Career Guide Leveraged Finance

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© 2006 Vault Inc.
FINANCE
LEVERAGED
VAULT CAREER GUIDE TO

CARE
LEVER
FINAN


© 2006 Vault Inc.
WILLIAM JARVIS
FINANCE

AND THE STAFF OF VAULT
LEVERAGED
VAULT CAREER GUIDE TO

CARE
LEVER
FINAN


Copyright © 2006 by Vault Inc. All rights reserved.

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Table of Contents

INTRODUCTION 1

THE SCOOP 3

Chapter 1: The Background of Leveraged
Finance 5

Leveraged vs. Investment Grade: An Important Distinction . . . . .6
The History of Leveraged Finance . . . . . . . . . . . . . . . . . . . . . . . .10
Leveraged Finance vs. Corporate Finance/Investment Banking .13
Types of Leveraged Finance Deals . . . . . . . . . . . . . . . . . . . . . . . .15
Opportunities In Leveraged Finance . . . . . . . . . . . . . . . . . . . . . . .16

Chapter 2: Major Industry Players 19

Investment Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Commercial Finance Companies . . . . . . . . . . . . . . . . . . . . . . . . . .26
Hedge Funds and Other Institutional Investors . . . . . . . . . . . . . . .28
Private Equity and Financial Sponsors . . . . . . . . . . . . . . . . . . . . .30

Chapter 3: The Products 33

The Leveraged Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
The High-Yield Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Capital Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Chapter 4: Leveraged Finance Groups 45

Structuring/Origination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Credit/Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Ratings and Capital Structure Advisory . . . . . . . . . . . . . . . . . . . .47
Corporate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
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Vault Career Guide to Leveraged Finance
Table of Contents

Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Syndicated Loan Sales & Trading (Primary and Secondary) . . . .51
High Yield Bond Sales & Trading . . . . . . . . . . . . . . . . . . . . . . . .53

Chapter 5: The Transactions 55

The Leveraged Buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
The Corporate Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

Other Event-Driven Financings . . . . . . . . . . . . . . . . . . . . . . . . . . .59
The Debt Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

GETTING HIRED 63

Chapter 6: What Leveraged Finance Firms are
Looking For 65

Personality Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
The Resume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

Chapter 7: The Hiring Process and Interview 71

The Standard On-Campus Interview/ Recruiting Process . . . . . .74
Lateral Hires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
Typical Interview Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79

ON THE JOB

Chapter 8: Leveraged Finance Positions, Pay,
and Lifestyle 83

Investment Banks: Structuring/ Origination . . . . . . . . . . . . . . . . .84
Investment Banks: Capital Markets/Loan Sales and Distribution 87
Investment Banks: Credit/Risk/Corporate Banking/Ratings
Advisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

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Table of Contents

Commercial Banks and Commercial Finance Companies . . . . . .90

Chapter 9: The Leveraged Finance
Career Path 95

Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
A Day in the life of a Leveraged Finance Structuring/
Origination Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96
Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102

A Day in the Life of a Leveraged Finance Structuring/
Origination Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106
Managing Director/Group Head . . . . . . . . . . . . . . . . . . . . . . . . .107

Final Analysis 111

About the Author 112

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CAREER
LIBRARY xi

Introduction
Right now, it seems like every other headline in The Wall Street Journal is a
blockbuster M&A event, a multi-billion dollar LBO, or a rise from
bankruptcy by a fallen corporate angel. Much as they did in the late 1990s,
both investors and corporations have cash burning holes in their pockets
because of positive economic conditions, and are subsequently pushing the
financial markets near new heights. Like the late 90s, the result is record

M&A activity, a boom in hedge fund activity, a rise in venture capital
spending, a return to the buyout activity of the late 1980s, and a general
feeling of excitement on Wall Street. But unlike the late 1990s, this flurry of
financial activity is somewhat tempered, as today bankers distinctly
remember the subsequent massive economic downturn of only a few years
ago and its effects on global financial markets. Nevertheless, the major forces
that have spurred this investment activity, such as historically low interest
rates, low credit default rates, and healthy cash balances are making Wall
Street an exciting place to be.

