target LBOs as well as existing portfolio companies. As individuals do when buying homes, financial sponsors shop around for the best financing cost and terms. For them, this is a fixed pie equation—the more they spend on debt, the less money they make. Negotiations between the PE shops and leveraged finance firms are intense, but in the end, usually successful for both.

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The Corporate Restructuring

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Another of the landmark transactions executed in leveraged finance is the corporate restructuring. Have you ever flown on United Airlines? Have you ever heard of Interstate Bakeries Corporation? (If not, you probably have heard of its brands—Twinkies, Wonder Bread, and Ding Dongs, to name a few.) These are two prime examples of companies that have worked with the federal bankruptcy court in order to avoid liquidation. They both have required debt financing packages that gave them the ability to operate while in Chapter 11 bankruptcy. Where did this financing come from? You guessed it—a leveraged finance firm.

Commonly structured in the form of debtor-in-possession (DIP) loans, these financing packages are very risky for a leveraged finance firm to arrange and thus exemplify the equation of risk = reward. Needing guaranteed financing, these struggling clients must have an underwritten financing package capable of helping them operate without sinking them in astronomically high interest rate costs. Therefore, they offer what little they have as incentive—they place the assets of their firm as collateral for the loan. If the firm must be liquidated, the assets will be sold and will be paid to the most senior debt holders first. These debt holders are the investors in the DIP financing. Not only is this transaction already a risk for a leveraged finance shop, but the financing firm is knowingly taking this risk on a company that has a not-sopretty financial track record. (Airlines are popular in the restructuring world.) However, the reward for this risk comes in extraordinary large fees upon exit 58

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of bankruptcy, as well as a rock-solid financial relationship for what will undoubtedly be numerous large fee events in the near future (IPO, bond offerings, M&A advisory work, restructuring advisory fees, etc.). On the whole, restructuring work is generally advisory in nature, and is geared towards helping firms rethink their operations in order to reinvent themselves. However, a key portion of this reinvention is having the money to stay afloat and either avoid or exit bankruptcy, which is precisely where a leveraged finance firm comes into play. Unlike the process-orientation of a typical leveraged finance deal, the corporate restructuring tends to be a much longer process, more similar to a coverage role than a leveraged finance role. Not only must the financing firm work with the client, but it also must work with the federal bankruptcy court and numerous legal teams, often with the distractions of lobbyist firms and labor unions. The three major players in this mixture of advisory and financing are JPMorgan, Citigroup, and General Electric.

Other Event-Driven Financings

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Aside from the LBO and corporate restructuring, there are a number of other types of event-driven financings. What is meant by event-driven? These are financings that are pursued In order to execute a separate transaction and are contingent upon, or work in tandem with, this other financial event. These events include acquisitions, IPOs, recapitalizations, acquisition financings, spin-offs, and divestitures. Generally, these financings change the financial makeup of a company and subsequently are the more complicated leveraged finance deals to arrange. They are often composed of a revolving credit facility, institutional term loan, and high-yield bond. In some cases, the financing package can span both the debt and equity markets, which is definitely a challenge for even the most sophisticated financing institutions. Due to the importance of the financing in order for the transaction to occur, nearly all event-driven transactions are underwritten by the leveraged finance firms. Event-driven financings are often very profitable deals and typically stem from a strong relationship with a client. The origin of this kind of deal more often than not comes from the coverage side of the investment bank. For example, the coverage team pitches a spin-off to a client and, based on the profile of the company, has determined that the appropriate debt financing Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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 King’s 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, you’ll 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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The Debt Refinancing The bread-and-butter deal for any major firm in leveraged finance is the standard debt refinancing. These are the bellwether deals of the financing markets, are generally the most routine transactions, and they keep the leveraged finance firms in business. The fastest deals to execute, debt refinancings easily comprise a majority of the volume in the leveraged loan market, as well as a substantial amount of volume in the high-yield market. With no significant capital structure changes as part of the transaction and rating agencies, investors, internal credit, and structuring teams already familiar with the issuer, there is significantly less work involved in these 60

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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.

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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. Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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LEVER AGED FINAN CHAPTER 1

GETTING HIRED Chapter 6: What Leveraged Finance Firms are Looking For

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Chapter 7: The Hiring Process and Interview

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What Leveraged Finance Firms are Looking For CHAPTER 6 Like investment banking in general, leveraged finance groups are very specific in their search for junior talent. As each crop of new analysts/associates enters from undergraduate programs, top-tier MBA programs, or even as lateral hires, firms are making an investment in these resources and taking a risk that they may or may not work out. These questions are at the very core of the firms’ thinking: How do we replace the top talent that left last year? Will this next crop of talent be as good as the last? How many future leaders of the firm are in this class? Firms tend to have top junior resources conduct interviews and resume screening in order to assess all-important questions such as, “Will I enjoy sitting next to this person for 100+ hours a week” and “Do they have what it takes to be truly successful and ‘get it’”? For the top-performing leveraged finance junior talent, these questions about incoming resources are pretty easy to answer. The top performers seem to fit a certain mold and gel with the existing team. Each and every firm seems to have its own culture and nuances, which is why it is difficult to generalize about what type of personality will be successful at all firms. Where one firm might rather have a Wharton finance-educated student, another firm might prefer someone with a liberal arts background that they can mold. Despite these cultural differences, a few aspects of the hiring process remain relatively consistent at the major leveraged finance shops.

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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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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on you. An MD needs to be able to leave town for a week on a roadshow for another deal and not come back to a deal in shambles. And as the deals move through the market, you might be asked to send clients important information. The deal team needs to know that it can count on you to think through the assignment and do it correctly. Furthermore, when explaining the analysis to the client, you need to be able to represent the firm in the most upstanding way possible, since the firm’s reputation is always on the line. As for the importance of friendliness and getting along with your colleagues, at most leveraged finance shops, the teams are arranged like the rest of debt capital markets-in a trading floor or similarly close-knit atmosphere. Even if you are in cubicles, you are not isolated or working by yourself. The deals are accomplished by the work of many on a wide variety of team projects. If you are the hiring manager, do you really want to spend 100+ hours a week sitting beside someone with no personality who is not friendly?

