Vault Guide to Leveraged Finance

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© 2006 Vault Inc.

LEVER

FINAN

CARE

VAULT CAREER GUIDE TO

LEVERAGED

FINANCE

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© 2006 Vault Inc.

LEVER

FINAN

CARE

VAULT CAREER GUIDE TO

LEVERAGED

FINANCE

WILLIAM JARVIS

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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.

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Library of Congress CIP Data is available. ISBN 1-58131-502-3

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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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INTRODUCTION

1

THE SCOOP

3

Chapter 1: The Background of Leveraged

Finance 5

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 19 Investment Banks . . . .19

Commercial Finance Companies . . . .26

Hedge Funds and Other Institutional Investors . . . .28

Private Equity and Financial Sponsors . . . .30

Chapter 3: The Products 33 The Leveraged Loan . . . .33

The High-Yield Bond . . . .43

Capital Structures . . . .44

Chapter 4: Leveraged Finance Groups 45 Structuring/Origination . . . .45

Credit/Risk . . . .45

Ratings and Capital Structure Advisory . . . .47

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Vault Career Guide to Leveraged Finance Table of Contents

Capital Markets . . . .49

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

High Yield Bond Sales & Trading . . . .53

Chapter 5: The Transactions 55 The Leveraged Buyout . . . .55

The Corporate Restructuring . . . .58

Other Event-Driven Financings . . . .59

The Debt Refinancing . . . .60

GETTING HIRED

63

Chapter 6: What Leveraged Finance Firms are Looking For 65 Personality Type . . . .65

Education . . . .67

The Resume . . . .68

Chapter 7: The Hiring Process and Interview 71 The Standard On-Campus Interview/ Recruiting Process . . . .74

Lateral Hires . . . .76

Typical Interview Questions . . . .79

ON THE JOB

Chapter 8: Leveraged Finance Positions, Pay, and Lifestyle 83 Investment Banks: Structuring/ Origination . . . .84

Investment Banks: Capital Markets/Loan Sales and Distribution 87 Investment Banks: Credit/Risk/Corporate Banking/Ratings Advisory . . . .89

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

Career Path 95

Analyst . . . .95 A Day in the life of a Leveraged Finance Structuring/

Origination Analyst . . . .96 Associate . . . .102 A Day in the Life of a Leveraged Finance Structuring/

Origination Associate . . . .103 Vice President . . . .106 Managing Director/Group Head . . . .107

Final Analysis 111

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Right now, it seems like every other headline in The Wall Street Journal is a blockbuster M&A event, a multi-billion dollar LBO, or a rise from bankruptcy by a fallen corporate angel. Much as they did in the late 1990s, both investors and corporations have cash burning holes in their pockets because of positive economic conditions, and are subsequently pushing the financial markets near new heights. Like the late 90s, the result is record M&A activity, a boom in hedge fund activity, a rise in venture capital spending, a return to the buyout activity of the late 1980s, and a general feeling of excitement on Wall Street. But unlike the late 1990s, this flurry of financial activity is somewhat tempered, as today bankers distinctly remember the subsequent massive economic downturn of only a few years ago and its effects on global financial markets. Nevertheless, the major forces that have spurred this investment activity, such as historically low interest rates, low credit default rates, and healthy cash balances are making Wall Street an exciting place to be.

Because of low interest rates, relatively few bankruptcies, and investors’ hesitation to invest in the equity markets, no area has seen more activity than debt markets. This activity has manifested itself into record global borrowings, as global credit issuance is expected to exceed $7 trillion in 2006, dwarfing its $2 trillion level in 1995 and far surpassing its $4.5 trillion level in 2005.

A vast majority of this activity has been spurred by the field of leveraged finance. With financial institutions eager to lend money and borrowers excited to capitalize on market conditions, the effects in just the past few years are easily identified: the second, third, and fourth largest LBOs of all time, record fundraising by hedge funds and private equity shops, M&A activity levels reaching the highs of 1999/2000, all-time-low borrowing costs for companies, and off-the-charts volume in the high-yield bond and syndicated loan markets. For all of these reasons and many more that we will discuss in this Vault Guide, leveraged finance is a good place to be.

