Q&A: Non-Bank Commercial Lending
Doubt there's much interest in this, but might as well put it out there. I'm a credit analyst at a specialty finance company. We directly originate loans (mostly lower MM) and typically compete against commercial banks or other similar companies for those deals. Everything is transaction driven (no cash management, capital markets, etc.), and a combination of leverage and the spread creates out-sized returns for what are otherwise vanilla loans. There are various product groups, but the general philosophy is the same. I don't have a ton of market intel as an analyst. It seems like a pretty fragmented market and the business model changes depending on where you sit in the capital stack and your financing. There are BDCs, hedge funds, PE-managed/owned companies, no-name shops with private capital, etc. so it's a pretty wide universe (within the context of MM/lower-MM debt, hah). - Hours range from ~50-70 hours a week, usually closer to 50 than 70. - Comp is solid for the lifestyle. More like consulting than IBD. Can't speak too generally for this though. - I don't know what it's like to work in, like, the Wells Fargo rotational program, but the threads on this site don't align with my experience at a smaller company.
CommercialAnalyst thanks for the AMA! This is an area that I'm interested in as I worked for a small partnership that would source and lend money to small business owners. Some questions:
1.) Can you explain what you mean by transaction focused (no cash management)? Not quite sure I understand.
2.) How did you land the Credit Analyst role? Did this firm recruit on-campus or was this through networking?
3.) Who is your primary customer base? Are they small to mid-size companies? Why do they come to you versus a national bank such as JP Morgan, BAC, etc?
I'll start with these and follow up with more questions. Thanks!
Sorry, all I meant is that we make all of our money from loans. There aren't any services to cross-sell, so we can't make a loan at L+200 for the relationship.
I got the job through a campus posting. There's a mix between people who started out of school and people with a year or two of experience in (mostly) I-Banking or Big 4 Financial Advisory.
Worse credits. A lot of the deals we see are in workout, or the facility isn't being extended with their current bank. A company has a bad year, trips some covenants, the bank has to reserve more capital against the loan and now the economics don't work...that kind of stuff. Sometimes a company or sponsor is willing to pay more for certainty to close and flexibility with covenants.
I interned in commercial lending last summer. It's funny how commercial lending gets no coverage on this site when some of the lenders make boat loads of cash specially with commission based lending models.
I've said this since the 1st day I got here.
The attitude is like Commercial Lending doesn't even exist. I assume there are people on Wall Street who are in Middle Market lending (not even Corporate Lending). But maybe I am wrong and those roles doesn't exist on Wall Street. Obviously this site is geared for IB, but considering other industries get a lot of coverage (Real Estate, Consulting, etc), Commercial Banking should have more of a spot light. I mean, you have John Thain who was a well known IB guy moving to CIT to run a Commercial Bank. If that doesn't validate the inter-contentedness, i don't know what does.
I also agree there is a mountain of money to be made. Additionally, you can be greatly successful in a low COL area so not only are you making very good money, you are retaining most of it and have a superior quality of life.
Oh well, I will get off my soap box. I have already stressed these points, ad nauseum, on this site.
To the thread starter, what is comp like for the guys on the originations side? I assume they are relationship managers since they manage the credit after closing? Since you dont take deposits, where does your funding come from?
No one at my company would say that we're on Wall Street, but it's a comfortable niche. I think it's a hard business to scale, since a $10MM deal can take as much work as a $100MM deal, and then depending on leverage the equity might only be a fraction of that. There are definitely points of intersection though. Lots of firms "specializing in middle market debt solutions" are full of former bankers and lawyers. Major PE firms are buying senior lenders and a lot of bigger names have BDCs that invest in the lower/middle market. On the back end, too, financing is provided by the bigger shops.
Realized I'm reviving an old thread but curious...what's daily responsibilities like when you're in a down cycle? Ex - CRE/C&I lending was the primary driver behind most (regional) bank loan growth over the past 3 years or so. Now it's decelerating. Are you still making calls looking for new business? Managing relationships? Monitoring credit metrics?
What part of the country are you in? How much do the originators make there?
East Coast.
East Coast. Not sure what originators make. Very few of them actually come into the office. Most work from home in various parts of the country and travel.
CommercialAnalyst, follow up questions:
1.) Any tips on what one can do to prepare for a Credit Analyst interview? What technical questions should you prepare for?
2.) Have you read any books or primers on Credit Analysis that you found useful or insightful?
Thanks once again for the AMA!
Sorry, logging in for the first time in ages...