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What types of personalities do not fit the mold? If you prefer to work alone, leveraged finance is not the place for you. If you like to problem-solve in an open-thought consulting-type atmosphere, working in leveraged finance may frustrate you because of its frenzied pace and focus on process. If you find yourself wanting a predictable lifestyle, leveraged finance is not an ideal fit. This is a get-your-hands-dirty business, where getting tasks accomplished is the main key to success. In some cases, VPs may bind their own presentations and MDs rework financial models at all hours of the night to get a deal through the markets. One of the most common ways that junior professionals damage their careers is by being overconfident. Leveraged finance is a great fit for someone who strives for and graciously accepts compliments, but does not let them go to his or her head. The following scenario takes place more often than you might think: someone has been at a firm for six months and has been fortunate to have closed a couple of high-profile deals. Thinking he is now a “hitter,” he shows up on Fridays in golf shirts, begins calling clients by their first names, and starts trying to staff others under him. He criticizes a managing director, thinking the director is wasting his precious time with a boring refinancing, reworking pitch pages that do not matter, and asking for all sorts of unnecessary work. A couple of negative comments to his peers about this MD and before you know it, he is the black sheep of the floor. Or worse, come bonus time, he is given a number so far below the range that he would

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have earned more at a minimum-wage job, based on the hours he worked throughout the year. Although one might not agree with the style or the way that the deals get done, the bottom line is that you earn your rank in the world of leveraged finance. Managing directors and vice presidents have worked hard to get where they are and more importantly, they control junior resources’ bonus, lifestyle, and upward mobility. This is probably the single most important lesson to keep in mind. Leveraged finance is a place where you earn your way to the top, by putting in your time and investing hard work. The promotions do not come easily or quickly, but when they come, they are worth it. So, work hard, maintain a positive attitude, and respect your elders—before you know it, you will be in their shoes.

Education

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For the most part, investment bank corporate finance programs generally do the hiring for the leveraged finance teams. At these banks, firms place analysts and associates into industry coverage groups, M&A, or leveraged finance based on the needs of these teams and how the analyst/associate has prioritized his or her personal choices. However, some firms hire into these teams directly during the recruiting process. Whether a firm hires directly into the leveraged finance team or not is an important firm-by-firm distinction that you should research during the recruiting process. It’s an unavoidable fact that there are “target” undergraduate and graduate programs for each bank. This does not necessarily mean that someone from a non-target school cannot be hired into a program. Rather, these candidates will not have the on-campus interviews and dedicated information sessions that their peers’ target schools have during the fall undergraduate recruiting season. The target programs vary from firm to firm and lists of them can often be found on each firm’s web site. But they typically do include a common set of schools: Wharton, Harvard, Yale, Columbia, Princeton, NYU, Georgetown, Dartmouth, Brown, Williams, UVA, Northwestern, Michigan, and Notre Dame for undergraduate recruiting and Wharton, HBS, Stanford, Northwestern, Columbia, MIT, University of Chicago, Dartmouth, UCLA, Duke, Michigan, NYU, UVA, Cornell, University of Texas, Yale, and Emory for MBA recruiting.

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Does an undergraduate need to major in finance to land a position in leveraged finance? No. Although it is helpful to understand the basics of finance before beginning your job, the general corporate finance training programs are designed to teach you these basics. It is more important to have the right personality fit, understand the nature of the business, and be able to articulate why you want to work in corporate finance and/or leveraged finance. Quite often the people that are the most successful do not have a formal finance background, but have analytical skills and a desire to succeed. For firms with a general recruiting process and a subgroup placement later, targeting a leveraged finance team during this process, as opposed to just targeting the firm, should not be a hindrance to getting hired. With a solid need for analysts/associates every year due to the size of the team, it is very possible for the interested student to make his way into leveraged finance by expressing interest in the group, meeting with VPs and MDs within the group, and even talking to the group’s staffers. Furthermore, even if you’re not originally placed into leveraged finance when you join the bank, you can often switch from an industry coverage team to the leveraged finance platform. Once you are at the firm, the rest is up to you.

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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 first—the world of investment banking often values form as much as substance. This is also true when it comes to your resume. Not only should your resume have great highlights about you, but it should be well-laid-out and easy to read. Even for the most accomplished MBA, this still means one page with decent-sized margins. If you are having trouble with formatting, buy a resume book and study its layouts. Organize information into sections: contact info, education, relevant experience, and activities/interests. Keep it simple. 68

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A resume is not a competition to list as many extracurricular activities as possible. Rather, investment banks would like to see that you were involved with a few things and were dedicated, as opposed to being involved in everything. So do not list everything you have ever done; convey what you did, how you improved the world around you, and do it as briefly as possible. Leveraged finance firms are interested to know that you can take a large amount of information and boil it down to the important points very quickly. Also important: show, don’t just tell. Most jobs are self-explanatory, which is why it is extremely important to show the interviewers what value-add you had to your job. If you were a lifeguard, it’s easily to understand that you watched a pool all day while working on your tan. But aside from stating the obvious, you need to emphasize what other responsibilities you had and how you added value. Maybe you also taught swim lessons or coached a local swim team. Finally, do not ever make anything up. Just as they do due diligence for all of their clients, leveraged finance bankers will not hesitate to do the same for your background.

The Investment Banking Internship

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The best way to get into leveraged finance is to get an internship with an investment bank—in any corporate finance area—before you graduate. Even if you are unable to secure a spot interning in the leveraged finance group at an investment bank, you still have a chance of eventually getting hired into the group if you take an internship elsewhere in the bank’s corporate finance program. If you are unable to get an I-banking internship, you should spend your time trying to get another internship or other relevant experience that you can parlay into good conversation during the interview period. Working at another financial services firm outside of corporate finance shows your dedicated interest in the industry. Even studying finance abroad will show your interest in the global financial markets. These types of experiences do help when you are being compared in a stack of resumes a mile deep.

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The Hiring Process and Interview CHAPTER 7

Hiring Trends As of this book’s printing in 2006, with the financial markets still relatively hot, corporate finance programs are hiring at record rates. MBAs from the top programs have numerous job offers in hand upon graduation, much like the 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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To B-School or not to B-School? Where does business school fit into the leveraged finance equation? Most investment banking analysts wrestle with the question of whether to leave leveraged finance to go to business school, as the timing makes financial sense. Paid a bonus in July, an investment banking analyst is able to make a clean break after his second or third year without leaving a half-year’s bonus on the table. However, even associates are often willing to leave, seeing the value of the MBA in the upper echelons of management of banking, or desiring a serious career change.

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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.

What are the values of having an MBA in leveraged finance?

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If you are interested in an MBA (or are currently pursuing one) and leveraged finance, the above does not mean that there is no value in the degree in the field. Many MDs and VPs who hold MBAs did not originally start in leveraged finance. Subsequently, they used the MBA as something of a “career reincarnation,” redirecting themselves into the field. Furthermore, as the MBA has become an increasingly popular degree, it has changed the playing field. The same leveraged finance MD who did not pursue the degree 20 years ago might view the situation entirely differently today. Aside from the personal and alumni network that MBA graduates bring to the table (which can be immensely valuable), MBAs bring a unique perspective to the table. With prior job experience, they view situations very differently than their analyst-to-associate counterparts. Also, since they have not spent three years on the same deals with the same clients, they usually are less in-the-weeds and bring fresh insight to deals. Quite often, this fresh perspective is very much appreciated. You should consider the profiles of a firm’s senior management. In the case of the investment banks, commercial banks, and finance companies, the very top-tier management usually have MBAs. If your goal is to run a division or firm, the degree could be quite useful from a credential perspective. That being said, the best man for the job in

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leveraged finance is still likely to be chosen based on experience, regardless of whether or not he/she has an MBA.

