Leveraged Finance (LevFin)
Leveraged Finance (also known as LevFin and LF) is an area within the investment banking division of a bank that is responsible for providing advice and loans to private equity firms and corporations for leveraged buyouts.
Bankers working in LevFin tend to focus more on high-yield and mezzanine debt as they can typically charge higher fees and the client is more willing to do so due to lack of debt covenants.
LF departments work on acquisitions (leveraged buyouts), recapitalisations, and asset purchases. Companies looking to do any of those things can do so using debt, and it is cheaper to use debt than to use equity or cash.
Although LF and Debt Capital Markets teams both work in debt, the DCM team works more with investors and the markets while the LF team works with the actual company on the structuring of the deal. One of the most prestigious LF departments is within J.P.Morgan in Europe. Leverage is sometimes referred to as 'gearing' in European countries.
Leveraged Finance Firms
There are far fewer LF groups on the street than most groups. It is exclusive to bulge brackets and a few mid-sized banks. Here's why from @exADbnkr13.
Most boutiques are not really in the business of LevFin (if you are talking about the Evercore, Lazard, Centerviews of the world) -- it requires a significant amount of capital, hence the boutiques don't play a large role in that market.
Because of the nature of LF - lending extremely large amounts of capital - boutiques can't have a slice of the pie. Besides the bulge brackets in the space, middle market firms like Jefferies, RBC, and GE Capital are big players.
For exit opps and prestige, your firm goes a long way. Here's a fairly exhaustive list of the best names in LF.
- JP Morgan
- Credit Suisse
- Goldman Sachs
- Morgan Stanley
- Wells Fargo
These are the top players as of now. Use the search function in the top right corner of your screen if you have any questions regarding this list/other firms. The paradigm is constantly shifting after all.
Hours, Salary, and the Work Itself
What are the hours like in LevFin groups? How do those hours compare to M&A? Do those hours vary by firm? Answers to all of those questions from @exADbnkr13.
I worked as an analyst, up to Sr. VP in Lev Fin - first at a mid-size bank, then at 2 BB firms. I had first started my career in M&A at a BB, so I have a good sense of comparing the 'brutality', if you will. I would say that Lev Fin is on par with M&A as having the most grueling hours. The reason is really the client base. If you're working in Lev Fin, your clients are predominantly PE firms, and they are (obviously) the most demanding, time-sensitive clients to deal with. As far as the specific question of the difference in hours for Lev Fin at BB vs Boutiques, I have to say that most boutiques are not really in the business of Lev Fin (if you are talking about the Evercore, Lazard, Centerviews of the world) -- Lev Fin requires a significant amount of capital; hence the boutiques don't play a large role in that market... but I will add that the hours at the mid-size bank were somewhat better than the BBs simply because BBs have much more flow/volume of deals and the mid-size banks can only commit so much capital to be a real player.
Hours are just as gruesome as M&A, 70-80 hour weeks are the norm, and 100+ when it comes to crunch time. As for what you spend your time on in LF, it's mostly credit analysis and modeling - although some firms don't do any modeling whatsoever. Here's some insight from @WallStreetPlayboys on what credit analysis is and why it's necessary.
Whether you are investing in equity or credit, you are evaluating whether or not a given company is worthy of an investment (stating the obvious we know). That is, if you give XYZ Corp. some of your money now, is XYZ likely to give you your money (and more) back in the future. The biggest risk in both cases is that you are not paid any of your money back. Alternatively? You are not paid the "appropriate" amount of money back for the amount of risk you took on. The difference is in the potential upsides. For equity investors, upside is unlimited. For credit investors, the upside is contractually limited.
Credit investors are guaranteed their upside, so their biggest focus is on the risk of not getting paid back. Since their returns are capped (fixed income), they spend a lot more time caring about the nature of the actual security that they are investing in. Where does it fall within a given Company's capital structure? Do they believe the Company will be able to afford their interest payments? Will this lead to an eventual return of principal? They aren't nearly as focused on earnings or the income statement as a whole. Instead, they focus much more on the balance sheet and cash-flow statement.
Salary is comparable to most investment banking gigs, all-in compensation coming out around $130k.
In LF, analysts mainly do a combination of credit analysis, modeling, and other miscellaneous things. Here's a nice summary of what they do from @ginNtonic.
Analysts structure leveraged loans / high yield bond deals for corporate and private equity firm transactions, such as M&A, LBOs, div recaps, etc. Analysts will write approval memos, offering materials, talk to institutional/bank investors, and model transactions.
Thing is, there's a lot of variation in the above functions depending on the firm. Some groups do plenty of modeling; some do a little; some do none. Some groups don't let their analysts talk to investors; most do.
Leveraged Lending vs Leveraged Finance
Here are a few differences between leveraged lending firm and a LevFin division from @AsAnalyst14. At its base, understand that one is a firm (typically middle market) while the other is a division within a firm (typically bulge bracket).
Before being sold to CPPIB, Antares was the sponsor coverage division at GE Capital. GE Capital was in the business of underwriting middle market leveraged loans for LF transactions and general corporate purposes. Debt raised for clients is then syndicated to other middle market lenders, which could include Golub. Golub is a BDC, which functions similarly to a credit fund. BDCs lend directly to middle market companies. But whereas Antares (or GE) was interested in underwriting volume and generating capital markets fees, Golub has more limited funds and is more concentrated on generating yield from a loan book for their LPs.
