1. The medias watching Vault! Heres a sampling of our coverage. For those hoping to climb the ladder of success, [Vaults] insights are priceless. Money magazine The best place on the web to prepare for a job search.Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library Fortune [Vault guides] make for excellent starting points for job hunters and should be purchased by academic libraries for their career sections [and] university career centers. Library Journal The granddaddy of worker sites. US News and World Report A killer app. New York Times One of Forbes 33 Favorite Sites Forbes To get the unvarnished scoop, check out Vault. Smart Money Magazine Vault has a wealth of information about major employers and job- searching strategies as well as comments from workers about their experiences at specific companies. The Washington Post A key reference for those who want to know what it takes to get hired by a law firm and what to expect once they get there. New York Law Journal Vault [provides] the skinny on working conditions at all kinds of companies from current and former employees. USA Today

2. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 3. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 2006 Vault Inc. FINANCE LEVERAGED VAULT CAREER GUIDE TOCARELEVERFINAN 4. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 5. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 2006 Vault Inc.WILLIAM JARVIS FINANCEAND THE STAFF OF VAULT LEVERAGED VAULT CAREER GUIDE TOCARELEVERFINAN 6. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library Copyright 2006 by Vault Inc. All rights reserved. All information in this book is subject to change without notice. Vault makes no claims as to the accuracy and reliability of the information contained within and disclaims all warranties. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Vault Inc. Vault, the Vault logo, and the most trusted name in career informationTM are trademarks of Vault Inc. For information about permission to reproduce selections from this book, contact Vault Inc., 150 West 22nd St, New York, New York 10011, (212) 366-4212. Library of Congress CIP Data is available. ISBN 1-58131-502-3 Printed in the United States of America 7. ACKNOWLEDGMENTS We are extremely grateful to Vaults entire staff for all their help in the editorial, production and marketing processes. Vault also would like to acknowledge the support of our investors, clients, employees, family and friends. Thank you!Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 8. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 9. Table of Contents INTRODUCTION1 THE SCOOP 3Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library Chapter 1: The Background of LeveragedFinance 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 Players19 Investment Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Commercial Finance Companies . . . . . . . . . . . . . . . . . . . . . . . . . .26 Hedge Funds and Other Institutional Investors . . . . . . . . . . . . . . .28 Private Equity and Financial Sponsors . . . . . . . . . . . . . . . . . . . . .30 Chapter 3: The Products33 The Leveraged Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 The High-Yield Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Capital Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Chapter 4: Leveraged Finance Groups45 Structuring/Origination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Credit/Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Ratings and Capital Structure Advisory . . . . . . . . . . . . . . . . . . . .47 Corporate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48Visit the Vault Finance Career Channel at http://finance.vault.com withinsider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARYix 10. 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 . . . . . . . . . . . . . . . . . . . . . . . .53Chapter 5: The Transactions 55 The Leveraged Buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 The Corporate Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library Other Event-Driven Financings . . . . . . . . . . . . . . . . . . . . . . . . . . .59 The Debt Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60 GETTING HIRED 63Chapter 6: What Leveraged Finance Firms are Looking For65 Personality Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67 The Resume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68Chapter 7: The Hiring Process and Interview 71 The Standard On-Campus Interview/ Recruiting Process . . . . . .74 Lateral Hires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76 Typical Interview Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 ON THE JOBChapter 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89CAREER xLIBRARY 2006 Vault Inc. 11. Vault Career Guide to Leveraged Finance Table of ContentsCommercial Banks and Commercial Finance Companies . . . . . .90Chapter 9: The Leveraged Finance Career Path95Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95A Day in the life of a Leveraged Finance Structuring/Origination Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryA Day in the Life of a Leveraged Finance Structuring/Origination Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106Managing Director/Group Head . . . . . . . . . . . . . . . . . . . . . . . . .107Final