What are the relevant classes I should take if I am getting my MBA now? If you are currently pursuing an MBA and are interested in coursework relevant to leveraged finance, look no further than your corporate finance and accounting classes. As a debt function, leveraged finance tends to be concerned quite a bit with the interaction of the three financial statements: the income statement, the balance sheet, and the cash flow statement. Understanding how these three interact bodes well for your success in leveraged finance. A sound understanding of both corporate finance and accounting will deliver you these necessary skills. Advanced finance classes that discuss acquisition finance, capital structures of companies, and the financial markets will also be very useful when it comes to understanding the day-to-day workings of leveraged finance. These classes will touch on all of the major terminology of leveraged finance and will put the transactions and financial markets into perspective. Finally, if your career center offers classes on investment banking and/or commercial lending, these are definitely a must for anyone interested in leveraged finance.

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If I am thinking about a career in leveraged finance, which is better: a full-time or part-time MBA? The quick answer to this question from a recruiting standpoint is fulltime. Not only will you have access to the career center (which you might not with a part-time program), but you will also have the opportunity to intern with a firm, which is the golden way to get a career in leveraged finance. If you are a part-time MBA and are seeking to make a switch to leveraged finance, this is a difficult transition because you might be job-hunting, attending classes, and working at the same time, while you are competing with a group of peers who are able to do summer internships at their target firms. However, sometimes part-time MBAs will come over to leveraged finance once they have completed their MBA program, generally as lateral hires, if they do not make it during the regular recruiting season, or they are hired after full-time offers have been extended. However, for those currently in the field of leveraged finance, the answer is part-time, as it tends to serve as much purpose without the high cost of tuition. Provided you are able to manage the MBA time

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commitment and your firm is willing to pay for the degree, the part-time MBA can be a huge payoff. Not only will it give you the credentials you are searching for, but having your firm pay for it lets you know that they are genuinely interested in your career potential with them.

The Standard On-Campus Interview/ Recruiting Process

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The interview process for the large leveraged finance firms is much like that of investment banking corporate finance programs. An information session and resume-drop, followed by an on-campus interview period, and later a “Super Saturday” process (with a day full of interviews at the firm’s offices) is the norm for all investment banks. These Super Saturdays often include multiple interviews with multiple teams to assess a candidate’s fit for the firm as a whole. However, often an individual will have at least one interview with someone from leveraged finance, which is the perfect opportunity to express his or her serious interest in the field. And if the firm hires directly into teams, you should be busy expressing your interest in leveraged finance from the very get-go. In order to tackle the process successfully, it is very important to understand the perspective of the firm representatives. Alumni of schools and other HR personnel volunteer to help with the recruiting process, often traveling during their busy schedules to give on-campus presentations, as well as review resumes and cover letters. They meet hundreds of students annually, passing out business cards along the way. This means, in order to stand out during a recruiting process, you must not only present yourself exceptionally via your credentials, but you must also use the information sessions as a chance to connect with these people on both a personal and professional level. A positive impression during the resume review and/or interview feedback session will greatly increase your chances at a job offer. Besides, most bankers enjoy meeting new people and talking about everything from football to their most recent successful deal experience. During the resume-drop period, these same people sort through hundreds of resumes, eliminating candidates from the process for major spelling errors, low GPAs, irrelevant job experience, silly cover letters, or putting the wrong firm name in a cover letter. Narrowing down a field of talented candidates is not easy, especially when they have limited interview slots. You must also present 74

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yourself on paper in the best light possible. Your cover letter and resume must be to-the-point and polished. It is also at this point, during a resume review session, where having a recruiter know your name will be immensely valuable. From here, firms will notify those selected of their interview date and time. Interviewers will take time out of their days to come to campus to interview. Realize that these interviewers are often returning to the office, knowing that they will be working late to make up for the missed time. Their time is immensely valuable, so be cognizant of this and come well-prepared. After this process, the interviewers generally discuss among themselves, as they rank candidates, whom to invite back to the firm for a Super Saturday. These selected candidates will be invited back for a series of interviews at the firm with multiple teams. After this grueling process, the interviewers sit down again in a conference room to review the candidates, and then potentially extend job offers. A sole voice of dissension from one person during the review process can be detrimental to a candidate’s chances. Conversely, a voice of support could be the edge needed to give that candidate an offer. So it’s critical to convey a consistent message throughout the process, avoid controversial topics, and be polished. Practicing for this only makes your chances better. 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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The not-so-standard process If you were not given an interview, but felt that you connected with a recruiter, all is not lost. This is actually how many people end up working at investment banks, by remaining persistent (but not overly pushy), working their way to an interview. Many times, a selected candidate will miss his interview for whatever reason, opening up an extra interview slot. Take the initiative to see if you can be an alternative, or interview before or after the schedule starts. If you are not scheduled to interview, you might consider e-mailing those recruiters you met at the information session to ask if they can make time in their schedule. If they have traveled to the school to meet candidates and Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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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The hiring process At a junior level, lateral hiring is very common, especially in the summer months after bonuses have been paid. After a firm has lost certain resources to private equity, hedge funds, and MBA programs, it typically will seek to replace these resources with the upcoming recruiting class. However, as leveraged finance tends to have a somewhat larger turnover during the hot economic periods, due to the variety of available options, it is not uncommon for a firm to seek out immediate experienced replacements for deal teams. Although more expensive than training first-year analysts, these replacements are able to hit the ground running. In order to find qualified applicants, a firm will likely hire a headhunter, such as Glocap, to review and bring in candidates for interviews. Also, the firm will seek out internal candidates to interview, as well as anyone else who receives a recommendation from a current employee. At this point, the search to fill an interview schedule might only take a week or so, while the firm reviews resumes on a real-time basis.

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With a need to fill and a sense of urgency, firms will substantially abbreviate their interview process. For every available slot, they might bring in five to seven candidates for interviews and put them through a simulated “Super Saturday” with interviews only by the leveraged finance team. After conducting a day of these interviews, the firm will usually make their decision quickly, often passing an offer to the candidates within a few days. Start dates usually follow soon thereafter. Of course, since the lateral hire has come into the firm outside of the general recruiting cycle, she or he will be put through an accelerated training course. With previous credit backgrounds and a firm understanding of Microsoft PowerPoint, Word, and Excel, these resources are usually cranking on deals and adjusting to their environments in just a few days.

How do I get in as a lateral? The quick nature of the lateral hiring process in leveraged finance highlights what the firms are searching for in lateral hires, aside from the cultural “fit”: previous credit and/or deal experience, a solid understanding of financial modeling, and previous exposure to a process-oriented environment. Lateral hires commonly come from the other leveraged finance groups mentioned in Chapter 4, both internally and externally. Lateral hires also come from other corporate finance positions, Fortune 100 management programs, top-tier consulting firms, commercial banks, private equity shops, hedge funds, and even law firms (if they have experience working with credit agreements and term sheets). All are usually considered good inroads into the field.