LevFin groups at a BB bank (BofA, JPM) operate more similarly to a GE Capital just on a larger scale, both in terms of clients and debt quantums. They will also provide clients with access to the bond market, which can include high yield bonds. Bonds are not a common method of debt financing in the middle market given that most companies will be private. However, Leveraged Loans and Unitranche debt have taken on a lot of the structural characteristics of a High Yield debt in Credit Agreement terms (e.g., cov-lite, basket definitions, Available Amount).
You get rewarded for paying your dues in LF, more on that from @exADbnkr13.
As it relates to exit opportunities in Lev Fin Cap Markets: the bottom line is that the opportunities are much better than DCM (in my experience, both personally and with former colleagues of mine) -- and it really has to do with the complexity of lev fin vs structuring boring investment grade bonds. (No offense to anyone who works in DCM, but you guys work on rudimentary crap, plain vanilla, T+ nothing deals.) Lev fin cap markets, like lev fin originations, involves a lot more quantitative analysis, market analysis, and smarts.
I have been on both the cap markets and originations side. I have seen guys in cap markets go on to Asset Management. ( A former co-worker of mine who was a great LFCM banker is now working at the most prestigious PE firm in asset management.) I have also seen guys go work elsewhere on the buyside in portfolio management and even trading HY bonds/lev loans. LFCM guys (and gals) also have much better latitude to move around internally or externally to other parts of the i-bank: some go work in liability management (tenders/swaps/exchanges, etc), others could join the HY sales desk (very easily since they already know all the investors)...
Long story short: I am of the opinion that LFCM opens a lot more doors than DCM (and yes, HFs are also a possibility). To the first question about careers at places like RBS Citizens, PNC Cap, the quick answer is that middle market volume has not picked up nearly as much as the rest of the market. The other issue is some of these MM players (with the exception of some of the top MM players like GE, Jeff, RBC, CIT (to an extent), BNP - despite issues in euro zone) are starving for more deal activity right now as well as increased competition from the slew of specialty lending platforms that popped up (as I mentioned). And even the big PE firms have set up special mezzanine/sub-debt platforms focusing on the MM -- so it's a bit iffy at the moment. I would say they do tend to pay less (I mean an RBS Citizens type shop) and the lifestyle is decent (but it does vary). Given what's going on at the big firms right now, I would say that lateral moves are more difficult in this environment. (You definitely can go from MM to MM firm, but as everyone knows, the large firms are still in firing not hiring mode -- they still need to hire new analysts and associates because they can't keep existing analysts in the same seat forever. But they are just doing it in much less volume and are being more selective than ever).
The three exit opportunities that LF sets you up nicely for are:
- Hedge funds
- Private equity
- Mezzanine funds
Mezzanine funds deal with mezzanine financing - a form of debt that replaces the equity owed investors. If the company defaults, the lender gets either ownership or equity. Mezzanine loan interest rates are typically 12-20%; it's a high-risk high-reward gambit.
Besides the above three exit opportunities, there are always the typical investment banking exit opps: entrepreneurship, grad school, and all sorts of roles within a corporation.
As for private equity as an exit opp to LF, your chances depend greatly on the firm you work for. See the list above under "Leveraged Finance Firms" for an idea of what firms are the best to work at in terms of exit opps and prestige.
Should You Get a Job in LevFin?
How does LF compare to the other investment banking groups? For career opportunities, here's how it stacks up against other groups from @1styearBanker.
There are many different kinds of PE, some groups like TMT will place into tech-oriented PE, some into healthcare-oriented PE, and whatnot. If a coverage group does its own modeling, like GS, you'll even have GS TMT going into KKR/BX and other megafunds. (GS TMT consistently sends the most to KKR; there is no comparison.) From a general approach, LevFin with good experience will be just as good, if not better than M&A, but analysts from both groups depend heavily on deal flow and their experiences. Most importantly, it depends on the bank. Some banks, like MS M&A, will obviously place better than MS LF, but BAML LF will place better than BAML M&A.
If you had to rank groups, which makes no sense since it depends on the bank and that bank's reputation, go forLF and M&A first. Then go for strong groups that your bank is known for. Then finally, go for DCM due to some modeling experience, and if you have absolutely no choice left, you will get stuck with ECM, in which case you should reneg on the offer and go to a boutique.
While M&A takes the cake for best investment banking group for many, LF groups are just as good in many cases and better in others. If you get an offer with any of the top firms we mentioned before, then you've set yourself up for some nice exit opportunities.
Secured a summer internship in LevFin and looking to get prepared? Fret not! Here's @1styearBanker with three tips for you.
- Brush up on your modeling skills. It always helps to be familiar with lbo models although the extent to which you will model will largely depend on your team culture / bank. (As mentioned countless times, some teams do more modeling than others.)
- I would also not forget to work on your PowerPoint skills. Although you do significantly less PowerPoint than in industry coverage teams, it still helps to be efficient at this level.
- Understand the differences between leveraged loans and high yield bonds, the processes, the technicalities, etc. This is probably the most important, as being able to understand the technical aspects can really make you stand out.
One thing to note is that you will likely be doing very little modeling, so don't worry too much if that's not your strong suit yet. Tips two and three, however, are golden. You should absolutely brush up on PowerPoint and understand the terms mentioned in three.
- Bridge Loan
- Debt Capital Markets (DCM)
- Investment Banking Division (IBD)
- Leveraged Buyout (LBO)
- Private Equity (PE)
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