Because of low interest rates, relatively few bankruptcies, and investors’
hesitation to invest in the equity markets, no area has seen more activity than
debt markets. This activity has manifested itself into record global
borrowings, as global credit issuance is expected to exceed $7 trillion in
2006, dwarfing its $2 trillion level in 1995 and far surpassing its $4.5 trillion
level in 2005.

A vast majority of this activity has been spurred by the field of leveraged
finance. With financial institutions eager to lend money and borrowers
excited to capitalize on market conditions, the effects in just the past few
years are easily identified: the second, third, and fourth largest LBOs of all
time, record fundraising by hedge funds and private equity shops, M&A
activity levels reaching the highs of 1999/2000, all-time-low borrowing costs
for companies, and off-the-charts volume in the high-yield bond and
syndicated loan markets. For all of these reasons and many more that we will
discuss in this Vault Guide, leveraged finance is a good place to be.

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CAREER
LIBRARY 1

LEVER
CHAPTER 1

AGED

THE SCOOP

FINAN
Chapter 1: The Background of Leveraged Finance
Chapter 2: Major Industry Players
Chapter 3: The Products
Chapter 4: Leveraged Finance Groups
Chapter 5: The Transactions

The Background of
Leveraged Finance
CHAPTER 1

The financial markets can be divided into two major sections: debt and equity.
Under this overarching organization structure, think of leveraged finance as
the intersection of investment banking, commercial banking, hedge funds,
private equity, and sales & trading on the debt side of the financial markets.

Generally speaking, leveraged finance is a platform in all major investment
and commercial banks. It is a function that taps into two major financial
markets (the high-yield bond market and the leveraged loan market—more on
those later), is accessed by nearly all private equity shops and hedge funds on
a regular basis, and has been one of the booming profit centers of Wall Street
for the past two decades. For analysts and associates, it has become a prime
training ground for the most elite private equity shops and hedge funds.
Subsequently, for careers on Wall Street, leveraged finance is one of the most
sought-after fields.

Why leveraged finance?
Along with its role as a potential springboard to careers in private equity and
hedge funds, leveraged finance is also unique from a career perspective
because it provides a vantage point into most of the other areas of investment
banking, as well as sales & trading. For analysts and associates, working in
leveraged finance allows one to see what else is out there career-wise in the
financial markets, without ever having to leave the field.

Another advantage of working in leveraged finance is that in general, it is an
area of investment banking that is focused on closing transactions. In a
corporate finance role within a coverage team in an investment bank (a team
that covers a specific industry and pitches deals to companies in that
industry), one analyst might close one or two deals a year in an investment
bank. By contrast, in leveraged finance, it’s feasible to close five to 10
transactions a year. Leveraged finance affords analysts and associates a
continually busy pace and good deal and client exposure along the way.

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The Background of Leveraged Finance

Major deals
One of the great advantages to working in leveraged finance is that you will
typically work on notable transactions. As an analyst or associate in a major
leveraged finance firm, you may even see at least one of your deals make the
cover of The Wall Street Journal. Notable brands like RJR Nabisco, Burger
King, United Airlines, Domino’s Pizza, and Sony MGM have all accessed the
leveraged finance markets. From multi-billion dollar leveraged buyouts to
major corporate restructurings, there are plenty of headline transactions

across the field.

Leveraged vs. Investment Grade: An
Important Distinction

The difference between leveraged and investment grade debt is an extremely
important concept to understand. By definition, “Leveraged finance” is debt
issued for clients that are considered “leveraged,” not “investment grade” by
the two major rating agencies, Standard & Poors and Moody’s. In other
words, it is debt for clients considered a higher credit risk by the rating
agencies.

A typical rating agency grid appears on the next page. The solid bold lines
denote the “investment grade” vs. “leveraged” threshold.