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If you have this or other relevant experience, and are interested in the field, you should be able to find your way into leveraged finance. However, this will definitely take initiative on your behalf. Here are some suggestions as to how to get your name and credentials noticed: 1) First, research the leveraged finance firms you are interested in joining. To do this, find a set of league tables, which will list the rankings, by searching through the WSJ, Thomson Financial, or Bloomberg for syndicated loans, leveraged loans, and high-yield bonds. These league tables are produced quarterly, generally with full articles for the annual rankings. 2) Drop your resume and cover letter online with the institutions that you are interested in joining. If there is not an online site, mail these materials to

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their human resources department. HR will be the first place contacted, if a firm is searching for resources. 3) Contact headhunters, expressing your goals and interests. They are usually paid for placement of professionals by firms seeking to fill staffing needs, which automatically places you in good hands. To find lists of headhunters, search the Internet, BusinessWeek, Forbes, and Fortune. They are often ranked as well as profiled in various financial publications. Be wary of any headhunter that charges you for access to their services. 4) Search your local alumni database for people who work at your target firms. Contact friends and even friends of friends who work in corporate finance. Even if they are not in the leveraged finance division, they might have a friend or another colleague who would be willing to take a look at your credentials and grant you at least an informational interview. 5) Contact your university’s career management office and see if you can get the name and e-mails for the contacts at the firms for which you are interested. After having followed their standard hiring procedures by dropping your resume online (and/or mailing it to them), a follow-up absolutely betters your chances. However, generally waiting a couple of days for them to reply is advised, since thousands of resumes are generally dropped online.

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6) Use the Internet to search for recent transactions and the professionals associated with them. If you can locate their e-mail information on the internet, it never hurts to send them a quick e-mail note, expressing your interest in their work and their field. Whereas this may not land you with an interview, this person might be willing to help you out. 7) Search online at the major private equity shops and hedge funds for lists of professionals. You may find people with leveraged finance backgrounds who may even have worked in your current position, or have gone to your alma mater. 8) Remember that everything you do is a reflection of you. Firms are not interested in hiring the person who is not polished, well put-together, or pushy. Be mindful of everyone’s time and put yourself in the hiring manager’s shoes—do you really want someone calling you five times a week about a job? Probably not. Be interested, but not over-the-top outrageous. Keep in mind that firms have seen everything, so trying to be original is probably not going to work stay resourceful and stick to the traditional routes

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of friends, your network, and HR.

Typical Interview Questions A candidate will be face several different types of interview questions when interviewing for any corporate finance position. There are behavioral questions, career-related questions, case-study questions, brainteasers, basic finance questions, and sometimes even team projects or take-home financial modeling projects (this is typical of the very top-tier private equity shops). Furthermore, as leveraged finance is a debt function entirely its own, these teams will most likely have a few basic questions of their own. Some common examples are below:

Behavioral interview questions 1) Give me an example of a time when you: led a team, struggled on a project, disagreed with a team member, took initiative, failed at something, let someone down, etc 2) How would your friends/colleagues describe you? 3) What three adjectives would best describe you? 4) What is your definition of success? 5) What would a former manager say about you, if they had to give 3 positives and 3 negatives?

Career-related interview questions 1) Where do you see yourself in five years? 10 years? 2) Do you prefer working alone or in a team? Why? Customized for: Daniel ([email protected])

3) What is your idea of the perfect job? 4) If you had all the money in the world, what would you be doing?

Brainteasers: 1) How many gas stations are there in North America? 2) How many golf balls fit into a 747 airplane? 3) Give me numerous examples of how you can tell if a refrigerator light has gone out. Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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General finance questions 1) How many types of financial statements are there? Briefly define each. 2) What is NPV? Walk me through a simple NPV calculation. 3) Given a company, talk to me about a few different ways to value it.

Leveraged finance questions 1) Why leveraged finance? Tell me what you think about some recent deal examples. 2) What is meant by EBITDA? How is it calculated? 3) What is meant by senior debt? Subordinated debt? 4) What is an LBO? Why are they important to leveraged finance? 5) What is leverage? Why is it important?

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A common misperception is that for most of these questions, there is a right or wrong answer. This is not the case. Most interviewers are mainly trying to assess who you are, whether you would be a good fit for an organization, and how much you know about the job, career path, industry, and yourself. More than anything, it is important to keep your cool during the interview, always trying to answer a question without giving up and getting frustrated. Furthermore, if you do not know the answer to a question, working around the question and saying “I don’t know that, but I DO know this…” or “I would go here to find that answer” will usually suffice. These interviewers are definitely not expecting you to know everything. Rather, they want you to be creative, resourceful, and interested. Subsequently, the absolute worst thing you can do in an interview is say, “I don’t know” and give up. But make sure you do your homework. Read The Wall Street Journal regularly and be sure to skim the headlines the day of your interview. Scour the company’s web site, making note of any recent major headlines. Showing a genuine interest in the firm is much easier when you can ask questions about a recent deal or talk about a recent organizational announcement. This also gives you a chance to bond with your interviewer. After the interview is over, write a thank you e-mail or even a handwritten note to all of your interviewers. Phone calls are cumbersome, so avoid them. A simple “thank you” e-mail will not go unnoticed.

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LEVER AGED FINAN CHAPTER 1

ON THE JOB

Chapter 8: Leveraged Finance Positions, Pay, and Lifestyle

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Chapter 9: The Leveraged Finance Career Path

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Leveraged Finance Positions, Pay, and Lifestyle CHAPTER 8 How much will I make and what will my lifestyle be like? These are probably the two most frequently asked questions in the job search. Rumors continually circle around how much the best-of-the-best in leveraged finance are paid, and how these numbers are decided. Furthermore, just about every firm has its own unique hierarchy, with different titles for every position, different pay scales and compensation packages, and different barriers to promotion (covered in Chapter 9). As someone at a commercial bank or finance company might be a senior associate, a third-year analyst at a top-tier investment bank with the same experience might have a lesser title, but command more compensation. Most of these nuances depend on the economy, as well as the firm. But here’s an indepth view of what you generally can expect.