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CHAPTER 1

LEVER

AGED

FINAN

THE SCOOP

Chapter 1: The Background of Leveraged Finance

Chapter 2: Major Industry Players

Chapter 3: The Products

Chapter 4: Leveraged Finance Groups

Chapter 5: The Transactions

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The Background of

Leveraged Finance

The financial markets can be divided into two major sections: debt and equity. Under this overarching organization structure, think of leveraged finance as the intersection of investment banking, commercial banking, hedge funds, private equity, and sales & trading on the debt side of the financial markets. Generally speaking, leveraged finance is a platform in all major investment and commercial banks. It is a function that taps into two major financial markets (the high-yield bond market and the leveraged loan 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?

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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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.

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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Vault Career Guide to Leveraged Finance The Background of Leveraged Finance

Standard & Poors (S&P)

AAA

Moody’s

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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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.”

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.

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 day-to-day life of those working in leveraged finance.

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The History of Leveraged Finance

Loans for companies

Leveraged finance originated from what would historically be thought of as commercial banking. As companies needed money, they would typically go to the loan officer of their local bank to obtain financing. Much like you might need a loan to buy a house or car, companies have always needed loans to buy properties or even fleets of cars. Lending institutions generally distributed these loans in certain sizes and interest rates to companies, based on the 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. 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

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opened up the syndicated loan market, but it also made other financial markets more transparent, due to the emergence of the relative value of products across asset classes. Although still issued in a very small number of situations, the bilateral loan for the multi-billion corporation is now essentially obsolete.

The bond market

In addition to being able to take out loans from banks, companies that are large and stable enough have historically also had access to public bond markets. To do this, companies enlist investment banks to issue bonds to investors that promise a set interest rate of return on investment. Investors independently analyze the company issuing a bond and determine the interest rate that makes it worthwhile for them to take on the risk of the company not making its scheduled payments. If acceptable to enough investors, the bond is issued; these investors have essentially lent the company money through this bond issuance.

Being able to issue bonds has made it possible for companies to raise money for acquisitions, to invest in capital projects, or to refinance existing debt. Together, the bond and loan represent the major financial instruments in the world of leveraged finance.

The expanding market of debt

The bond and the syndicated loan markets have also evolved and expanded over the past few decades. In 2005, the U.S. syndicated loan market reached issuance volumes near $1.6 trillion, nearly doubling its $800 billion volume in 1995. In 2005, the high-yield bond market also more than doubled in volume in the past 10 years, reaching approximately $100 billion, versus $40 billion in 1995. A vast majority of this evolution is due to exceptional credit conditions, fewer bankruptcies, record low issuance rates, and the relative value of the asset classes as investment areas for institutional investors. This relative attractiveness of the debt markets is especially strong in light of the equity market downturn in the early 2000s. With security and near-guaranteed returns, the debt markets have seemed exceptionally 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

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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

Also, it is important to note that these lending transactions are very profitable for institutions that arrange them, not just the institutional investors. For the largest deals, this can mean tens of millions of dollars in arrangement and syndication fees. For example, it was estimated that the fees for the financing of the famed 1989 leveraged buyout of RJR Nabisco by Kohlberg Kravis Roberts (immortalized in the book Barbarians at the Gate) were somewhere in the hundreds of millions of dollars. Thus, armed with large balance sheets and subsequently the ability to lend money to numerous companies, the bulge bracket investment banks with historically strong commercial banking arms (JPMorgan, Bank of America, Citigroup) have become the dominant players of the leveraged finance industry. Not only do these banks have the money to lend and the historical know-how to do so, but they also have the priceless investment banking relationships which they can use to propose financings. Increasingly, leveraged finance is attracting new and different players to the industry. Competition for providing large financing solutions to companies has become intense, with many companies even conducting “auctions” to see who brings the best financing package to the table. Realizing that they might be late to the game, large banks are rapidly bulking up their leveraged finance platforms in order to take advantage of the abundance of fees for arranging these transactions. Although the big firms continue to dominate the industry issuance in loans and bonds, smaller firms have realized they can make an exceptional return on their money and time by providing financing to middle-market companies (middle middle-market is generally defined as a company with less than $500 million in annual revenues and/or less than $50 million in annual EBITDA). For example, by raising $25 million for a company by assembling a syndicate of lending institutions hungry to put idle cash to work,

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small lending shops are finding themselves with a few million dollars in fees and profitable new relationships.

