4/26/15

We have not done an overview in quite some time and needed a post specific to Wall Street. This will elaborate a bit on our hedge fund posts and provide an overview for those that are interested in Investment Banking (You will work closely with Leverage Finance at some point in your career). As with our many other overviews, please feel free to add any additional color. You guys know the drill already...

1) Introduction

2) Corporate Debt Securities

3) Purposes of Debt Instruments

4) Lending Side of Leveraged Finance

5) Credit Analysis

6) Investment Considerations

Introduction

Unlike the equity market, the credit universe captures a huge variety of security-types.

Why? It encompasses (pretty much) every other sort of financing. The size and complexity is also magnitudes larger than the equity market (roughly speaking the US bond market is 3x the size of the equity market!!!). As such, we're focusing on perhaps the most significant portion of the credit markets to institutional (i.e., HF / PE) investors: the leveraged finance market (LevFin).

We are focusing on LevFinfirst for the following key reasons:

Depth Instead of Breadth: We could give an overview of the entire credit market at a much higher level, or we could explain part of it really well. We prefer more quality and of course *actionable and useful* information.

Single Markets Make Descriptions Easier: Fundamental credit analysis is best introduced within the vacuum of a single market segment and a limited number of security-types

Cross Sectional Leverage: As noted above, LevFin is useful to the largest cross-section of our Wall Street focused readership. Almost all front office Wall Street careers are guaranteed to involve at least some exposure to and interaction with LevFin in one form or another. Better to learn the basics now so you don't have to deal with it later.

Corporate Debt Securities

As many of you know, corporations have three basic ways of securing financing: 1) debt, 2) equity, and 3) hybrid securities. We're only concerned with credit for now, so we're going to ignore equities, hybrids and other more complex securities.

Corporate Debt Securities (In rough order of seniority)...

Revolving Credit Lines (Revolvers / Short-Term Financing): Simplistically a corporate credit card issued to a company by a bank. Companies are allowed to draw on and repay revolvers as they please. They are usually secured by a Company's cash flow, meaning they always have to be 100% repaid before any other non-mandatory debt prepayment. As a result, revolvers are the cheapest form of debt financing.

You will find many of these instruments outlined in SEC filings. Simple example? Companies access the revolving credit facility when there is a short term swing in cash flows. They access the facility for the temporary operating purpose and repay the debt.

Ford is a great example (Page 67 of 10-k filing), emphasis is ours.

"We target to have an average ongoing Automotive gross cash balance of about $20 billion. We expect to have periods when we will be above or below this amount due to (i) future cash flow expectations such as for pension contributions, debt maturities, capital investments, or restructuring requirements, (ii) short-term timing differences, and (iii) changes in the global economic environment. In addition, we also target to maintain a revolving credit facility for our Automotive business of about $10 billion to protect against exogenous shocks."

Other types of short-term / senior-most financing can include: 1) Swingline Loans, 2) Bridge Loans, 3) Commercial Paper, 4) Letters of credit (LOCs)

Loans (Term Loans / Amortizing Loans): Exactly what they sound like! Loans issued to corporations by banks (which in turn usually syndicate the loan to other banks and institutional investors so as not to keep too much risk on their own balance sheets). They require full payback over periods of anywhere from roughly 3-9 years. These loans usually include restrictive covenants as well since they are ranked second in overall seniority.

Unlike Revolvers (cash flow), Loans are secured by a lien (claim, or first right) on the value of a company's assets in bankruptcy.

Here is an overview of the various types of term loans:

Term Loan A (TLA / Amortizing Term Loan / Senior Secured: This is the most senior Loan type. Secured by a priority lien on the Company's assets. Amortized evenly. Syndicated to banks. Lower interest rates. Maturities

Institutional Term Loan (TLB / Term Loan B/C/D / Senior Unsecured): Junior to TLAs. Either unsecured, or secured by a lien that is typically junior to that of the TLA (in bankruptcy, they only get right to corporate assets once the TLA lenders have been repaid first). Amortize partially with bullet repayment schedule. Syndicated to both banks and institutional investors. Higher interest rates. Maturities range is roughly 3-9 years. There are two major types of TLBs worth mentioning:

2nd Lien Loan: Specifically refers to TLBs with a junior claim (2nd lien) on corporate assets and

Covenant-Light Loans (Covi-lite): Loans that have more relaxed, bond-like financial covenants rather than maintenance covenants that are typical with loans. Usually issued in "seller's markets", as companies can get away with more relaxed covenants when investors have excess cash to invest.