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We’ll start with investment banks. Although they vary from firm to firm, the major titles at investment banks (from the most junior to the most senior) tend to be analyst, associate, vice president, and managing director. Firms will often break these into multiple roles, to add further title and pay stratification. For example, some firms have junior analysts and analysts, associates and senior associates, principals, directors, managing directors, and even senior managing directors. The difference between the titles largely correlates to compensation and experience. 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. Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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Investment Banks: Structuring/ Origination Within structuring/origination, there are four major roles: managing director, vice president, associate and analyst. As the hierarchy is structured, there are generally more analysts than associates, more associates than VPs, and more VPs than MDs. At most firms, the ratio tends to be one MD for every one to two VPs, two to three associates, and three to four analysts. Managing director: Sitting at the top of the leveraged finance food chain, the MD generally spends most of his/her time speaking with treasurers and CFOs of companies, in order to assess their financial status and need for debt facilities. The MD is usually the key relationship manager for the bank because of continuous dialogue with the client. As senior members of the deal team, MDs have something of a sales role, and interact with a limited number of clients whom they have worked with throughout the years. The top MDs are group heads, who may have contracts outlining their compensation structure.

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Managing directors will spend quite a bit of time pitching ideas to clients, as their salary is typically determined based on the fees they earn from their deal flow. In this sense, it is not uncommon for the best-of-the-best MDs to command multiple-millions of dollars in compensation in good years (think $3 million or more in bonuses). Naturally, it pays to be an MD in a leveraged finance group that executes a high volume of exceptionally profitable LBOs, DIP facilities, and recapitalizations. However, more often than not, the salary of an MD is enough to support his/her basic lifestyle and the bulk of pay comes in the form of a bonus paid with stock options that must vest over a certain period of years. These “golden handcuffs” are usually incentive enough for senior MDs to stay at their current firms for long periods of time, which generally ensures consistency at the most senior ranks. As for lifestyle, managing directors typically work “market” hours—from 8 a.m. to 7 p.m. However, when working on more complex transactions, they will often work later, reviewing financial presentations and editing offering memorandums. Rarely is a weekend worked from the office, but it is not uncommon for an MD to review materials and make calls from their homes on the weekend or on the train ride home from work. MDs also tend to have access to corporate expense accounts, in order to entertain clients over lunch, dinner, a ballgame, or on the golf course.

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Vice president: The vice president on a deal team is the right hand man of the MD. Once a mandate has been won, the VP generally takes over and manages the process going forward. From the negotiating and signing of legal documents to the final signoff of the information memorandum, the VP’s role is to ensure that everything in the deal goes smoothly. Throughout the deal lifecycle, a VP will often act as the relationship manager, delivering the periodic client update call and subsequently laying the future foundation for his promotion to MD. Although, like MDs, VPs interact frequently with clients, VPs tend to be salaried and not commission-based they way MDs typically are. The very best VPs are paid extremely well, commanding salaries in the multiple hundreds of thousands of dollars, like their other corporate finance investment banking counterparts. In great years, it is not uncommon for a top performing VP in a very active team to clear $1 million. However, in bad economic times, or working in groups that do not originate many transactions, these VPs tend to make closer to $250k.

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The high performing VPs are generally on the fast track to promotion, spending three to four years in the role before becoming a managing director. At some firms a vice president will be referred to as a “principal” or “director”—the main distinction of this role from that of a managing director is a lower salary. VP titles are also quite often awarded to those who spend a good amount of time interacting with clients. 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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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.

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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 associate’s 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 analyst’s ranking compared to his/her peer class. In determining an analyst and associate rankings, the analysts and associates are force-ranked within their class and among the larger corporate finance junior resource pool. With the market momentum in the past years, this trend towards promotion has been more the rule than the exception. In recent years, about 50% of second-years were offered a third year and roughly 50% of those were given the A-to-A offer. It is more common find managing directors who have started as analysts and worked all the way to the top in leveraged finance when compared to other areas of an investment bank. 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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Investment Banks: Capital Markets/ Loan Sales and Distribution Managing director/vice president: In a capital markets function, the managing director and vice president often have very similar job responsibilities; one’s title reflects not job responsibilities but years of experience in the field. As loan sales and distribution is typically grouped with these capital markets professionals (if not one and the same at most firms), these positions are compensated similarly. Managing directors and vice presidents spend most of their time advising deal teams and clients on market conditions, as well as delivering these deals to investors. With years of relevant experience, these professionals generally hail from origination and structuring teams or another section of the investment bank’s corporate finance practice, and are typically compensated on a scale comparable to their managing director and vice president peers in origination and corporate finance. Although their function is not specifically “on the

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line” (they are not directly responsible for generating revenues for a firm), and this means that their pay scale might not be quite the same as those successful at originating many deals, it is generally very close. However, because the pay for a capital markets MD does not depend as much on fee generation as it does for an origination MD, this can lead to more consistent earnings for the capital markets MD/VP year after year. In this sense, the capital markets and loan sales teams are like head coaches of professional sports teams: whereas the players (the deal team) are out winning the games, the coach is directing the team during games, drawing up new plays (adjusting the terms of the deal in market), conducting research on other competition (market comparables), talking to fans (investors), and interacting with the team’s owners (the client). While marquee players bring in extraordinary financial contracts, the very best coaches are generally not too far behind.

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As the firm’s eyes and ears of the financial markets, the capital markets and loan sales positions tend to work more “market” hours. In at 7am and out by 7pm is somewhat typical for these senior professionals. However, even the senior capital markets professionals will commonly find themselves working with origination teams and issuers to structure large deals well into the evenings. Loan sales professionals often work late too, but in a different capacity and outside of the office. Often, they are attending dinners/sporting events with investors and/or clients. Regardless, the lifestyles of senior professionals in both capacities tends to be quite hectic: following the markets, talking to clients, answering questions from investors, and spending the day attached to a BlackBerry. Weekends for these teams are typically freer than they are for origination teams, but there is always occasional work that needs to be done. 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, that’s not necessarily true.

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While an origination analyst or associate completes a number of different tasks over the span of a week (such as writing an info memo, adding pages to a credit deck, or completing slides in a pitch), the capital markets associate/analyst usually completes tasks on a daily or hourly basis. The nature of the job is like a sprint, not a marathon, often involving numerous fire drills. For example, deal teams might ask for league tables and credential slides, investors might want to know the spread differential between a particular syndicated loan and a high-yield bond, a senior MD of the bank might want a deck of slides outlining market conditions, and a client might want a set of recent 2nd lien LBO deals. These are all likely requests in the first half of a day for a capital markets associate or analyst.

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Therefore, it is not uncommon for an associate/analyst in these groups to spend the entire day at his desk, working through a large list of requests. On the upside (if you can call it that), the day will most likely end before midnight (and usually closer to 9 to 10 p.m.) and resume again promptly at 8 a.m. Although the capital markets have closed and the MD and VPs might have gone home, there are always materials needing preparation for early morning meetings and late-night last-minute requests from deal teams. This is quite different from origination, where the day of an analyst might not end until 4 a.m., but the next day will not usually start until 10 a.m., as there is less market sensitivity in origination/structuring. Weekend work for capital markets associates and analysts is usually a regular occurrence. While unlike the weekends of their origination counterparts, weekends for capital markets analysts and associates are usually not spent entirely in the office, the variety of the requests is less predictable than in origination. In origination, there are usually projected deadlines for projects. In capital markets, those deadlines are usually ASAP. As for sales, working on a weekend would be quite out of the ordinary. A quick phone call or BlackBerry message to a client might occur, but not the creation of market update slides or league tables, which usually happens in capital markets.