Analysis111About the Author112 Visit the Vault Finance Career Channel at http://finance.vault.com with insider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARYxi 12. IntroductionRight now, it seems like every other headline in The Wall Street Journal is ablockbuster M&A event, a multi-billion dollar LBO, or a rise frombankruptcy by a fallen corporate angel. Much as they did in the late 1990s,both investors and corporations have cash burning holes in their pocketsbecause of positive economic conditions, and are subsequently pushing thefinancial markets near new heights. Like the late 90s, the result is recordCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryM&A activity, a boom in hedge fund activity, a rise in venture capitalspending, a return to the buyout activity of the late 1980s, and a generalfeeling of excitement on Wall Street. But unlike the late 1990s, this flurry offinancial activity is somewhat tempered, as today bankers distinctlyremember the subsequent massive economic downturn of only a few yearsago and its effects on global financial markets. Nevertheless, the major forcesthat have spurred this investment activity, such as historically low interestrates, low credit default rates, and healthy cash balances are making WallStreet an exciting place to be.Because of low interest rates, relatively few bankruptcies, and investorshesitation to invest in the equity markets, no area has seen more activity thandebt markets. This activity has manifested itself into record globalborrowings, as global credit issuance is expected to exceed $7 trillion in2006, dwarfing its $2 trillion level in 1995 and far surpassing its $4.5 trillionlevel in 2005.A vast majority of this activity has been spurred by the field of leveragedfinance. With financial institutions eager to lend money and borrowersexcited to capitalize on market conditions, the effects in just the past fewyears are easily identified: the second, third, and fourth largest LBOs of alltime, record fundraising by hedge funds and private equity shops, M&Aactivity levels reaching the highs of 1999/2000, all-time-low borrowing costsfor companies, and off-the-charts volume in the high-yield bond andsyndicated loan markets. For all of these reasons and many more that we willdiscuss in this Vault Guide, leveraged finance is a good place to be. Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 1 13. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 14. LEVER CHAPTER 1AGEDCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library THE SCOOPFINAN 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 15. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 16. The Background of Leveraged Finance CHAPTER 1The financial markets can be divided into two major sections: debt and equity.Under this overarching organization structure, think of leveraged finance asthe intersection of investment banking, commercial banking, hedge funds,private equity, and sales & trading on the debt side of the financial markets.Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryGenerally speaking, leveraged finance is a platform in all major investmentand commercial banks. It is a function that taps into two major financialmarkets (the high-yield bond market and the leveraged loan marketmore onthose later), is accessed by nearly all private equity shops and hedge funds ona regular basis, and has been one of the booming profit centers of Wall Streetfor the past two decades. For analysts and associates, it has become a primetraining ground for the most elite private equity shops and hedge funds.Subsequently, for careers on Wall Street, leveraged finance is one of the mostsought-after fields.Why leveraged finance?Along with its role as a potential springboard to careers in private equity andhedge funds, leveraged finance is also unique from a career perspectivebecause it provides a vantage point into most of the other areas of investmentbanking, as well as sales & trading. For analysts and associates, working inleveraged finance allows one to see what else is out there career-wise in thefinancial markets, without ever having to leave the field.Another advantage of working in leveraged finance is that in general, it is anarea of investment banking that is focused on closing transactions. In acorporate finance role within a coverage team in an investment bank (a teamthat covers a specific industry and pitches deals to companies in thatindustry), one analyst might close one or two deals a year in an investmentbank. By contrast, in leveraged finance, its feasible to close five to 10transactions a year. Leveraged finance affords analysts and associates acontinually busy pace and good deal and client exposure along the way. Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 5 17. Vault Career Guide to Leveraged FinanceThe Background of Leveraged FinanceMajor dealsOne of the great advantages to working in leveraged finance is that you willtypically work on notable transactions. As an analyst or associate in a majorleveraged finance firm, you may even see at least one of your deals make thecover of The Wall Street Journal. Notable brands like RJR Nabisco, BurgerKing, United Airlines, Dominos Pizza, and Sony MGM have all accessed theleveraged finance markets. From multi-billion dollar leveraged buyouts tomajor corporate restructurings, there are plenty of headline transactionsCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryacross the field. Leveraged vs. Investment Grade: An Important DistinctionThe difference between leveraged and investment grade debt is an extremelyimportant concept to understand. By definition, Leveraged finance is debtissued for clients that are considered leveraged, not investment grade bythe two major rating agencies, Standard & Poors and Moodys. In otherwords, it is debt for clients considered a higher credit risk by the ratingagencies.A typical rating agency grid appears on the next page. The solid bold linesdenote the investment grade vs. leveraged threshold.CAREER 6LIBRARY 2006 Vault, Inc. 18. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance Standard & Poors (S&P) Moodys AAAAaa AA+Aa1 AA Aa2 AA-Aa3 A+ A1 AA2 A- A3Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library BBB+ Baa1 BBBBaa2 BBB- Baa3 BB+Ba1 BB Ba2 BB-Ba3 CCC+ B1 CCCB2 CCC- B3 B+ Caa1 BCaa2 B- Caa3 CCCCa CD/C DC Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 7 19. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance Hows 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 companys credit risk. The rating agencies assess the quality of the companys 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 getCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 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 shouldnt 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. Youd probably not hesitate to give him $10 or so, because you know youre 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. CAREER 8 LIBRARY 2006 Vault, Inc. 20. Vault Career Guide to Leveraged Finance The Background of Leveraged FinanceRatings determine access to financial marketsOf course, there are advantages to being investment grade. Since investmentgrade companies are consider much less risky, they have the ability to accessa number of other financial markets, including the commercial paper market.Furthermore, these investment grade companies are typically able to getmuch larger amounts of debt than their leveraged counterparts. For example,as a triple-A rated company, General Electric has syndicated loan facilities ofover $20 billion, not to mention any other debt, such as bonds or commercialCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Librarypaper. In contrast, the largest syndicated loan package for a leveragedcompany is probably somewhere near $6 to 8 billion.It is important to note that entire financial markets exist for companies in bothof these buckets (investment grade and leveraged). When it comes to bonds,there is a high grade market for investment grade companies, and a high-yieldmarket (also known as junk bonds) for leveraged companies. For loans, thereis a high grade syndicated loan market (also known as the investment gradesyndicated loan market) for investment grade issuers and a leveraged loanmarket for those companies that are considered leveraged.For companies that are not rated, their access to either market is determinedby their financial ratios, while crossover companies typically access themarket that plays to the better of their ratings.The field of leveraged finance is concerned with riskier companies thattypically seek funded debt as a necessary piece of their capital structures.Because syndicated loans and high-yield bonds are necessary for thesecompanies operations, leveraged finance can be a little more exciting andadventurous. In the leveraged finance world, you will encounter companiesthat put together comprehensive financing packages to exit bankruptcy justhours before a federal court would have forced them to liquidate, privateequity shops that push the limits of corporate finance by strapping nearlyincomprehensible amounts of debt on companies, multinational corporationsavoiding hostile takeovers by issuing large amounts of debt in order toexecute share repurchase plans, and well-known organizations that needevery single dollar available to them in order to keep their lights on andfactories working. These types of complex transactions are part of the day-to-day life of those working in leveraged finance. Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 9 21. Vault Career Guide to Leveraged FinanceThe Background of Leveraged FinanceThe History of Leveraged FinanceLoans for companiesLeveraged finance originated from what would historically be thought of ascommercial banking. As companies needed money, they would typically goto the loan officer of their local bank to obtain financing. Much like youmight need a loan to buy a house or car, companies have always needed loansCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryto buy properties or even fleets of cars. Lending institutions generallydistributed these loans in certain sizes and interest rates to companies, basedon the companys risk and size. Very similar to how a JPMorgan Chase,Wachovia, Bank of America, or Citigroup would give a home loan with acertain interest rate to someone based on their personal credit score, theseinstitutions structured loans for corporate clients. Typically, the less creditrisk a company presented, the more money these banks would lend.This type of lender-client relationship has existed for centuries. But in thepast few years these lending institutions