Bonds: Even the masses are familiar with this one. About as vanilla as debt securities come. The lender purchases a bond from the borrower in exchange for periodic fixed interest (coupon) payments (hence the term "fixed income") principal repayment at maturity.

Broadly, there are two types:

Investment Grade: Bonds issues by companies considered investment grade (BBB- or higher)

High Yield (HY Bonds / Leveraged Bonds / Subordinated Notes / Junk Bonds): Bonds issued by companies rated BB+ and lower. carry much higher interest rates than Investment Grade Bonds

Mezzanine Financing (Mezz): Here we won't go into too much detail as we're knocking on the hybrid securities arena. But here are two basic bullets on the topic:

Hybrid-like debt financing, also called "in between" debt which ranks above equity but below other debt in a company's capital structure

Typically high-yield subordinated debt coupled with equity warrants ("equity kicker")

Leveraged Finance: Within the context of the credit market, "Leveraged Finance" involves any debt financing in which a company is financing with more debt than what is considered normal for that company or industry (overleveraging itself) relative to earnings and cash flow. This is certainly a vague line to draw.

What's more than normal? There's no set answer. But. Some rules of thumb are based on interest rate spread cut-offs (anything > LIBOR+125-150bps), ratings (anything BB+ or lower), and leverage ratios (Net Debt / EBITDA) relative to industry comps. Typical LevFin issuers include sponsors, fallen angels, company's exiting bankruptcy and startups that need seed capital.

If you work in a specific sector (Consumer, Technology, Oil and Gas, Healthcare etc.) You will find various rules of thumb to add to your definition of "over leveraged".

In Short: There are several types of debt/loans and the seniority is as follows: 1) Revolving Credit, 2) Term Loans - followed by B's C's and various levels of security, 3) Bonds, 4) Mezzanine Financing and 5) Leverage Finance.

Purposes

What is more telling than interest rate cutoffs or leverage benchmarking? What is the company *using* leveraged financing for?

Overleveraging is a risky and expensive proposition, so it is typically used for specific projects in which the borrower feels the potential upside from the project is high enough to justify the increased cost of capital. This increased leverage generally comes with restrictive covenants particularly in an aggressive leveraged finance investment. Examples of such project include:

LBOs: The business model of Private Equity. The increased leverage is justified by the increased returns on equity possible once the debt is paid down. The simplest example... even for your "Average Joe" is the purchase of a fixer upper home. He puts down a minimal down payment (over leverage) then tries to fix the asset and sell it for a profit (or generate higher than expected cash flow to more than offset the monthly payments).

If you want a basic overview of a real estate LBO/private equity investment we have one here and if you'd like to look at company specific ones... You'll have to wait! Generally for a company there is ~10-20% equity and ~80-90% debt, heavily leveraged and you're looking for a 20% annual ROI (yes the typical definition is 90% debt and 10% equity but we're expanding the range to encompass more transactions)

M&A / Capital Expenditures: If a company identifies an attractive enough acquisition target or capital investment opportunity, they can justify the leverage based on the synergies and growth opportunities they think a potential investment will provide them.

Re-capitalizations: Equity holders will leverage the Company in order to use the proceeds for a dividend, stock repurchase, equity infusion, or any other transaction that will significantly impact a Company's debt / equity ratio. Recaps are used when the company's current capital mix is equity-heavy enough to justify allowing equity holder to liquidate of portion of their stake

Refinancing: Investment grade issues will use Refis to take advantage of periods of low interest rates in order to swap their existing debt out for *new*... Cheaper debt. Companies that use LevFin to refinance, are likely facing a maturity wall, cash flow shortage, or upcoming default event.