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

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

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. 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.

This breadth vs. depth tradeoff is directly related to the amount of transaction experience offered in leveraged finance. For example, the day-to-day grind might be a little more hectic in a leveraged finance role, as a deal team could potentially be closing two multi-billion dollar transactions on the same day— something that would be quite unlikely in a coverage role. However, this transaction-oriented environment involves substantially less idea generation and pitching of ideas to clients than one would find in an investment banking industry coverage group. That is not to say that someone in leveraged finance will not do any pitching—quite the contrary. While the industry coverage group might come up with and pitch the idea of a syndicated loan or high-yield bond to finance an M&A deal, they will surely bring along the appropriate people from the leveraged finance platform to comment on the markets, comparable transactions, and provide other relevant advice. If you are beginning your career in finance, it is important to think about your long-term career goals when considering a role in investment banking coverage versus leveraged finance. If your goal is to work in a specific industry—let’s say running a health care company—you would probably be better served in a health care coverage group at an investment bank. However, if you are interested in working at a hedge fund or private equity 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

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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.

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

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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.

Vault Career Guide to Leveraged Finance The Background of Leveraged Finance

EBITDA

In leveraged finance, there are some common terms and phrases, from “revolving credit facility” to “senior debt,” that you will learn as you read this guide and learn more about the world of leveraged finance. However, no term is more important than the word EBITDA. Companies live and die by it. The leveraged finance markets are built around it. Basically, EBITDA is a relative measure of a 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

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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.

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-over-year, 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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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.

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.

Major Industry Players

CHAPTER 2

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

These are truly the dominant players in the industry. These are firms that have been lending to companies for years; therefore, their relationships with 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

Top firms

• Bank of America • Citigroup • Deutsche Bank • JPMorgan Chase • Wachovia

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Because of the vast expansion of the field of leveraged finance, as well as the increase in size and scope of the financial markets, these types of firms are redefining stereotypical investment banking: they are becoming “one-stop shops” for clients. As the commercial banking operations of these firms have become more integrated with their investment banking operations, a client can rely on one banker to get nearly everything it needs, including M&A advice, a syndicated loan, a high-yield bond, an IPO, or even savings and checking accounts. Furthermore, clients can now count on one banker to know everything about their companies, which creates a very trusting relationship. Since most of these clients started at one point or another with a small loan from one of these banks, it comes as little surprise that leveraged finance contacts are very often the managers of these extremely valuable relationships. Needless to say, this is very good exposure for a young leveraged finance analyst or associate.

Also, generally speaking, because the leveraged finance operations of these firms started as part of their commercial banking operations, the leveraged finance groups in these types of investment banks will typically have more of a commercial banking feel: a little more laid-back and a little bit less hierarchical than their M&A counterparts. However, they still all fall 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

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 fee-related events. Without a commercial banking presence, these pure investment banks would rather allocate their balance sheets to larger fee-events for revenue generation, such as proprietary trading, rather than investing and structuring syndicated loans or high-yield bonds for their clients.

This is not to say that these firms do not arrange syndicated loans and high-yield bonds. On the contrary, they do and they are quite good at it. As just a pure matter of transaction volume, however, they just do not have the breadth of experience or leveraged finance market presence. However, they will seek to do this type of arranging of financing for firms where an obvious M&A relationship, or other type of fee relationship, exists. For this reason, a much larger portion of the leveraged finance deals handled by a standalone investment bank will be LBO, IPO, spin-off, or M&A-related. (The firms’ bankers in other departments will be generating fees for work on these larger deals that have a leveraged finance component.) In contrast, a firm such as JPMorgan Chase or Bank of America will arrange a syndicated loan or high-yield bond for just about any client of the investment or commercial bank for any reason, whether it be as part of an LBO, IPO (or other larger deal), or something simpler like a debt refinancing that is not related to another fee-related event.

