Modeling in Leveraged Finance
I am a 2nd-year Analyst in the LevFin origination group at a BB. I often read that LevFin is very modeling intensive, but after 2 years in my group, I feel like I have barely learned any modeling at all. High level- my group underwrites Term Loan Bs/Revolvers. Our bank holds a portion of the facility and our syndicate desk sells off the remaining portion to institutional investors. The "modeling" that my group does is taking the sponsor's projection model and company historicals and drop it into our template model. I then compare our model's projections with the sponsor model to make sure everything checks out, and then we look at credit ratios, EBITDA cushion, etc. Now obviously every model needs adjustments, and we tweak the template each time. I typically build in a down case as well. However, its nothing more than a 3 statement operating model. Is this typical for LevFin groups? I know our coverage and M&A teams are getting a better technical experience, but I am falling behind LevFin analysts at other banks? My goal is to jump to a credit fund next year.
What more to modeling do you think there is besides the operating model?? Most of the modeling that gets done by coverage isnt that difficult either- its mainly just looking at equity research and bullshitting assumptions. Furthermore, you said you have exposure to not only the operating model but also you create your own downside case scenarios- this is what modeling is. Also, in lev fin (in the case of LBOs) the model is created by the financial sponsor (since they are experts in the subject)- your job is to check how reasonable this is and then determine the true borrowing capacity for the entity.
Sounds like you are getting good experience- also you can always load up a template and make the model yourself- it isnt rocket science and quite frankly isnt that difficult. Also if your goal is to jump to a credit fund it sounds like you are gaining great experience for it. You even have good experience for PE from the exposure to the models that you have as well.
Yeah this - I'd argue that you get more value from your understanding of credit (docs, terms, etc.), industries (looking through DD) and the deals you covered. Modelling by and large, while useful, shouldn't be the one main thing that you learn from your banking years,
What else would you need to be showing for a paydown model anyway? Coverage bankers basically do the same thing for their projection models, except the bank-and-forth is with management assumptions. Banking in general isn't building a model totally from scratch to get to a valuation assumption - that's def more of a research / HF role.
Agreed, I’m in levfin as well and do the same as you
Work in lev fin at a smaller bank. Can confirm we always get a model from the sponsor. The thought is they are far more sophisticated than we are and have more insight into the company, hence why it is required in the capital markets for them to provide us or any other investor a model.
As for learning, I mean I feel like I’ve learned a lot about modeling, and can customize our model which often is set up quite differently than the sponsors, especially when fixing taxes ect. What more do you need to do than figure out if it will be able to payback through cash flows/ set covenants/ make sure ratios appear to be in order? Having 30 pages of build up isn’t necessary for the sake of doing it.
Seems like we all think others are doing super complicated models but in reality we are all just plugging numbers into a simple template.
Phew, makes me feel less anxious about recruiting talks.
Who is “we” lol...OP has worked in Lev Fin for years
VP from a LevFin group of a US bank based in Asia. I'd say what you've been experiencing re modeling exposure is normal. Thing differ quite a bit bank to bank - I know folks at some banks don't do model at all, except feeding industry teams (who are holding master of model) debt terms like amort schedule and interest rate. In my group/bank, since most peers from the coverage side still don't quite get how cap structure and cash flow work after all these years, we've decided to take modeling in-house within the LevFin team for any LevFin transactions (LBO, M&A financing, recaps, etc) just to avoid all the hassles and inefficiency from sending draft models back and forth.
Based on my exp of working with my counterparts in the US or Europe, I'd say the modeling exposure here in Asia is quite robust, to a large extent because of the typical convoluted financing structures in this region of the world. Give you an example, for most LBOs of Chinese/Indian companies, you finance the buyout at the offshore/Holdco level, and things like certain refi and revolver on the onshore level. Holdco is essentially equity in the cap structure as these jurisdictions prohibit provision of upstream guarantees or securities. Hence you gotta model out how to get cash out of the onshore space (where cash is generated) to the offshore/Holdco level in order to service debt. Why all the hassle? Because we want to know the potential leakage and timing mismatch of cash flows, and make sure when there's a $20M interest due next month, the target can upstream enough cash to service debt.