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Standard & Poors (S&P) Moody’s
AAA Aaa
AA+ Aa1
AA Aa2
AA- Aa3
A+ A1
A A2
A- A3

BBB+ Baa1
BBB Baa2
BBB- Baa3

BB+ Ba1
BB Ba2
BB- Ba3

CCC+ B1
CCC B2
CCC- B3

B+ Caa1
B Caa2
B- Caa3

CCC Ca

C D/C

D C

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LIBRARY 7


How’s your credit?
How are these ratings assigned? A company is analyzed by the rating
agencies and is assigned a rating(s) based on these agencies’ assessment of
the company’s credit risk. The rating agencies assess the quality of the
company’s operations, its future potential, past track record, and financial
health. Once this analysis is completed, the agencies assign ratings to the
company and monitor the company going forward. Anything under a certain
rating threshold is considered “leveraged.” A company that chooses not to get

rated is considered “not rated.” Also, companies that are rated “investment
grade” by one agency and “leveraged” by another are considered “crossover
credits.”

The words “leveraged” and “debt” normally have negative connotations. But
this shouldn’t necessarily be the case. Millions of people have loans for their
homes. In this sense, they are borrowing money and are “leveraged,” as most
of them do not have the cash on hand to pay off their loans immediately. Just
because someone has a home loan or a car loan, or does not have much cash
on hand, does not mean they are not worth lending to. If that were the case,
no college student would have a credit card. The more debt someone has in
relation to their cash or future earnings potential, the more “leveraged” they
are.”Investment grade” companies are the least risky of those in the debt
markets. They are typically your long-standing, exceptionally stable
companies, such as General Electric, Pfizer, John Deere, and ExxonMobil.
Their credit history is outstanding and they have the ability to borrow large
amounts of debt at any time, since they typically have the cash on hand to pay
back those loans at any given time. Of these thousands of companies, only a
handful have the highest debt rating (“Triple A”).

To illustrate the difference between investment grade and leveraged, consider
the following example. Suppose you have a rich friend who asks to borrow
money from you for lunch. You’d probably not hesitate to give him $10 or
so, because you know you’re likely to be paid back immediately (and
probably without having to hound him for the money). That friend would be
considered “investment grade.” Now consider the college buddy who always
asks to borrow money for beer runs, yet amazingly can never “remember” to
pay you back. That college buddy would be considered “leveraged.”

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Ratings determine access to financial markets
Of course, there are advantages to being investment grade. Since investment
grade companies are consider much less risky, they have the ability to access
a number of other financial markets, including the commercial paper market.
Furthermore, these investment grade companies are typically able to get
much larger amounts of debt than their leveraged counterparts. For example,
as a triple-A rated company, General Electric has syndicated loan facilities of
over $20 billion, not to mention any other debt, such as bonds or commercial

paper. In contrast, the largest syndicated loan package for a leveraged
company is probably somewhere near $6 to 8 billion.

It is important to note that entire financial markets exist for companies in both
of these buckets (investment grade and leveraged). When it comes to bonds,
there is a high grade market for investment grade companies, and a high-yield
market (also known as junk bonds) for leveraged companies. For loans, there
is a high grade syndicated loan market (also known as the investment grade
syndicated loan market) for investment grade issuers and a leveraged loan
market for those companies that are considered leveraged.

For companies that are not rated, their access to either market is determined
by their financial ratios, while crossover companies typically access the
market that plays to the better of their ratings.

The field of leveraged finance is concerned with riskier companies that
typically seek funded debt as a necessary piece of their capital structures.
Because syndicated loans and high-yield bonds are necessary for these
companies’ operations, leveraged finance can be a little more exciting and
adventurous. In the leveraged finance world, you will encounter companies
that put together comprehensive financing packages to exit bankruptcy just
hours before a federal court would have forced them to liquidate, private
equity shops that push the limits of corporate finance by strapping nearly
incomprehensible amounts of debt on companies, multinational corporations
avoiding hostile takeovers by issuing large amounts of debt in order to
execute share repurchase plans, and well-known organizations that need
every single dollar available to them in order to keep their lights on and
factories working. These types of complex transactions are part of the day-
to-day life of those working in leveraged finance.