Refinancing using the LevFin market is somewhat of a "last resort". But. Lacking other options, companies prefer expensive debt that's matures 7 years from now over cheaper debt that matures tomorrow that they don't know if they can repay.

In Short: Leveraged Finance is expensive debt that's usually tied to a specific purpose. It is crucial to understand what the financing is being used for as the reasons for the financing will determine what investors are interested in the debt instruments.

Lending Side of Leveraged Finance (Lenders / Investors)

Leveraged Finance includes three of primary security-types: Institutional Term Loans, High Yield Bonds and Mezzanine Financing. These are typically the only debt securities with high enough yields to attract institutional investors. As such, they are the focus of a majority of institutional credit analysis. This brings us to the other side of the LevFin market: who the investors (or lenders) are.

In contrast to the low-risk Investment Grade debt market (largely funded directly by banks themselves), lenders in the LevFin market are typically institutional investors seeking to generate a higher risk-adjusted return.

Besides banks and finance companies, they include:

1) Hedge Funds: Debt focus; 2) Niche Private Equity Shops: Specifically, Mezzanine funds, 3) Traditional Institutional Investors: Pensions, Endowments, Insurers etc.

And finally.... The most infamous example...

4) Collateralized Debt Obligations (CDOs): The perpetrators of the 2008 Financial Crisis (partial joke for the intense finance readers). A CDO is essentially a corporate entity that is set up in order to buy a slug of debt securities and pool them together. CDO investors then buy stakes (liens) in that entity, which gives them a right to the cash flows from the debt purchased. The CDO is cut into slices (tranches) based on seniority, and investors pick which tranche they want to invest in based on their risk-return preferences.

The debt payments are then paid out to investors in a waterfall fashion, with those who bought the more expensive senior tranches being paid before those who bought the cheaper and higher yielding junior tranches.

To give you an idea about sizing: the HY Bond market is ~$1.4Tn, the Leveraged Loan market is ~$625Bn, and the Mezzanine Finance market is ~$500Bn. So all in, LevFin is about a $2.5Tn market!!! There is a lot of money out there!!!

In Short: When you start looking at "over leveraged" investments you begin talking to more and more risk loving investors. Or as they like to call themselves "sophisticated investors" (please tell us you got that joke!). The market is huge at $2.5Tn and you will certainly deal with the LevFin market at some point during your career.

Credit Analysis

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.

While credit analysts end up covering the same companies as the equity analysts... They spend almost all of their time on different things.

Credit analysts also find themselves working on unique and complicated situations that the equity analysts often avoid. This includes restructuring, asset sales and joint ventures. It requires hours of reading through bank covenants and other financial documents which most equity analysts don't have the time to do. In order to predict cash flow, you still have to be able to predict revenue, so you do spend a decent amount of time on revenue and costs as well.

In Short: Credit investors have much less upside relative to equity investors. They are looking to secure a defined return and want to mitigate risk to hit their specific benchmarks. Therefore, a credit analyst would look at a security in a different light relative to an equity analyst.

Investment Considerations

Given that credit investors will look at investments in a different fashion... Below is an outline of some of the key takeaways:

Default Risk: The likelihood of a borrower's being unable to pay interest or principal on time. Based on the issuer's financial condition, industry segment, conditions in that industry and economic variables/intangibles (company management as an example). Default risk will, in most cases, be most visibly expressed by a company's public credit rating from S&P, Moody's and the like.

Loss-given-default Risk: Severity of loss. How much will the lender lose in the event of a default? Investors assess this risk based on the collateral (if any) backing the loan and the amount of other debt and equity subordinated to the loan.

Industry Sector: Loans to issuers in defensive sectors (like consumer products) can be more appealing in a time of economic uncertainty, whereas cyclical borrowers (like chemicals or autos) can be more appealing during an economic upswing.

