Some one earlier shared their insight on how a deal worked with Apollo. He was a Lev fin banker.
Previously, I had read on here that the Lev Fin reports up to the head pf credit risk? is this true at most banks ?
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Leveraged Finance on this site is often extremely misunderstood. However, there are good resources when you investigate further into the field.
Short answer: no- credit risk is a middle office/ back office division that analyzes the bank's total position and offers its opinion on deals. They have the ability to push back but ultimately the Investment Banking division (where lev fin sits) will make the final call on all deals. Some credit risk structures require approval from credit risk but this becomes a clear conflict of interest considering the bonus pools are related between the divisions (even though they will never admit to this).
credit risk also underwrites a lot of the loans that the bank uses its balance sheet for. so that’s why I was asking.
Credit risk does perform a credit analysis on a loan- that's true- but your question is whether Leveraged Finance is the same thing and the reason it's not is what I stated above, but I can also add that Lev Fin pitches to the client and then originates the loan. All of the client interaction is between the Leveraged Finance deal team and the client- and if its a sponsor then the sponsor group will also get involved.
Ultimately, the leveraged finance group is the gateway between the client and the high yield (junk bond/loan) market. They also syndicate out the debt between various participating banks.
Credit risk has no role in pitching, raising capital, or syndicating the debt to other banks. They mainly analyse the credit and review loan docs to make sure the bank is protected when the bank's capital is at risk.
You’re really understating the role of credit risk in the deal process. They are not just a “sounding board” for IBD; every deal I’ve worked on where we are putting the bank’s capital at risk, credit approval is a gating item to the deal getting done at all. They’re involved in all of the calls with the heads of LevFin, coverage, sponsors, etc. We can put pressure on credit, but they are incentivized to say no to risky deals. And if they do, that’s it, pencils down, on to the next one. So we spend a lot of time analyzing the risks and making sure we get them comfortable at the beginning of the deal.
Anecdotally, have you seen folks from IB Credit Risk moving directly to debt buyside roles or would it be necessary to take a step in between to move to Lev Fin? Especially for credit teams where it's more of a" review and challenge" function
The reason why Credit Risk is included in the conversation is because LevFin groups commit to financing these deals with the intention to syndicate (sell) the debt to investors before the bank actually has to fund a portion of the acquisition. In the event that they can not syndicate the debt to investors they will usually have to write the check to the sponsor and take these loans and or bonds on their balance sheet and try to sell them into the market at a later date (usually at a steep discount because the deal typically wasn't attractive enough to investors in the first place to be sold at par or even with an original issue discount.) These type of events are sometimes in the news (See Deutsche Bank/HGGC acquisition of Monotype where DB got stuck with ~425mm of paper). Because of this (and other reasons) Credit Risk is typically looped in because if a bank is committing capital they need to ensure that they are not tripping any risk parameters and understand the risk if they have to hold these loans on their balance sheet for an extended period of time. Im not in LevFin or Credit Risk, but hopefully someone else can speak more to how Credit Risk gets involved specifically.
When you work in LevFin (or any debt-facing IB group), a lot of the work you do is for credit risk. They are essentially your “investment committee”. Any deal that has the potential to leave capital on the bank’s balance sheet - not just loans but also underwritten bonds / syndicated loans - has to get approved by risk because even if the deal goes to shit, the bank has committed to take that debt on (“invest” in it, if you will). Half your job is structuring the debt for your client, then the other half is convincing credit risk it won’t blow up your bank.
A credit memo is the main document relevant for the risk “investment committee”, and these are long - sometimes 100+ page - presentations that can go fairly deep into the client, their operations, their relationship with the bank, valuation, markets stuff, investor appetite, etc etc. LevFin usually holds the pen on this, with heavy input from coverage / corporate banking expected.
Was wondering if you knew how the work is divvyed up at American BBs - as I understand for example at JPM Credit holds the pen on underwriting memos while Lev Fin can be more capital markets oriented (in EMEA at least).
Do you also know if BAML / Citi operate on a similar basis to JPM in terms of how credit risk functions on deals? Have a potential opp and would be keen to see whether it can position me for IB / Lev Fin further down the line.
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Obviously I can only speak for my bank (which is an American BB), and I have no idea how it works in EMEA. That said, I would definitely expect LevFin Capital Markets desks (e.g. at Citi) to be less involved in deal origination, incl. credit memos, than their IB counterparts at other banks (e.g. at BAML).
At JPM, they have Credit groups within their CIB, separate from Credit Risk (outside CIB). As far as I know these roles are not quite comparable to LevFin, whether CM or IB.
Credit Risk is not responsible for writing up 100+ page memos. Although they will write the final sentences laying out their final decision/recommendation (which usually is the same thing because most CR groups have enough votes in a Credit Committee or Investment Committee to veto a deal), 80%+ of the memo will be pre-written/provided by Lev Fin or whichever front office group.
In essence, at most banks the credit risk teams work in a "transaction approval" capacity. Think of them as the people who'd review your mortgage application and approve your loan. They may send you a 1-page approval/disapproval note every now and then, but its your(Lev Fin) job to prepare/write-up all the supporting documents (i.e. credit memo) for your mortgage application.
If I want to work at a BX GSO, KKR Credit, Oaktree, etc. (credit roles, not PE), would LevFin at places like JPM and GS (generally speaking do less modeling) put me at a material disadvantage vs. places like BAML?
I have seen people go to the funds you've mentioned from LevFin Capital Markets desks (eg GS or Citi). This is something where a quick LinkedIn search should provide some good empirical evidence.
Not at all. But you would be at a significant disadvantage if you hadn't much modeling exp.
Good write up sb’d
Why does corporate banking weight in though?
Thank you!
At many banks corporate banking is involved in any debt deal. They admittedly don’t do too much when the deal is big enough to have IB get involved, but they will provide a few slides on the client and our relationship with them, as well as take the lead on portfolio management (if it is a balance sheet loan) after the deal has closed. They definitely work a lot closer with credit risk than IB (incl LevFin) counterparts.
If its a non-sponsor deal, isn't too complicated (think RC expansion/refi, TLA, TLB, IG Bonds refi), and is smaller corporate, like $1B revenue; corporate banking can lead the deal.
100 page credit memos?? Maybe if 75 pages were ripped from company materials.
could you elaborate ?
You’d be surprised. Worked on a multi-tranche sponsor-backed credit secured by a portfolio of dozens of assets...so much diligence....
bump
Any insights on comps for LevFin Credit Risk Analyst?
https://www.wallstreetoasis.com/forums/day-in-the-life-middle-office-ri…
It looks like the dude is talking more about credit risk analyst for corporate banking. I cover more on the high yield/lev fin side for mostly M&A transactions. Anyone has any additional insights on credit risk analyst that focuses on just levfin deals?
From my interaction w risk and levfin at JPM, levfin is the team that comes in when a leveraged company needs to raise debt (DCM would handle the IG stuff). They'd handle the pitch to the client, the initial model, syndication etc. Then once the fee is paid, they're done.
Risk would be involved during that part, participating in diligence, reviewing/assisting on items levfin puts together, and making the internal credit memo for the committee to approve if there's any amount JPM is going to hold. After deal close, they remain managing names similar to portfolio management with regular model updates, etc and annual reviews.
At many banks, the credit risk team = credit committee / decision maker because they usually have veto rights in the committees.
However, like the LevFin guy mentioned in his write-up about working with Apollo, a lot of power stuff can come into play, and the head of CR could (quite often) be forced into approving a deal that he believes is gonna blow up.
Ive actually seen that in the past few months. Lot of the deals look bad but still pushed through for the fees
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