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LIBRARY 9


The History of Leveraged Finance

Loans for companies
Leveraged finance originated from what would historically be thought of as
commercial banking. As companies needed money, they would typically go
to the loan officer of their local bank to obtain financing. Much like you
might need a loan to buy a house or car, companies have always needed loans

to buy properties or even fleets of cars. Lending institutions generally
distributed these loans in certain sizes and interest rates to companies, based
on the company’s risk and size. Very similar to how a JPMorgan Chase,
Wachovia, Bank of America, or Citigroup would give a home loan with a
certain interest rate to someone based on their personal credit score, these
institutions structured loans for corporate clients. Typically, the less credit
risk a company presented, the more money these banks would lend.

This type of lender-client relationship has existed for centuries. But in the
past few years these lending institutions have evolved, as have the needs of
their clients. In the late 1990s investment banks and commercial banks were
able to once again legally merge due to the repeal of the Glass-Steagall Act.
This means that investment banks are now not only able to provide financial
advice to clients, but also utilize the know-how of their commercial banking
division to deliver that financial solution. Together, this has allowed
companies to access the financial markets even more readily and has
fundamentally changed the investment banking relationships on Wall Street.

During the past few decades, the fundamental loan product has also changed.
The original loan between two parties, referred to as a bilateral loan, was
becoming obsolete. Clients were becoming larger and their financing needs
were growing. Subsequently, lending institutions started finding others to
provide the loans alongside them. Instead of bearing the risk of an entire $1
billion loan, they found they could significantly diminish their risk by
“syndicating” this loan exposure to others. With institutional investors also
seeking new ways to place money into the financial markets, the syndicated
loan became a prime source of investment. Subsequently, the syndicated loan
market exploded in volume, so much in fact that a secondary loan trading
market was created out of it. Today, as opposed to a bilateral relationship
with a single lending institution, a company that “issues” a loan can have
hundreds of investors in its syndicated loan. This investor interest not only

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opened up the syndicated loan market, but it also made other financial
markets more transparent, due to the emergence of the relative value of
products across asset classes. Although still issued in a very small number of
situations, the bilateral loan for the multi-billion corporation is now
essentially obsolete.

The bond market
In addition to being able to take out loans from banks, companies that are

large and stable enough have historically also had access to public bond
markets. To do this, companies enlist investment banks to issue bonds to
investors that promise a set interest rate of return on investment. Investors
independently analyze the company issuing a bond and determine the interest
rate that makes it worthwhile for them to take on the risk of the company not
making its scheduled payments. If acceptable to enough investors, the bond
is issued; these investors have essentially lent the company money through
this bond issuance.

Being able to issue bonds has made it possible for companies to raise money
for acquisitions, to invest in capital projects, or to refinance existing debt.
Together, the bond and loan represent the major financial instruments in the
world of leveraged finance.

The expanding market of debt
The bond and the syndicated loan markets have also evolved and expanded
over the past few decades. In 2005, the U.S. syndicated loan market reached
issuance volumes near $1.6 trillion, nearly doubling its $800 billion volume
in 1995. In 2005, the high-yield bond market also more than doubled in
volume in the past 10 years, reaching approximately $100 billion, versus $40
billion in 1995. A vast majority of this evolution is due to exceptional credit
conditions, fewer bankruptcies, record low issuance rates, and the relative
value of the asset classes as investment areas for institutional investors.