Also, as a syndicated loan tends to require more of a capital commitment than a high-yield bond due to the sheer size of the loans, these standalone investment banking firms tend to be more active in the high-yield bond

Top firms

• Credit Suisse • Goldman Sachs

• Lehman Brothers • Merrill Lynch

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market than in the syndicated loan market. Furthermore, on average, syndicated loans tend to be less profitable than their high-yield bond counterparts, especially those that are not event-driven. Where a firm might earn $1 to $2 million for arranging a $100 million syndicated loan for an LBO financing, raising that same amount using high-yield bonds could earn the bank anywhere from $3 to $5 million, possibly more. In this situation, the standalone investment bank has made a quantity vs. quality tradeoff, opting for the market with substantially less volume but a high rate of return for its own money and time. This is especially true in the event of a general refinancing, when these bonds and loans tend to earn substantially less. Every firm has internal metrics for the rate of return it must earn for its own balance sheet, for these firms, that rate is typically much lower than the investment banks with commercial banking divisions.

Organizationally, these firms typically place their leveraged finance platform into the debt capital markets portion of the corporate finance division of their investment banks. Unlike their counterparts with commercial banking operations, they typically do not have full teams dedicated to originating transactions. Most of the deal origination at standalone investment banks comes from an investment bank client coverage team; the market 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

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presentations for lenders, and more intricate offering memorandums. Also, since this type of leveraged finance platform might span multiple debt markets, it is also possible that an analyst/associate here might see other types of debt transactions, including high-grade bonds, private placements, investment grade syndicated loans, and even mezzanine debt tranches. The regional or boutique investment bank with a commercial banking presence

These firms, which do have both investment and commercial banking presences, are also players in the leveraged finance market. However, they typically arrange financings in the “large cap” space for clients where they have a distinct relationship, or they compete in the exceptionally profitable middle market space. Larger firms in this category (such as ABN AMRO, Barclays, and SunTrust) often have full-scale leveraged finance platforms, but they might find themselves investing in these loans and bonds more often than actually arranging them. The same is somewhat true of the smaller lending operations, such as Jefferies, yet they generally compete for financings in the middle market space.

A substantial difference between the large investment banks with 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

Top firms

• ABN AMRO • Jefferies & Co • KeyBank • National City • PNC • SunTrust • Wells Fargo

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financing packages are still comprised of leveraged loans and high-yield bonds and are structured for the same clients and for the same purposes as are the large investment and commercial banks.

Even further down the scale of size, many smaller boutique investment banks have formed lending units by raising a specific amount of funds (typically $1 to $5 billion) for the sole purpose of arranging financing packages for clients. Like the pure investment banks, they too are not chasing a quantity of transactions; instead, they are typically seeking event-driven deals. In order to distribute their capital wisely, these firms tend to work with smaller companies in the middle market space. However, they still arrange financing for the same variety of transactions that the larger players do and they tend to interact with the same top-tier private equity shops and hedge funds. On occasion, they will even work with venture capital firms, which is something that the larger leveraged finance shops very rarely do. Also, these smaller lending institutions tend to own a larger piece of the financing package than their larger leveraged finance counterparts and they tend to syndicate to a much smaller investor universe. At these firms, the workplace culture is typically more laid-back than at the pure investment banks and in general is more similar to a commercial banking operation. Also, with less deal volume than their larger counterparts, one can generally expect to close fewer transactions at these firms, yet be much more acutely involved in every piece of the leveraged finance process. With much less transaction volume, analysts and associates at these shops typically become even more involved in every aspect of the process and this will add to the depth of their working experience. . Also, with generally fewer people in the leveraged finance groups, analysts/associates have an opportunity to take on a substantial amount of responsibility and even truly develop client relationships.

Junior resources at these firms are also sometimes considered part of corporate finance programs as investment bankers, and sometimes they are not. This distinction depends entirely on the firm, as do the culture and hours. Hours tend to fluctuate with the peak times of a deal, such as the closing and funding of a transaction

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Commercial Finance Companies

If you were to take a brief look at the descriptions of commercial 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.

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

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

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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

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.

Reflecting the global financial markets, institutional investors tend to be located all across the globe. It is not uncommon for an investor to be located in Miami Beach, FL, Los Angeles, CA, or Greenwich, CT. Organizationally, these firms tend to run fairly lean, only hiring individuals that can add immediate value to their firm. As a growing number are playing in both the primary and secondary leveraged loan and high-yield bond markets, they are seeking individuals with prior credit experience. Individuals working in leveraged finance have become a highly sought after commodity for hedge funds. Some of these funds play entirely in the leveraged finance markets, while most of the large firms typically have a set amount of their assets under management invested into the markets.