Sponsorship: If a sponsor has a good track record, a loan will be easier to syndicate and can be priced lower. In contrast... If the sponsor group does not have a loyal set of relationship lenders, the deal may need to be priced higher to clear the market.

Liquidity: All else being equal, more liquid instruments command thinner spreads than less liquid ones.

Market Technicals: If there are a lot of dollars chasing little product. Then... issuers will be able to command lower spreads. If the opposite is true? Then spreads will need to increase for loans to clear the market.

In Short: Credit analysts focus more on *downside* risk. Why? Well the upside is already capped at X% return so that is already set in stone. What is not set in stone? The downside of a default and overall payment risks.

Concluding Remarks

Here are the main takeaways in bulleted form:

- You will likely work with the Leveraged Finance team at some point in your career. That said if you're interviewing for one you now have an overview. Two birds. One stone

- The LevFin market is huge at $2.5Tn

- Several types of debt/loans and the seniority is as follows: 1) Revolving Credit, 2) Term Loans - followed by B's C's and various levels of security, 3) Bonds, 4) Mezzanine Financing and 5) Leverage Finance

- It is crucial to understand what the financing is being used for as the reasons for the financing will determine what investors are interested in the debt instruments

- When you start looking at "over leveraged" investments you begin talking to more and more risk loving investors or "sophisticated investors"

- Credit investors have much less upside relative to equity investors. They are looking to secure a defined return and want to mitigate risk to hit their specific benchmarks

- Credit analysts focus more on *downside* risk. Why? Well the upside is already capped at X% return so that is already set in stone. What is not set in stone? The downside of a default and overall payment risks

Comments (42)

4/24/15

I needed this about 12 hours ago

Investment Banking Interview Course
4/24/15

Hahaha! Hope it went well anyway!

4/24/15

+1 SB Great overview!

How do associate exit opportunities differ for people coming out of a Lev Fin group?

4/24/15

As noted it's actually pretty similar you're just more niche.

Ie: specific debt hedge funds and of course PE will understand your background. The good news is you'll have exposure to many sectors, the only bad news is you won't have much specific experience to one sector.

Ie: unless you worked on deals all in the consumer sector jumping to a consumer specific fund would be harder. But. The door is always open for a high yield debt fund or specific mezzanine funds.

4/25/15

SB'ed! Thanks for this, big fan of your earlier overviews as well. The breakdown of info into short, easily understandable pieces is great. Perhaps you could shed some light on the largest players in the LevFin market?

4/25/15

Probably worth mentioning the leveraged lending guidelines and life at regulated banks isn't what it used to be. Also, correct me if I'm wrong, but equity warrants for mezz is a thing of the past. At least from what I've seen, we never get warrants, but will co-invest in the equity.

4/27/15

Correct, though that may change at some point as credit normalizes.

4/25/15

Well done. +1

4/25/15

I don't think its very common anymore to have LBOs financed at 10% equity. Greater than 20% is more the norm.

4/26/15

30% - 40% equity is actually common now. Banks are also more at ease with sponsors that are specialists in the target's industry / business model. Regulators are all over lev fin deals.

4/26/15

Definitely could see that being true. I should probably know this because I've worked with LevFin guys before lol

4/27/15

Broadly from a Lev Fin perspective it also has to do with the cyclicality of the industry as stable businesses with predictable and steady cash flows can obviously absorb more debt. Banks will have greater comfort that the client will delever and less concern over interest payment capacity until maturity.

For a LBO @ ~20% equity a bank would probably only fund a non-cyclical industry + steady business, otherwise risk hearing complaints from the Fed that your bank originated a criticized deal. Anyone know the gearing for the Porsche / VW deal?

Off topic but from OP's summary I think one distinction between TLA vs TLB is that the former is fully amortizing whereas TLB has minimal amortization followed by a bullet. The buyside appears to be craving for this paper.

4/27/15

10% equity? When was this? Even in 2006-7, you weren't pulling down LBOs with only 10% equity checks.

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Best Response
4/25/15

Great post and detailed write up.

