Leveraged Finance

 Leveraged Finance (also known as LevFin or LF) is an area within the Investment Banking Division (IBD) of a bank that is responsible for providing advice and loans to private equity firms as well as corporations for primarily:

• Leveraged buyouts,
• Recapitalizations,
• Refinancing old debt, and
• Mergers & acquisitions.

Raising debt (or leverage) is typically done as a means to boost returns on a potential investment if a company doesn't have enough capital to purchase the acquisition outright with cash.

One of the key distinctions of LF is that they largely focus on the issuance of below-investment-grade debt. Firms in this below-investment-grade category often have a higher default rate, higher risk, higher leverage use, and less consistent operating results. To offset this, debt issuances to these firms often have a higher return.   Each deal the client presents may be different and as a result will require different solutions.

Leveraged Finance Group Definition

LF departments work on acquisitions (LBOs), recapitalizations, and asset purchases. Companies looking to do any of those things can do so using debt, and it is cheaper to use debt than to use equity or cash.

Although this group and Debt Capital Markets (DCM) teams both work with debt, the DCM team works more with investors and the markets while the LF team works with the actual company on the structuring of the deal. They typically make money by earning fees on the debt they help raise and advise on.  One of the most prestigious LF groups is within J.P. Morgan in Europe. Leverage is sometimes referred to as 'gearing' in European countries.

What Does Leverage Mean in Finance?

Simply put the word "leverage" is synonymous with the word "debt".  In finance, "levering up" means to use outside funding, typically borrowed capital as a means to generate or maximize returns on a potential investment (this debt becomes part of the capital structure like any other). Companies may often choose to use leverage in their projects as it is cheaper and easier to get compared to issuing stock through an IPO or secondary offering. In the capital structure, secured bank debt (backed by collateral) is typically senior to unsecured debt which is more common for LF teams to be involved with.  Both of these types of debt are senior on the capital structure compared to mezzanine, preferred or common equity.

Is it Good or Bad for a Company to use Leverage?

Properly managed leverage can be a great strategic tool for companies that lack the buying power or capital of larger firms.  From a private equity fund involved in LBOs, leverage is one of the main ways they generate outsized returns for their LPs, so it is critical to their business model.

Of course, with this use of leverage, it will also increase the potential downside risk of an investment. Mismanaged leverage can easily burden a company and too much debt may increase risk for those holding equity in the company. An example of this would be a corporation undertaking a risky project or investment using leverage. If this risky investment didn't go the way the company planned, it could leave the company in a vulnerable position where the equity position in the company compromised (or in a bankruptcy, sometimes completely wiped out!).  As a result, too much debt on a company can lower the valuation of a company since it increases the risk of it as a going concern.

Is Leveraged Finance Investment Banking?

Yes.  The LF group is simply one division in the Investment Banking Division of a bank and they typically work closely with the Mergers & Acquisition team in the bank.

What Do LevFin Teams Do?

LF teams in a bank can act as a middle-man between the investors and the company seeking to raise funding. This team will often work on structuring the deal, often act in an advisory role, and work on the eventual execution of the deal.

While their work is similar to those in a DCM role, the key distinction lies in their clientele, which are typically private equity (PE) firms. Members of this team will often be: communicating with clients, analyzing and examining the credit/risk profile of their clients, structuring debt for the deal, and analyzing potential returns of the debt.

What is a Typical LF Deal?

These deals typically include a large sum of debt, typically up to a point where 50-60% of the capital structure is debt (compared to 50-40% equity).  These deals have the added benefit of increasing a project's Internal Rate of Return (IRR).

Due to the riskier nature of the transaction, the return on the investments is much higher than secured bank debt, and is often referred to as high yield. The deals are usually specific and require custom solutions from those on the LF team.