This relative attractiveness of the debt markets is especially strong in light of
the equity market downturn in the early 2000s. With security and near-
guaranteed returns, the debt markets have seemed exceptionally more
attractive from an investment standpoint. If you knew that you could get 7 to
10 percent annual return investing in the loan of a relatively stable company,
wouldn’t you put your money there, as opposed to buying shares in the equity

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LIBRARY 11


markets, which present greater risk? Furthermore, if a company defaults on
the loans, they are typically secured by the assets of the company, whether
those be airplanes, property, or even hamburgers. In contrast, if the stock of
a company loses all of its value, there is little to no recourse. As for high-yield
bonds, although not typically as secure as investment grade bonds, they’ll
typically offer investors a return of 8 to 12%. Also, just like investment grade
bonds, high-yield bonds are “senior” to the equity of a company, and thus are
paid off first in the event of a bankruptcy liquidation.

Good news for the banks
Also, it is important to note that these lending transactions are very profitable
for institutions that arrange them, not just the institutional investors. For the
largest deals, this can mean tens of millions of dollars in arrangement and
syndication fees. For example, it was estimated that the fees for the financing
of the famed 1989 leveraged buyout of RJR Nabisco by Kohlberg Kravis
Roberts (immortalized in the book Barbarians at the Gate) were somewhere
in the hundreds of millions of dollars. Thus, armed with large balance sheets
and subsequently the ability to lend money to numerous companies, the bulge
bracket investment banks with historically strong commercial banking arms
(JPMorgan, Bank of America, Citigroup) have become the dominant players
of the leveraged finance industry. Not only do these banks have the money
to lend and the historical know-how to do so, but they also have the priceless
investment banking relationships which they can use to propose financings.

Increasingly, leveraged finance is attracting new and different players to the
industry. Competition for providing large financing solutions to companies
has become intense, with many companies even conducting “auctions” to see
who brings the best financing package to the table. Realizing that they might
be late to the game, large banks are rapidly bulking up their leveraged finance
platforms in order to take advantage of the abundance of fees for arranging
these transactions. Although the big firms continue to dominate the industry
issuance in loans and bonds, smaller firms have realized they can make an
exceptional return on their money and time by providing financing to middle-
market companies (middle market is generally defined as a company with
less than $500 million in annual revenues and/or less than $50 million in
annual EBITDA). For example, by raising $25 million for a company by
assembling a syndicate of lending institutions hungry to put idle cash to work,

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small lending shops are finding themselves with a few million dollars in fees
and profitable new relationships.

In the future, this trend is expected to continue. Although interest rates have
been rising over time, this will not deter companies from continuing to seek
syndicated loans and high-yield bonds, which have become a necessary part
of a firm’s capital structure. Although it will be unlikely that firms will want
to refinance their existing debt with more expensive (higher interest) debt,
many issuers will still turn to these financing sources for general corporate

needs or to acquire other companies. Also, with the rise of interest rates has
come a rise in M&A volume, which fuels the issuance of debt to make those
mergers and acquisitions happen. Finally, to quote a tenet of basic corporate
finance, the cost of debt is often substantially less than the cost of equity. So
it seems likely that these leveraged finance shops will remain in business and
profitable for many, many years to come.

The leveraged finance markets are quite complex, but the underlying
principle and motivation—providing financing for companies—is simple.
Whether this financing involves a loan to refinance existing debt, or the
issuance of a complex loan and high-yield bond package in order to execute
the largest LBO of all time, these markets are quite often at the center of the
action on Wall Street. Companies still call their banks and loan officers for
advice on syndicated loans, but at the same time are now speaking to
managing directors at investment banks that can provide a number of
complex financing alternatives, tapping a variety of financial markets. With
nearly $1 trillion of combined annual global volume in the U.S. in the
leveraged loan and high-yield bond markets, these leveraged finance markets
provide ample access for investors to put money to work.

Leveraged Finance vs. Corporate
Finance/Investment Banking

Are the leveraged finance and investment banking the same animal? Sort of.
As leveraged finance was originally a commercial banking function, most of
the premier leveraged finance shops can be found within the investment
banks of the largest finance institutions, such as JPMorgan Chase, Bank of
America, and Citigroup. Because of the sheer amount of leveraged finance
deal volume at these institutions, there will typically be entire floors and

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Career Guide Leveraged Finance

Career Guide Leveraged Finance

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Career Guide Leveraged Finance