1/2. I don't think it's any different from other new grad finance positions, in terms of interviewing. All the WSO/Vault/M&I guides are still relevant, but with less of an emphasis on the DCF and actual valuation aspect. It might help to have a coherent explanation as to why you want to work in debt/lending. As far as primers
http://www.leveragedloan.com/primer/#!whatisaleveragedloan is good overview (I don't even work in leveraged lending).
Yes, we need certain returns, which in turn leads to a different risk profile from bank commercial lending. We refinance a lot of loans in workout with commercial banks. Underwriting is more of a career path as well (at least within my firm). My impression is that commercial banks put you through a rotational program and then the goal is to work in originations. Again, only speaking for my company but the underwriters aren't rubber stamping whatever origination brings in.
50MM to 1B is about right.
It's a far cry from high finance and might be kind of depressing on first glance for the GS or bust crowd, but just google like commercial finance/leveraged lending/bdc news and some decent sites will pop up...but I don't think anything really comprehensive or great exists for the middle market because it's so fragmented.
We don't really operate in the same space.
~100 people. My group is probably ~15 people not including the portfolio team.
Deal teams are usually a junior person and a director. An originator will source a deal, hand over some initial data, we do a prelim that goes through an informal screening. Based on that, a term sheet goes out. If we sign up the deal, the originator is basically hands off from that point.
My job is basically 1. writing the credit memo 2. making the model and 3. running internal processes (pissing off back office, funding mechanics, etc.). The director usually reviews the memo/model, runs the legal process, and manages third parties. It's not a case of "the analyst is seen and not heard" - we go to management meetings, ask questions, sit in on most legal calls and review docs.
Curious - does your firm have a separate portfolio management team? Is that essentially a monitoring/risk management responsibility?
CommercialAnalyst Thank you for doing this.
What is different between private lending and lending at a larger commercial bank? Specifically, I am assuming that there is pledged capital, so that investors must look for a specific return on risk-averse terms.
Also, you say it's MM, so would you consider 50MM to 1B in rev the correct range?
What's the industry/product/individual to business mix that you would typically follow? Do your bankers do corporate dev and go out to source capital as well as new financings?
Thanks in advance!
Thank you for taking the time to do this,
What would be your recommended book or resource to learn about this topic?
Thoughts on the likes of Lending Club and other bad actors in the marketplace lending space having a negative effect on the overall specialty finance sector?
I love when a fellow commercial guy comes out of the wood work and I can say your experiences fall nearly identical with mine. A few quick ?'s that i don't think have been addressed.
1) Assuming (potentially to a fault) you're a non-ivy grad? Possibly B1G, AE or SEC schooling? (personal curiosity, feel free to be as vague as you want) 2) By east coast (and not specifying NY) I assume you're in the DMV? (again personal curiosity,same) 3) Do you get involved in any larger syndications to spread the risk around? or does that take more juice out of your return than you're willing to work with? 4) Does your firm have separate CRE and C&I/BDC groups or do you find yourself working with any/all credit types?
Thanks
Thanks for putting this up!
Thanks for starting this thread! Very insightful. I was wondering if you could answer a few of my questions:
1) For someone in leveraged finance, would it be possible to move to a commercial banking analyst role in a smaller city if that is a market he/she wanted to ultimately reside in? If so, what would the roles be called - commercial underwriter (1,2, 3, etc.), relationship manager, etc.? What level of experience would be best to make a move at? 2) Is it a good idea for a credit analyst to move from one of these non-bank companies to a bank and try and get into a more "sales-oriented" role? Would these be the relationship manager roles aforementioned? What is the lifestyle and earning potential in a role such as this?
Thanks! Any additional insight would be very helpful.
Biggsy,
1) commercial banks on the MM side typically attempt to hire from within - train kids right out of college and keep them for life as the whole premise is based on relationships (generally speaking). While I don't see why one would not be competitive with a lev fin background, it is less likely to see that transition occur. - probably an underwriting role.. on the MM side, you see employees start as credit analysts and work up to RM.. so to make the move, it would probably be better with couple years of experience at most, then perhaps post MBA (MBA doesn't carry as much weight as in other industries tho)
2) typically the move is from bank to non-bank just as with IB > PE.. if you want to get into sales then sure an RM is the idea, but you could likely make much more doing sales in some other capacity or industry.. lifestyle and comp - comfortable, but unlikely to make it big (relative to whatever you personally benchmark).
hope that helped.
Bump for answer to my question
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