I want to note that a revolver is not necessarily more senior to a term loan in the repayment waterfall. A senior secured revolver or senior unsecured revolver is going to be pari passu to a senior secured or senior unsecured term loan. Credit agreements are structured to have mandatory prepayments that if triggered will require mandatory pay down of the facilities in question (I.e X% of equity issues, X% of proceeds from asset sales, etc.). More often than not a revolver and term loan will be governed by the exact same credit agreement. Middle market and larger companies will have multi-year revolving credit facilities which can remain drawn until maturity and only pay interest (repay borrowing at maturity) while smaller "business banking" type clients typically have one-year facilities renewed annually and contain covenant that require revolver borrowings to be repaid every so often (i.e making the facility "revolve" as opposed to drawing it and using it like a term loan.)

The other point to note, and this will differ by bank. Typically leveraged finance (product group that's part of investment banking) will not work on revolvers / term loan A, etc. This will be handled by corporate banking coverage / credit. Lev Fin will focus on leveraged loans and high yield bonds while IG bond issuance will be handled by DCM and revolver / TLA by corporate banking.

A revolver swing line essentially allows for same day borrowings extended by the swing line lender defined by the credit agreement. When a company issued a borrowing notice (not swing line) it is funded by the bank group pro rata for each banks hold of the facility. A swingline allows for typically one bank to fund the borrowing request (swing limit is typically a small part of the aggregate facility size.) if swing line borrowings are not repaid, the swing line lender can request pro rata participation from the remaining banks in the bank group and share the exposure.

On the syndications side, Syndicated Finace (loan syndications) will work on syndicating the revolver / term loan A exposure to the broader bank group while leveraged finance at a BB will have a syndication arm to sell Term loan B to institutional investors and banks who have appetite for the paper.

As for credit analysis on the corporate banking credit side, I want to note that all three statements are equally important in addition to industry analysis. As a lender you want to gain a comprehensive understanding of a company's operating model, industry cycle, competitive position, etc. as you are concerned with the company's ability to repay its obligations. You are not concerned with metrics such as EPS, accretion / dilution, dividend yield, etc, as mentioned there is no upside to being a creditor. However, you definitely want to know what's driving stock price volatility, the impact of corporate policy or an acquisition, etc as if all ties to a company's operating performance and repayment / refinancing of debt.

3/21/17

High yield desk analyst here..On top of this i would add that Revolvers are typically secured on a 1st Lien basis by the Company's working capital assets (Cash, Inventory, Receivables etc..) meanwhile Term Loans can have a 1st Lien security on all other assets (like PP&E). The banks providing the revolver would much rather take over liquid assets in event of default rather than long term assets.

This becomes important in a waterfall analysis.

Also the borrowing base on a revolver is usually determined based on whats called "advance rates" and is a % of the each working capital asset. For instance if a company has a revolver up to $100mm, the borrowing base may be less than that. Using random numbers, it'll be the sum of 75% of Accounts Receivables, 80% of inventory, 100% of cash etc...

It can become even more nuanced than that. I recently saw a revolver which had a borrowing base with advance rates that fluctuated based on the quarter. This is because of seasonality. The banks are willing to lend more during periods that they can quickly sell the assets if need be.

3/22/17

SB'd for truth. I have a few borrowing bases that have seasonally-adjusted advanced rates. Ag. and natural resources are heavily cyclical, so inventory is much more liquid certain times of the year. Also happens with aged products like whiskey or cheese. Borrowers will generally maintain inventory "pool reports" for banks. A distiller with $80MM of 10-year whiskey in its warehouse is a helluva lot more liquid than one with $200MM of 1.5-year whiskey.

4/25/15

Great review. Do top MM and MF prefer someone whose worked in LevFin team or industry team (if M&A group wasn't an option)? It seems that LevFin doesn't serve as many exit ops into equity side of PE. It's either you join on financing side or head to mezz fund/credit HF?

If so, I don't understand why LevFin group (JPM/CS/DB) seems to attract lots of attention?

Bitch please, I love bananas! If you found my advice useful, hit me up with one.