For these institutional investors, the gateway to entry into the leveraged loan and high-yield bond market comes from either the firm originating the transactions, or the firm administrating the transactions. When a leveraged loan deal is structured, marketed, and syndicated many of these investors are given the chance to invest in the loan. Similarly, when the high-yield bond is marketed, these institutional investors are given the opportunity to buy into these bonds. On the secondary side, as a firm finds an interest in the outstanding leveraged loan or high-yield bond of a firm, it would call its relationship manager at its investment bank to place a trade. When placing such a trade, it is not atypical for the order amount to be multiple millions of dollars. So a one-point move in the trading level of a position can have a major financial impact on a firm.

Without league tables to rank the buy-side firms, it should be noted that the major institutional investors in the high-yield bond market are typically insurance corporations, money managers, and investment corporations, such as Fidelity, PIMCO, and AIG. Though hedge funds play in this financial market quite frequently, only the large ones are generally targeted in the roadshow offering process. In contrast, on the leveraged loan side, institutional investors tend to include all of the above players, as well as quite a few hedge funds, including large firms like Highland Capital, Eaton Vance,

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Van Kampen, and SAC Capital. All of these investors, and more, are targeted in the loan syndication process.

Culturally, it is tough to stereotype the institutional investor universe, as the size and investment nature of the firm can have a dramatic impact on their organization. (The Vault Career Guide to Hedge Funds is a good resource for anyone seeking to understand more about these firms.) However, because hedge funds generally represent an improvement in hours and, in some cases, also represent a step up in pay, many former leveraged finance analysts and associates seek careers at hedge funds. With a firm understanding of credit, interaction with the leveraged finance markets, a wide arsenal of relationships, and an understanding of a variety of transactions, the junior resources at top-tier leveraged finance shops are frequently contacted by headhunters and other placement professionals for positions at top-tier buy-side shops. In these positions, these junior resources now become clients of their former leveraged finance peers, investing in transactions they very well might have structured when on the other side of the fence.

Private Equity and Financial Sponsors

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. 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/spin-off financings, and M&A transactions.

Career-wise, private equity shops tend to be another major career alternative for those in the leveraged finance field. An investment banking professional who has completed the analyst program at a top-tier leveraged finance group

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seeking a slight career transition might seek out a two-year program with the big names in private equity, including KKR, Blackstone, Bain Capital, Madison Dearborn, Carlyle, Texas Pacific Group, Hicks Muse, JPMorgan Partners, and Thomas H Lee. With financial-sponsor transaction experience, a firm understanding of the lucrative buyout process, and interaction with the leveraged finance markets, a career in private equity can be a comfortable career fit for a former leveraged finance banker. Although the hours might not be drastically better than the in investment banking, private equity firms generally pay at the top end of the Wall Street scale, assist with MBA applications to top-tier programs such as Wharton and Harvard Business School, and many even allow “carry” in the firm’s funds (a share of the firm’s profits). These are the typical reasons why some seek a change of pace into the private equity field.

The leveraged finance players providing the bulk of the financing money for private equity transactions also happen to be the firms with the largest balance sheets and top-notch financial sponsor coverage teams. At the top of this list are familiar leveraged finance names, such as JPMorgan, Deutsche Bank, Bank of America, Citigroup, Credit Suisse, Goldman Sachs, and Lehman Brothers. As the nature of LBO transactions tends to favor purchasing stable companies (whose earnings can be used to pay of the loans used to purchase the company), there tends to be more activity in the large cap space when it comes to LBOs. The major leveraged finance players in the industry also have the ability to offer their financial sponsor clients a wide variety of financing solutions across both debt and equity markets, which is not typical of a large commercial finance operation.

Still, though they do not generally compete in the large cap LBO space because they place less emphasis on serving private equity shops, commercial finance companies are active in the middle market LBO arena. Examples of these include GE Antares, CIT Group, CapitalSource, Ableco-Dymas, and Madison Capital.

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