Investment Banks: Credit/Risk/ Corporate Banking/Ratings Advisory

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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.

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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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Organizationally, commercial banks and commercial finance companies tend to set up their leveraged finance platforms in relation to their deal flow. Whereas some of the larger players like GE have dedicated origination teams to cover large cap and small cap issuers, smaller middle-market players might combine all of their origination, capital markets, and sales roles. Typically though, the large players are set up in a manner similar to the investment banks, although they will combine the complementary functions such as sales/capital markets and underwriting/credit/risk. At these firms, the titles/hierarchy are similar to that of investment banks, as is the way that pay for each function depends on how closely tied that group is to revenue generation. However, at the commercial banks, pay and lifestyle are often very different than that at an investment bank.

Compensation On the whole, pay within a commercial bank’s leveraged finance platform tends to be less than at a major investment bank. As commercial banks are not usually leading the signature event-driven multi-billion-dollar financing transactions, their leveraged finance platforms are not bringing in the same volume of revenues as their investment banking counterparts. Assuming the same mix of 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.

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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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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investment banking analysts: $175k and $200k at investment banks versus $85k and $100k at commercial banks. This compressed pay scale continues through the ranks. While the top performing managing directors in an investment bank’s leveraged finance group can expect to earn millions of dollars in any given year, a counterpart at a commercial bank might expect to earn only multiple hundreds of thousands of dollars. A top performing vice president at a commercial bank might make $300-500k in compensation, whereas top performing senior vice presidents at investment banks can make $1 million.

Lifestyle Of course, the greater pay at an investment bank’s leveraged finance group versus at a commercial bank is related to a lifestyle tradeoff. Generally, analysts in a commercial banking leveraged finance division can expect long days of hard work and occasional weekends, but not the grueling hours and weekend expectations of their counterparts in investment banking corporate finance programs. Instead, their hours are typically 8 a.m. to 9 p.m. (and often extending until midnight), but absent the expectations of all-nighters and everyday weekend work. Associates and vice presidents also generally have better hours than their investment banking peers, with fewer late nights. At a managing director level, the consistency of hours for a commercial banking MD tends to be better than for the I-banking MD, although the difference in hours is not as severe at the MD level as it is for junior professionals.

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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 overcome—regardless of an individual’s 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 92

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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.

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When it comes to lifestyle and pay in leveraged finance, the mot important factor is consistency. This goes for everything including hours, weekend work, hiring/firing, compensation, and promotions. At the investment banks, there definitely is a risk/reward payoff in the good economies. However, even the top performers are not safe in bad economic times at these investment banks, as they are subject to the volatility of the markets and the effects the economy has on an organization. At a commercial bank or finance company, the stability of the company has less to do with the financial markets and, subsequently, so do all of these pay/lifestyle elements—a certain amount of career stability exists during bad economies at commercial banks, much more so than at investment banks.

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The Leveraged Finance Career Path CHAPTER 9

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.

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At the investment banks, analysts are usually hired into a two-year program, where they compete against their peers for rankings that determine bonus compensation and promotion. At the end of this two-year period, the analyst’s contract is either extended for another year, making them a 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 analyst’s salary. Also, this bonus is indicative of the analyst’s 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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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.

A Day in the life of a Leveraged Finance Structuring/Origination Analyst

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7:30 a.m.: It’s Thursday morning and you are just waking up from a late night of last-minute pitch changes until 3 a.m. You’re headed to the client’s office, thankfully only a few blocks away in Midtown Manhattan at 11, so you already printed and bound 25 copies of the refinancing pitch last night. You check your BlackBerry to make sure that the deal didn’t dramatically change while you were sleeping, shut off the alarm clock, and grab your suit. 8:30 a.m.: You arrive to the office via the subway, coffee in hand, to find yet another markup on your chair of the pitch from your associate. Thankfully it’s only a few minor errors that you overlooked, but it means that you’re going to spend the next few hours racing around, making changes, and substituting new pages. At any rate, it is better that you all caught the mistakes before you were actually in the pitch. Usually you are not in the office until 9:30 or 10, but with an important client pitch, you knew you had to be there early today. 8:40 a.m.: You login and check your voice mail, only to have 20 new emails, from your other deal teams, capital markets colleagues, friends, and 96

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lawyers. You ignore a voice mail from your buddies, knowing that you’ll need all of the next two hours. You put everything else that was on your chair into the stack of “stuff that’ll get done later.” 8:50 a.m.: You’re already cranking into the changes, saving the presentation, when your MD drops by your desk and says, “Let’s make this final change and update this slide.” After you quickly do so and incorporate the other changes, you send the pitch over to your production group, with instructions on which slides to replace in your 30-page presentation. 9:30 a.m.: After sending the presentation, you walk over to find that the presentations group is slammed with last minute requests. You call up your associate, who comes over to help. For the next 30 minutes, you are printing and swapping out pages while checking your BlackBerry. You also return to your desk to quickly burn the new presentation to a CD and save it, yet again, to your hard drive. Once the books are completed and flipped, you throw them in a bag and call your car service to make sure that a car is ready and waiting to leave at 10:15.

Customized for: Daniel ([email protected])

10:00 a.m.: You’ve returned to your desk, only to have a flurry of messages on your desk for other deals. Ignoring them, you grab your suit jacket, check yourself over once in the mirror, and stop by the VP’s desk, books and laptop in hand. The associate is right behind you and now you’re just waiting on your MD, who is on the phone with another client. 10:30 a.m.: Now in the car, you’re only 10 minutes away from the client’s office. The VP flips through the presentation only to temporarily freak out at the last minute addition. The MD assures the VP that she made the change and everyone reviews their speaking points for the presentation. Being exceptionally diligent, you have printed out the latest news about the client from the company web site, as well as online finance sites. You pass copies around. Even though it’s a refinancing, it’s multiple billions of dollars in financing for one of the firm’s most prominent clients, which means that if all goes well, there are definitely more transactions in the pipeline for your team. 10:45 a.m.: You arrive at the client’s office and you are escorted up to their boardroom. You set up your laptop (the associate has also brought a backup) and you plug everything in. You also set up each chair with a copy of the presentation and establish a dial-in line, as your capital markets expert was not able to make it in person. From a presentation standpoint, everything is

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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.