4/26/15

The structure of LevFin teams are very different across the street. Some LevFin groups are capital market functions of the bank, others actually do a lot of the modeling work for sponsor-driven LBOs. Levfin bankers coming out of a capital market role will probably have less relevant LBO modeling experience that could lead to a PE exit opp.

4/27/15

Yes I agree however the LevFin teams at the banks I mentioned in my post do a lot of the modelling work. However, you don't see as many exit ops into PE as say someone in an industry/M&A team. Are you suggesting that it doesn't make much of a difference when it comes to PE recruiting, if you aim to be on the equity side?

Bitch please, I love bananas! If you found my advice useful, hit me up with one.

4/27/15

The banks you mentioned, JPM, CS, and DB are strong balance sheet banks. While these guys get a lot of deal flow, I am pretty sure most of the modeling is done out of their sponsors group. I know for a fact DB has a strong sponsors group with strong exit opps. CS sponsors is also touted on this forum a lot but I can't confirm. JPM sponsors is also strong from what I hear.

4/26/15

What are some of the differences in work between a credit research analyst covering high yield debt and someone in LevFin banking(besides transaction vs non-transaction)? And how difficult is it to move from HY research to LevFin banking? Thanks.

4/27/15

TLBs are usually pari with TLAs, not subordinated.

MM IB -> TMT Corporate Development

4/27/15

good stuff

4/27/15

Few random thoughts:

Extremely rare for an LBO to have an equity check <25%, and pretty much non-existent <20%. Not only will banks not underwrite it (even before the leveraged lending oversight as of late), but the buyer won't win! With a check that small its hard to be the top bidder ;) NFW is something with a 10% equity check getting underwritten...

Loss-given default: both Moody's and S&P look at this, but usually S&P (recovery rating) is what gets the most attention. This can matter for syndication as CLOs will often have buckets for certain risk rating levels so the difference between a RR 2 and RR 4 can be huge in terms of your buyer universe.

TLAs and TLBs are almost always pari. Big differences are that the lenders in a TLA are commercial banks and the lenders in a TLB are institutional investors (mutual/hedge funds, CLOs, etc). TLAs are far less accepting of higher leverage (usually don't see a TLA with a 4-handle on the secured leverage) whereas you can push things with the TLB market. TLAs require amort with 5-year tenor and are far more likely to have maintenance covenants (and with a more restrictive covenant package generally). TLBs have like 1% pa amort over a 7-year tenor (generally) and these days are usually cov lite.

Credit analysis looks at a few things differently... you'll look at contracts, supplier concentration, customer concentration, litigation, employees (unions = bad) and stability of cash flows and be less focused on growth prospects. You're focused heavily on margins and trends. You almost always look at stats on an LTM basis and really never on a forward basis. And you'll never look at P/E, less so EV/EBITDA but more typically Debt/EBITDA, EBITDA/interest. Your modeling will be focused on deleveraging capacity and less on valuation. You'll have to be able to dig into the credit agreement and indentures to figure out the baskets (incurrence & liens capacity, RP, etc plus financial covvies if any).

JPM and BAML probably the best LevFin shops out there. From the junior banker perspective, LevFin can be very different from bank-to-bank. In some banks, industry/FSG runs the show and you're just there for some market pages and a term sheet. Other banks the levfin group runs the model and holds the pen on marketing docs, so you get much better experience. Those are the groups that exit well.

Happy to field questions...

4/28/15

Can you speak to exit opps for analyst in a Lev Fin group that doesn't run the model? Assuming they would be at a disadvantage for PE but relatively fine if they were interested in more credit-focused roles.

4/28/15

Have seen people leave for credit arms of MFs/ Upper MM, go the corporate route, or move internally to a coverage group and do a 3rd year before going to top classic PE shops

4/28/15

Thanks Mr. Galfond

4/28/15

So it seems that moving onto the equity arms of PE is a long shot straight out of LevFin, unless you transfer to a coverage group in your third year?

Bitch please, I love bananas! If you found my advice useful, hit me up with one.

