How does Loan Origination/IG Loans/Loan Capital Markets make money?
As above.
The way that I understand it, Commitment Fee, Drawn Margin, Utilization Fee - are all collected by the Corporate Bank. So how does the IB desk make money?
Is it only through Underwriting Fees (not applicable for RCFs) and Coordination Fees?
Would appreciate a full breakdown of fees etc!
Thanks
Based on the most helpful WSO content, the money-making process in loan origination or loan capital markets can be quite complex and varies from institution to institution. However, here's a general breakdown:
Origination Fees: These are fees charged by lenders for processing a new loan application, used as compensation for putting the loan in place. Origination fees are quoted as a percentage of the total loan and are generally between 0.5 and 1% on mortgage loans in the United States.
Underwriting Fees: These are collected by the investment banking desk for assessing the risk associated with a loan and conducting due diligence. They are typically a percentage of the loan's value.
Coordination Fees: These are fees that may be collected for coordinating the loan process, especially in syndicated loans where multiple lenders are involved.
Commitment Fee: This is a fee charged by a lender to keep a line of credit open, or to guarantee a loan at a specific date in the future.
Drawn Margin: This is the interest charged on the amount of the loan that has been drawn down. It's a significant source of income for the lender.
Utilization Fee: This is a fee charged when a borrower exceeds a certain level of use of the loan amount.
Remember, the specifics can vary based on the loan type, the institution, and the specifics of the deal. It's always a good idea to ask for a full breakdown of fees when negotiating a loan.
Sources: Thoughts on Goldman vs Lending Club, Working in FIG (Financial Institutions Group) - An Overview., https://www.wallstreetoasis.com/forum/investment-banking/how-ibd-makes-or-loses-money-and-why-that-matters-to-you?customgpt=1
Bump
You’re correct, underwriting and coordination / structuring fees are the primary revenue drivers for a Loan Capital Markets desk
If you underwrite bridge loans you can make massive structuring, upfront, and underwriting fees.
How much money would they be making?
Also, I understand that these underwritten bridge loans are pretty episodic and a lot of work is also on syndication of RCFs. But I understand that upfront and coordination fees (do both get paid for an RCF?) is pretty low, like 30 - 50k. So do LCM desks make a lot of money compared to DCM/ECM then or not really?
Underwriting fees can vary from 2-4% of the amount of $ underwrote.
Not only are the fees are very lucrative for the bank, but it also helps pull advisory/M&A business from the same client. On the flip side, if the bank doesn’t syndicate the deal successfully, the deal can lose money for the bank if the paper is stuck on its balance sheet.
And yes, I think LevFin (usually loan capital markets sits inside LevFin) pulls more income than DCM, which typically is more catered towards IG credits (this may vary by bank).
If you're working on a large M&A transaction, you can make a substantial amount ($10mm+) on the bridge loan underwrite and syndication. For IG, the way to make money is to lead major deals. For LevFin world, fees are proportionally much higher but so is the risk (see Twitter hung bridge loan as an example).
You typically will not make much doing BAU bank financings for revolvers and term loans but if you're the lead, can typically at least make $100k-$1mm in arranger and upfront fees.
You need Loans bankers in order to be apart of the non-bank financing transactions so their value is more than just the fee earned on participating in a syndicated revolver which may be essentially nothing.
Laboriosam amet illum et voluptate rerum. Deleniti in et aut totam. Qui doloribus repellendus hic vel ut expedita. Dolore ipsa cumque impedit corrupti aut. Ea dolores sapiente dolorem enim asperiores placeat. Natus enim cum sit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...