Customized for: Daniel ([email protected])

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. You’ve already got a sit-down with Credit at 4 p.m. to discuss an auction financing for an LBO by a major private equity firm, which Credit already does not like. Also, you have a conference call at 6 p.m. to discuss closing dinner slides with your coverage counterparts for your most recent transaction. Naturally, the associate from your 4 p.m. deal has been eagerly awaiting your arrival from your pitch, ready to tweak the financial model and credit package with the newest changes from that VP and MD. With a bid deadline on Tuesday, the financial sponsor coverage group wants to get approval before the weekend, in order to put together some financing slides for a Monday morning presentation with the PE firm. 2:30 p.m.: After you’ve made a list of things to get done and have returned a phone call or two, you realize that these “tweaks” are going to take every minute of the next hour and a half. You grab the most recent financial model from the share drive, throw on your headphones and start cranking. If you are lucky, the model will not implode and you will make the 4 p.m. deadline. 3:00 p.m.: Your parents call. They’re worried about you, since you haven’t called in a few weeks. You tell them that you’ll have to call them later, but everything is alright. Now, back to cranking on your financial model… 3:30 p.m.: The model is complete with the newest assumptions and you drop these new numbers into the credit package. You scan through it to make sure

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nothing else needs updating. Doing this, you notice that financing scenario is better, but still somewhat unlikely to get approved. The associate and VP stop by your desk to take a look and make sure they don’t want to make any other changes. 3:40 p.m.: The financial sponsor coverage team called and wants to check on the conference room for the meeting with credit. You double-check, get back to them, and call up the credit executive. The associate and VP made their minor changes to the presentation, so you click print on 10 copies on the presentation and the financial model. The printer is busy, but you’ve got two backups. Clicking print on both of these printers, you and the associate grab five binder clips each and wait for the printing to finish. At 50 pages each, this could take a little while. 3:55 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.

Customized for: Daniel ([email protected])

3:59 p.m.: Nearly out of breath, but right on time, you pass out the credit packages to everyone in the room: the financial sponsor’s coverage team, your origination/structuring team, the corporate banker, the credit executive, the loan capital markets MD, and the high-yield capital markets MD. For the next hour, everyone reviews the package, asks questions about the deal, the due diligence, and the company. You get to answer all of the financial modeling questions, while the associate tackles the mundane company questions, since you both decided early on to adopt these sections of the presentation. Somewhere during the presentation, you notice two or three minor errors, but since they’re buried in 50 pages of work, nobody can blame you. Surprisingly, at the end of the meeting, the credit executive gives signoff, but asks for some minor information, which you make note of and promise to deliver. The financial sponsor coverage team schedules another sitdown on Tuesday morning to discuss the sponsor’s reaction to the financing proposal, since they will be with the client all day on Monday. However, at this point, your firm is just trying to remain competitive with the other financing firms and it’s 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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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 firm’s financing offer. He fires around an e-mail, with congratulations, as well as a first-thing deal team sitdown in the morning to get started on drafting the info memo and launching the transaction. In the meantime, he tells everyone to go home soon, since there’s plenty of work to do tomorrow. Although exciting, you know that you will spend the majority of your weekend cranking on an info memo and prepping for a deal launch. Thank goodness this transaction is a standard loan refinancing from a prior deal, otherwise you would be up all night worrying about a high-yield roadshow and/or rating agency presentation.

Customized for: Daniel ([email protected])

5:50 p.m.: You finish up some e-mails and phone conversations, so that you can check out what is needed for the 6 p.m. conference call. Planning a closing dinner is somewhat enjoyable, as it is a chance to reminisce about the deal. You quickly review the deal toy choices, which were sent over to you from the firm preparing them, and you e-mail those choices out to the team. Since the dinner is two weeks away, you’re still in the idea generation phase with the team, but you have already written down memorable quotes, made a reservation at a high-end restaurant, sent out invites, and put together a slide of transaction highlights. 6:00 p.m.: The conference call only last 30 minutes and everyone is given a 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 Tso’s 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 you’ll be cranking most of this weekend to update slides in the financing pitch for Monday. However, since it is not the final round of the auction, this will be a relatively easy task. Realizing that you also have a first thing meeting with the MD of your live deal, which will likely take all day to finish, you decide to knock out these credit package changes ASAP.

Customized for: Daniel ([email protected])

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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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time you’ve got in the next 24 hours. Also, you know the deal team will be impressed when you’ve made good progress by tomorrow on the outline. 2:00 a.m.: Realizing that you’re exhausted, but have made great progress on the basic sections of the info memo, you decide to call it a night. Thankfully, there are many other analysts still cranking away, which kept you company for the past few hours. Since you live in Manhattan, you do not need to call a car service. Instead, you will just hop in a taxi waiting outside. To finish up the day, you respond to some e-mails from friends, shut down your laptop, and grab your BlackBerry. It has been another long day at the office, but the weekend is getting close.

Associate 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.

Customized for: Daniel ([email protected])

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 routes—such as business school, private equity, or hedge funds—at 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. 102

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At commercial banks and finance companies, the promotion to associate tends to be less eventful. Often, an analyst is promoted without a re-signing bonus, but simply an increase in pay to somewhere in the range of $65-80k. As they may already be paid on a January-to-January bonus cycle, there is typically no need for a stub bonus. However, for associates coming from business school, it is not uncommon for the firms to pay a relocation bonus of $10-15k and a stub bonus in January that will be smaller than that of their investment banking peers. Most associates at investment banks, commercial banks, and finance companies tend to spend three to four years in the associate role before promotion to VP. If there is a senior associate or junior VP title, this can mean less time with the “associate” title. At commercial banks and finance companies, promotions are generally less eventful and will occur at earlier periods than at investment banks. Furthermore, with the formality that exists at investment banks, associates who have been in their position for three-anda-half years and are not promoted to VP are usually asked to leave. This is not necessarily the case at commercial banks and finance companies.

A Day in the Life of a Leveraged Finance Structuring/Origination Associate

Customized for: Daniel ([email protected])

7:00 a.m.: It’s a little bit early for you to be up, but you want to get a head start on the day. Since it’s a Friday and your analyst has been cranking late on an info memo for a new deal, you definitely want to get into the office and review it ASAP. Also, your MD has called a 9 a.m. meeting for this deal and you want to be prepared. So, you grab the BlackBerry and head to the office. 8:15 a.m.: Even as a third-year associate, you still are not used to the early morning hours, which follow long evenings. Although you were at work until 11 p.m., your adrenaline still runs high, as you are now on two live deals. One, a multibillion dollar refinancing, was just mandated, and the second is in market with a lenders’ meeting on Tuesday morning. There’s always plenty going on in this job, which is exactly why you love it. You check emails and start to review the info memo shell that your topnotch analyst worked on late last night. That kid is definitely going places.

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8:40 a.m.: Realizing that you’ve got 20 minutes until your meeting, you 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.

Customized for: Daniel ([email protected])

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, they’d like to wrap up any major changes before the weekend. 11:00 a.m.: You make the call to the client, going slide-by-slide through your newest update to the presentation. You discuss talking points, where you all should meet, and any other changes. The client suggests updates to a few slides and you make note of them. Knowing these changes will be made to the info memo, you make note to change those as well. You promise to send them a soft copy of the slides by 4 p.m., so they can print them out before they leave for home.