4/28/15

I can discuss in great detail about the LevFin group at JPM. LevFin at JPM is a very markets focused group. If you're looking for the LevFin group that will develop your valuation/modeling skills, this isn't the group for you. However, there is a phenomenal amount of deal flow and you will definitely learn from some of the most intelligent folks when it comes to debt financing and interpreting the credit markets. From a historical perspective, JPM LevFin has been very successful for many years. Close second is BAML. I would say an analyst in JPM LevFin over their 2 years would do 2x-3x the amount of deals your typical coverage/M&A analyst will. I've seen mixed results from buddies who have exited the group. Many people get stuck with mostly credit buy-side opportunities, which is good/bad depending on your interests.

4/28/15

Thoughts on WF LevFin?

4/28/15

Their strongest group (they're based from Charlotte, with some guys in NY).

4/28/15

One question, I don't know if it's obvious, but I don't quite get it.

Let's say a sponsor does an LBO. This means the sponsor is leveraging the company.

If the sponsor acquires more that 50% of the company, all this debt raised is consolidated into the sponsors balance sheet. Am I correct?

Or are LBO's orchestrated in some kind of structure which evades consolidating debt into their balance sheet?

Thank you very much!

4/28/15

No. Focus on the BS of the target company.

5/1/15

What actually ends up happening is the sponsor creates a new shell holding company and reincorporates the target, along with the transaction debt, into this shell. From the perspective of the sponsor's balance sheet, the only change would be a credit to cash and a debit to investments

4/28/15

I'd say a fair amount of the lev fin groups in the BBs do not model. Also M&A/Lev Fin guys typically have the worst hours. According to my friend, BofAML is one of the few who models compared to let's say JPM. With that being said, I think it's a little more difficult to land a mega PE or L/S out of Lev Fin. I've looked at various distressed debt/ credit/ direct lending/ BDC-type opportunities and all have preference towards Lev Fin/ Restructuring bankers. I spoke to a couple PMs at those funds, and they also look for those guys.

Side note
Lev Fin advantages get more market focus and more modeling experience compared to coverage guys; also you learn a lot about credit and the loan market (you know it's one of the few markets where you can actually blacklist institutional investors from buying your debt if they are known to be vultures/ loan-to-own or take over your company type investors)

Restructuring advantages the financial components of modeling crappy companies on top of the constant interactions with lawyers/ legal framework of every pitch and deal is pretty interesting. You are always required to learn things you've never seen before b/c there are like many different ways you can salvage a company before it goes to chapter 11/7.

Both groups are good if you're interested in debt. From my interactions with various buysiders, I think both L/S and debt funds have their advantages and disadvantages.

5/1/15

Looks like the vast majority are answered:

1) yes equity range should be expanded from 10-20 to 10-40 higher than 20 these days. Stuck with the historical convention of 10-20.

Notably, RE has practically no debt a lot of the time.

2) exit opps covered well by you guys. Lots of people end up doing 3 years before going buy side at the analyst level but it is still doable. Just need to network and be top ranked/well liked.

3) exit opps based on prestige are clear. Don't want to get into a spitting battle over this one but the comments already reflect the good groups. Forget the "bank name" always go with what actually happens to the juniors and if they promote within. Getting promoted is severely underrated.

4) natural transition is more "debt related" type exits.

Luckily you guys already got all the ?s

Will check back next week.

3/21/16

WallStreetPlayboys, great post!

I wonder within the LevFin group, will analysts split to cover different sectors? If so, what sectors have the most deals?

3/21/16

At the BB I interned with they had: diversified industrials, TMT, midcap, and natural resources that I remember. Probably a few more I am forgetting. DI seemed to be the biggest, followed by TMT.

3/21/17

Is it typical that most Lev Fin groups at BB's do not do modeling nowadays? If so, how do you know? It seems that for example UBS Lev Fin does modeling. How do you know for other banks when applying?

Also, who else does the modelling for LBOS then for example? Sponsor group or M&A group for deals?

3/21/17

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