Leveraged Lending vs LevFin Groups

At the base level, this is the key difference between the two: one is a firm, usually in the Middle Market (MM) while the other is a division within a firm usually in a Bulge Bracket (BB). LF groups at a BB bank (BofA, JPM) operate more similarly to a GE Capital, just on a larger scale, both in terms of clients and the average size of each transaction. They will also provide clients with access to the bond market, which can include high yield bonds. Public bonds are not a common method of debt financing in the middle market given that most of these companies are private. However, leveraged loans and unitranche debt have taken on a lot of the structural characteristics of a High Yield debt in Credit Agreement terms (e.g., cov-lite, basket definitions, Available Amount).

Leverage Finance Investment Banks

Due to the nature of the business - lending extremely large amounts of capital - boutique IBs typically can't have a slice of the LF pie. Besides the bulge brackets in the space, middle market firms like Jefferies, RBC, and GE Capital are also big players. For exit opportunities and prestige, the firm you work with is one of the biggest factors in future success. Another factor to consider is the deal flow of that bank's division: ensuring that your bank has the proper deal flow will help immensely with exit opportunities. Here's a fairly exhaustive list of some of the best names in LF. For even more information, reference our WSO Company Database.

J.P. Morgan

- American Multinational Investment Bank and Financial Services Holding Company

- Statistics and Breakdown of J.P. Morgan

- J.P. Morgan's Leveraged Finance Ranking

Bank of America Securities

- American Multinational Investment Banking Division

- Statistics and Breakdown of Bank of America

- Bank of America's LevFin Ranking

Credit Suisse

- Global Investment Bank and Financial Services Firm

- Statistics and Breakdown of Credit Suisse

- Credit Suisse LF Workplace Culture

Citi

- Global Investment Bank and Financial Services Firm

- Statistics and Breakdown of Citi

- Citi - Leveraged Finance Thoughts

Goldman Sachs

- American Multinational Investment Bank and Financial Services Company

- Statistics and Breakdown of Goldman Sachs

- LevFin's Role at Goldman Sachs

Morgan Stanley

- American Multinational Investment Bank and Financial Services Company

- Statistics and Breakdown of Morgan Stanley

- Morgan Stanley's LF Division Compared to its Competitors

Wells Fargo

- American Multinational Financial Services Company

- Statistics and Breakdown of Wells Fargo

- Wells Fargo LF Exit Opportunities

Barclays

- British Multinational Universal Bank

- Statistics and Breakdown of Barclays

- Barclays Work Culture

Getting through the LevFin interview process can be a challenge since there are often questions involving complicated debt structures. Interviewers may ask you questions you weren't expecting or complicated brain teasers.  To help you get a flavor of the types of questions you can expect, we've compiled a list of leverage finance interview questions examples from our company database as well as the answers these applicants gave.

For a more comprehensive list of LF interview questions reference our WSO Company Database (filtered for this specific group) or this discussion for some more brain teasers.

Frequently Asked Interview Questions

 Hours, Salary, and Daily Work of Leveraged Finance Bankers

As part of the Investment Banking Division (IBD), the hours, salary, and daily work for those in LF are comparable to those in other areas. Key distinctions here are, long and difficult hours, salary + bonus of around $130,000-$180,000 a year, and daily tasks such as structuring leveraged loans and assisting with "Leveraged Buyouts (LBO)". Given the dynamic needs of the clients, bankers in this group can do tasks ranging from

• Credit analysis,
• Writing approval memos,
• Talking to investors, and
• Financial modeling.

The needs of the clients are always shifting and as such, bankers are often forced to come up with novel and unique solutions that fit their specific situation. Compiled below are some personal accounts from other WSO members regarding their experience working in these groups.