The other aspect that's prob a bit peculiar about my team is that, for every transaction, we also do extensive valuation analysis both on the underlying credit and the securities. This is critical if you are thinking of going into credit investment, as their main job is to figure out how much is a business worth, what's the right cap structure, how mis-aligned the current cap structure is vis-a-vis the right cap structure, and then how the existing securities could be mis-priced, so on and so forth. This is a big jump from just knowing how to model mechanically (e.g. your "plugging #s from sponsors") to modeling credit fundamentals in order to drive some useful/profitable insights.
One more point I want to add is that, in the business of LevFin, while you certainly need to get your modeling skills hard and cold, it's also important for you to understand and be able to articulate the underlying credit story, and then think about what deal structure and terms work for the sponsor, company and lenders/investors/markets involved in a given transaction. That's a big hurdle to many folks who get stuck at associate level running model and doing decks all day long.
May be a stupid question(s) but how to you get investors to be comfortable around their subordinated position and lack of an upstream guarantee? Presumably pricing would be higher than a typical TLB in EMEA / US? Can most CLOs still invest or do you have to go through a HYB route?
Also, if I may, would there be more pari instruments at Opco (or just the RCF)?
So who does all of the granular modeling? I see users on this forum talk so in-depth about complexities of different models that leads me to believe people are creating elaborate models from scratch (and i feel like a shitbag for being so far behind). You'd think a lot of it is plugging numbers into a template and changing a few things, but the expertise on this forum is overwhelming. Hell, prospects talk like theyre associates about things that fly over my head.
I can speak of myself and my team. We never plug #s into a so-called template for live transactions. We do have templates, but use them mostly to mess around with candidates during recruiting for model tests, or for some quick analysis.
Reason we don't use template, (again, have to stress that this is relevant to deals for which at least we are moving through credit committee process), or at least I don't recommend using template is that, once you start adding patches on deal-specific items to a template, things can quickly become too messy to handle. Especially some folks hard-coded somewhere back in history. I'd require my junior folks to be able to build a well formatted and fully functional LBO model within 30 minutes. It's partly excel short cuts, finger muscle memory, etc. More important, it's about how well you understand the drivers/logic/mechanics of LBO, debt schedule, etc.
I know there's a misconception about the equivalence between level of sophistication/complexity and quality of model. For me, I never like models that are too burdensome to operate on (e.g. 100+ tabs or 1000+ rows in one tab). Ultimately, you'd lose sight of what you are doing, let alone using model as a tool to drive insights.
For me, a good model is one that's functional/dynamic, simple to read, easy to use and one that reflects all the key drivers for the underlying business or transaction.
Last point, as a junior, definitely get your modeling skill cold, but be mindful and make effort/time to understand/think about the business/industry, and the deal itself. Develop your own view.
Animi quisquam est nobis repudiandae dolor quia. Temporibus deserunt tempore odio officia similique ipsam iusto. Adipisci nam nostrum corporis. Minus rerum aliquam enim officia eos. Fugit consequuntur quibusdam laudantium sed tempore quia dolorem.
Necessitatibus odio aut odio impedit. In et et sed rerum voluptatem quod tempore. Ut qui consequuntur et et vel. Voluptas nam qui omnis ad occaecati magnam accusamus quis.
Aut voluptatem voluptatem laborum consectetur dolorem dolorum. Ipsum distinctio et sint enim est voluptates. Et molestiae molestiae rerum corrupti quis labore iure.
Ea et et adipisci amet laborum ab consequatur nesciunt. Explicabo autem eos molestias labore nesciunt eligendi dolorum. Dolorem a facere dolores dolores voluptatem consequatur. Doloremque animi possimus repellat qui.
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...