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12:30 p.m.: Immediately after you get off the phone, you begin reviewing the changes. Recognizing that this will take you a few hours, you decide to grab a bite to eat from the cafeteria downstairs, since you know that you can get back to your desk quickly. 12:50 p.m.: Eating lunch at your desk, you start cranking on changes. The VP stops by periodically to ask questions, but otherwise you spend most of the afternoon cranking on the changes and double-checking everything. Since hundreds of investors will be scrutinizing this deck of slides, you want it to be as perfect as possible. Also, since this is going back to the client, you want the work to be top-notch. 3:00 p.m.: With the changes made, you circulate this presentation to the VP and MD to show them what you are sending. Often, the CFO and treasurer will call you directly and vice versa, but you still like to touch base with your deal team. Once you have final approval from them, you send over a copy of the lenders’ meeting slides.

Customized for: Daniel ([email protected])

3:30 p.m.: Your e-mail to the client has been sent, so now it is time to check in with your other deal team. Meanwhile, the analyst is cranking on the transaction overview section of the info memo and making good progress. You both grab some coffee to take a break, while you discuss the weekend and career stuff. 4:00 p.m.: Once back to your desk, you check e-mails and voice mails. You make some calls to friends, check CNN and the WSJ, and catch-up on the rest of your day. About this time, the analyst from your deal has arrived back in the office from the high-yield bond roadshow, completely exhausted. You both sit down to update on what has happened with the lenders’ presentation, while you strategize what needs to happen before Tuesday’s meeting. However, since the final approval for the deck of slides has not yet been given, you are really in a holding pattern on that front. Yet, updates need to 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 Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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shortly too. As one of them is drafting part of a credit agreement this weekend, she invites you to hop on a conference call tomorrow morning at 11 a.m. Since you will be in the office anyhow, this is totally fine by you. 6:00 p.m.: You stop by both analysts’ desks to see how they are doing. You divide up some minor tasks, so that everyone can get out of the office tonight, since it is a nice evening outside. With only a few hours of work on Saturday, you feel great about this weekend. 7:00 p.m.: You shut down the laptop, remind the analysts not to stay late, since a lot of that work can be done tomorrow, and you head home. As for a 7 p.m. departure on a Friday, you have seen a lot worse!

Vice President

Customized for: Daniel ([email protected])

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 team’s 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 firm’s best talent. As is the case with analysts and associates, vice presidents are usually grouped into classes based on when they joined the firm. However, it is at this level where pay tends to vary from firm to firm and group to group. A few firms will pay their vice presidents bonuses based on their individual fee generation, while 106

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most will pay based on forced class-ranking, much like the analyst/associate model. Since VPs are not usually responsible for client relationships, the latter tends to be the norm, but revenue-generating VPs tend to be paid quite differently than non-revenue generating VPs. At the same firm, a VP in risk might expect to earn $250k including bonus, whereas a top-tier VP in origination might expect $1 million a year or more in total compensation. Finally, VP pay can be remarkably different from firm to firm. VPs within origination groups at the top-tier investment banking leveraged finance shops are the highest paid, whereas risk/credit VPs at middle market leveraged finance shops with significantly less deal volume and fee generation are probably the least. Therefore, when choosing a firm for a career in leveraged finance, it is important to consider the nature of your role, the firm’s deal flow, and your team, as this could have a very substantial impact on compensation in the future. 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 (let’s 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.

Customized for: Daniel ([email protected])

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.

Managing Director/Group Head The managing director title is the pinnacle of leveraged finance, and banking in general. Managing client relationships is the key to this job and, in the case of origination/structuring, generating fees for the firm comes with this responsibility. That being said, there are usually more MDs in origination/structuring roles than there are in credit/risk/underwriting roles. Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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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 firm’s management team, this role is reserved not only for someone who has put in years of service to the firm, but also shows the potential for many more. As mentioned earlier, promotion to MD does not just happen after three or four years at the VP level. Like Hall of Fame inductions for professional sports, there are numerous qualified people, but only a certain handful of these candidates make it every year, depending on a firm’s needs. The best-of-thebest performers might find themselves in an MD role in their early/mid 30’s, promoted the first year possible and well on their way to top-tier management.

Customized for: Daniel ([email protected])

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.

Transitioning to Private Equity/Hedge Funds These days, leveraged finance is one of the hottest places to work before pursuing a career at a private equity shop or a hedge fund, a trend easily confirmed by searching through the bios of private equity associates/vice-presidents on the web sites of big hedge funds and PE firms. Because they have so much transferable work experience, as well as an understanding of the industries, top-tier analysts, associates, vice presidents, and even managing directors commonly leave their positions at leveraged finance firms for these shops.

Customized for: Daniel ([email protected])

More often than not, those working in leveraged finance seeking careers in private equity tend to make the career switch after their analyst years. Most of the big name PE shops hold recruiting seasons in the early fall for their expected incoming July class. Much like the traditional investment banks, these PE shops tend to hire analysts for two-year periods and then send them along to the top-tier business schools: Wharton, Harvard, and Stanford. In many cases, these analysts return to their PE shops as associates after completing their MBA. This means that PE shops are reasonably able to predict the number of resources needed to fill for each and every hiring year. Therefore, they seek out this analyst talent at the cream-of-the-crop investment banks and leveraged finance shops very early in the year. By hiring headhunters and using word-of-mouth on the Street, these private equity shops are always on the lookout for the best talent for next year. Analysts fortunate enough to land interviews at the big-name private equity shops will face extremely tough interviews. These firms will often conduct intense take-home financial modeling sessions in order to make sure that an analyst has the skills to succeed. Highly sought after, these interviews can weed out even the best talent. Candidates from leveraged finance, financial sponsors coverage teams, and M&A groups tend to comprise the majority of interview schedules, due to their financial modeling and deal experiences. Another reason for this July-to-July switch to PE has quite a bit to do with bonus pay cycles. Private equity shops also tend to pay their junior resources on a July-to-July basis, which is in line with the start of business school, as well as the bonus period for the analysts they are hiring. For this reason, many associates and VPs tend not to be involved with the PE recruiting process, choosing not to lose valuable years of work experience or potential pay at their current firms.

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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.

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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 firm’s 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. 110

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Final Analysis A dynamic and ever-changing industry, until the past decade or so, leveraged finance truly was the sleeping giant of investment banking. But as financing firms realized its potential, as the financial markets expanded, and as investors realized its vast opportunity, this giant awoke. Now a premier training ground for those crème de la crème private equity shops and hedge funds, as well as a lucrative profession for even the best investment bankers, the world of leveraged finance has only begun to take off.

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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.

Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more.

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About the Author

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William Jarvis graduated from Georgetown University's McDonough School of Business and has worked at General Electric Capital and JPMorgan (the leveraged finance group).

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