LevFin Work Hours

What are the hours like in LF groups? How do those hours compare to M&A? Do those hours vary by firm? Answers to all of those questions from @exADbnkr13".

exADbnkr13:

I worked as an analyst, up to Sr. VP in Lev Fin - first at a mid-size bank, then at 2 BB firms. I had first started my career in M&A at a BB, so I have a good sense of comparing the 'brutality', if you will. I would say that Lev Fin is on par with M&A as having the most grueling hours. The reason is really the client base. If you're working in Lev Fin, your clients are predominantly PE firms, and they are (obviously) the most demanding, time-sensitive clients to deal with.

Hours are just as gruesome as M&A, 70-80 hour weeks are the norm, and 100+ when it comes to crunch time. As for what you spend your time on in LF, it's mostly credit analysis and modeling - although some firms don't do any modeling whatsoever.

LevFin Salary

Salary is comparable to most investment banking gigs, all-in compensation coming out around $130k.

"At the junior levels, it is comparable at most investment banks. If LF is not core to a bank (i.e. Houlihan which is more advisory than debt financing) then it may be lower since the group is not as profitable (or at all). In a good market, LF is one of the more sought-after groups because of its ability to provide staple financings which is helpful in winning sell-side mandates. It can be profitable as any other banking vertical later down the career path depending on the fees brought in which is dependent on the type of credit market."

Daily Work

Analysts mainly do a combination of credit analysis, modeling, and other miscellaneous things. Here's a nice summary of what they do from @ginNtonic".

ginNtonic:

Analysts structure leveraged loans / high yield bond deals for corporate and private equity firm transactions, such as M&A, LBOs, div recaps, etc. Analysts will write approval memos, offering materials, talk to institutional/bank investors, and model transactions.

Thing is, there's a lot of variation in the above functions depending on the firm. Some groups do plenty of modeling; some do a little; some do none. Some groups don't let their analysts talk to investors; most do.

Exit Opportunities

The three exit opportunities that LF sets you up nicely for are:

• Hedge funds
• Private equity
• Mezzanine funds

For hedge funds and private equity as an exit opp from LF, your chances depend greatly on the firm you work for. See the list above under "Leveraged Finance Investment Banks" for an idea of what firms are the best to work at in terms of exit opportunity and prestige.

For mezzanine funds, their work consists primarily of working with leveraged buyouts, meeting specific needs of investors, having unsecured debt with few covenants, and dealing with private transactions. All of these are similar if not the same as to the type of work done in a leveraged finance division of a bank, making those programs great feeders to mezzanine funds.

Besides the above three exit opportunities, there are always the typical investment banking exit opps: entrepreneurship, grad school, and all sorts of roles within a corporation.

Should I Work in LevFin?

How does Leverage Finance groups compare to the other investment banking groups? For career opportunities, here's how it stacks up against other groups from @1styearBanker".

1styearBanker:

From a general approach, LF with good experience will be just as good, if not better than M&A, but analysts from both groups depend heavily on deal flow and their experiences.

While M&A takes the cake for best investment banking group for many, LF groups are just as good in many cases and better in others. If you get an offer with any of the top firms we mentioned before, then you've set yourself up for some nice exit opportunities.

Internship Preparation Before Working in a LevFin Group

Secured a summer internship in LF and looking to get prepared? Fret not! Here's three tips for you.

• Brush up on your modeling skills. It always helps to be familiar with IBO models although the extent to which you will model will largely depend on your team culture / bank. (As mentioned countless times, some teams do more modeling than others.)
• I would also not forget to work on your PowerPoint skills. Although you do significantly less PowerPoint than in industry coverage teams, it still helps to be efficient at this level.
• Understand the differences between leveraged loans and high yield bonds, the processes, the technicalities, etc. This is probably the most important, as being able to understand the technical aspects can really make you stand out.

One thing to note is that you will likely be doing very little modeling, so don't worry too much if that's not your strong suit yet. Tips two and three, however, are golden. You should absolutely brush up on PowerPoint and understand the terms mentioned in three.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Retained Earnings
• Fraud Triangle
• Accounts Receivable Turnover Ratio
• Marginal Cost Formula
• Nash Equilibrium