Why Would An Investment Bank Raise Debt To Keep On Its Balance Sheet?
My understanding is that an I-bank can either syndicate the debt for a client or not syndicate the debt for them to keep on the balance sheet. Why would an investment bank want debt to sit on its balance sheet?
You've got to get more specific here - there are various layers to debt and arrangement. A deal could be a bought IG bond deal where it's on the balance sheet temporarily while the sales and trading team find buyers. Or it can be a bi-lateral term loan A which is usually quite rare - either a small amount or for a small company.
Ok great. I wasn't specific because I don't really know what I'm talking about when it comes to debt. So an overview on the different types of uses like your comment is what I'm looking for.
Banks keep all kinds of loans on their books if the credit quality and security package of the loan is proper/adequate enough.
The only time banks DON'T keep loans on their books is for speculative or institutional capital.
Banks will hold Term Loan A's and RC balances, but will not for High Yield Bonds or anything more speculative/junior in the capital structure of a Term Loan B.
More info on this debt specific question on lifeandlevfin. Goes through all the kinds of debt products that a company can raise, and what a bnak like a JPM/WF/CS/BAML will hold
Hope this helps and best of luck.
I agree the jargon sucks
could mean borrowers drawing down on their revolver (RC), which banks lend to at a proportional % to their underwritten amount in say an LBO - all else equal. and basically every company has a Revolver
banks also are lenders via RC/ Term Loan A structure if generally leverage is less than 3.0x / 4.0x secured / total. above that and typical sponsor deals are TLB via institutional lenders (originate to distribute)
Let me try to answer further this one and the other similar thread on Underwriting
Relationship Lending - starts w/ Revolver -banks lend to Company thru RC, and get a certain "Wallet share" of other fees proportional to the % of total commitments / tier they are in. Banks go to credit committee as well as BUSINESS committee to see if the returns - or potential returns projected, say 15% - hurdle the minimum the committee needs. So yes, lending to companies is a KEY part of a bank's business to get: -interest income via Applicable Margin / committee fees paid -fees: underwriting fees mentioned below - thats the big $$
CVS (Aetna) = Allocations 3Y Term Loan A: $3B 5Y Term Loan A: $2B 1Y Bridge to Bonds: $44B -so you see,
Hopefully this allocation table illustrates -wallet share - other potential fees; cash management, FX (Japanese Yen - conv back to $), derivatives (Jetblue- hedging oil & gas/fuel) , and then hopefully if theres a big "transformative acquisition" - you get invited to participate in the underwriting. if thats: Inv Grade: Bridge Loan to: Term Loan A / Bonds (hopefully get bond economics Lev: Term Loan B underwriting fees of say: BB/Ba2: 1.00-1.25% B/B2: 1L TLB: 2.00-2.25% / 2L TLB: 2.50-2.75%
so to summarize for CVS -investment Grade / Leveraged up to ~4.0x: RC / TLA / Bridge Loan - syndicated to banks Highly Leveraged / LBOs / Sponsor financing >4.0x (typically like 4.5x/6.0x, 5.0x / 6.5x, or 5.0x/7.0x for software:
RC $25 / 2.00% fee TLB $150 / 2.00% fee
-banks underwrite $175 (RC + TLB) -hold the RC -get underwriting fees = to proportion of what they're holding in the RC with the other banks -launch syndicate of TLB via bank meeting to institutional investors - who hopefully buy it. -if they dont, you get hung
happy to follow up w more on best efforts vs UW, or like engagement letter vs. commitment letter and how you can tell its best efforts, etc. does this make sense?
if you wanna see banks commit to take on the most debt they've ever had to get approved for - take a look at the Broadcom (Qualcomm) deal which the White House killed. $100B
https://www.sec.gov/Archives/edgar/data/1649338/000119312518047396/d542…
Feel free to DM me for any more insight / trade emails and set up a gameplan to learn more about this space.
1 more visual just to show you the bank vs. institutional lenders and where they lend in the cap structure
Cap Structure Hanesbrands (BB+/Ba1) - or at least they used to be
Appreciate the insight you’re bringing on the LevFin front - nice to see reports from the trenches in the midst of all the undergrads talking out of their asses.
LMAO! appreciate you reading and acknowledging the efforts. I put a lot of time into posts where I can add a lot of value, and not just speak in “general terms” , but rather, give them a real example to visualize
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