have evolved, as have the needs oftheir clients. In the late 1990s investment banks and commercial banks wereable 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 financialadvice to clients, but also utilize the know-how of their commercial bankingdivision to deliver that financial solution. Together, this has allowedcompanies to access the financial markets even more readily and hasfundamentally 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, wasbecoming obsolete. Clients were becoming larger and their financing needswere growing. Subsequently, lending institutions started finding others toprovide the loans alongside them. Instead of bearing the risk of an entire $1billion loan, they found they could significantly diminish their risk bysyndicating this loan exposure to others. With institutional investors alsoseeking new ways to place money into the financial markets, the syndicatedloan became a prime source of investment. Subsequently, the syndicated loanmarket exploded in volume, so much in fact that a secondary loan tradingmarket was created out of it. Today, as opposed to a bilateral relationshipwith a single lending institution, a company that issues a loan can havehundreds of investors in its syndicated loan. This investor interest not onlyCAREER 10 LIBRARY 2006 Vault, Inc. 22. Vault Career Guide to Leveraged Finance The Background of Leveraged Financeopened up the syndicated loan market, but it also made other financialmarkets more transparent, due to the emergence of the relative value ofproducts across asset classes. Although still issued in a very small number ofsituations, the bilateral loan for the multi-billion corporation is nowessentially obsolete.The bond marketIn addition to being able to take out loans from banks, companies that areCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Librarylarge and stable enough have historically also had access to public bondmarkets. To do this, companies enlist investment banks to issue bonds toinvestors that promise a set interest rate of return on investment. Investorsindependently analyze the company issuing a bond and determine the interestrate that makes it worthwhile for them to take on the risk of the company notmaking its scheduled payments. If acceptable to enough investors, the bondis issued; these investors have essentially lent the company money throughthis bond issuance.Being able to issue bonds has made it possible for companies to raise moneyfor acquisitions, to invest in capital projects, or to refinance existing debt.Together, the bond and loan represent the major financial instruments in theworld of leveraged finance.The expanding market of debtThe bond and the syndicated loan markets have also evolved and expandedover the past few decades. In 2005, the U.S. syndicated loan market reachedissuance volumes near $1.6 trillion, nearly doubling its $800 billion volumein 1995. In 2005, the high-yield bond market also more than doubled involume in the past 10 years, reaching approximately $100 billion, versus $40billion in 1995. A vast majority of this evolution is due to exceptional creditconditions, fewer bankruptcies, record low issuance rates, and the relativevalue of the asset classes as investment areas for institutional investors.This relative attractiveness of the debt markets is especially strong in light ofthe equity market downturn in the early 2000s. With security and near-guaranteed returns, the debt markets have seemed exceptionally moreattractive from an investment standpoint. If you knew that you could get 7 to10 percent annual return investing in the loan of a relatively stable company,wouldnt you put your money there, as opposed to buying shares in the equity Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 11 23. Vault Career Guide to Leveraged Finance The Background of Leveraged Financemarkets, which present greater risk? Furthermore, if a company defaults onthe loans, they are typically secured by the assets of the company, whetherthose be airplanes, property, or even hamburgers. In contrast, if the stock ofa company loses all of its value, there is little to no recourse. As for high-yieldbonds, although not typically as secure as investment grade bonds, theylltypically offer investors a return of 8 to 12%. Also, just like investment gradebonds, high-yield bonds are senior to the equity of a company, and thus arepaid off first in the event of a bankruptcy liquidation.Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryGood news for the banksAlso, it is important to note that these lending transactions are very profitablefor institutions that arrange them, not just the institutional investors. For thelargest deals, this can mean tens of millions of dollars in arrangement andsyndication fees. For example, it was estimated that the fees for the financingof the famed 1989 leveraged buyout of RJR Nabisco by Kohlberg KravisRoberts (immortalized in the book Barbarians at the Gate) were somewherein the hundreds of millions of dollars. Thus, armed with large balance sheetsand subsequently the ability to lend money to numerous companies, the bulgebracket investment banks with historically strong commercial banking arms(JPMorgan, Bank of America, Citigroup) have become the dominant playersof the leveraged finance industry. Not only do these banks have the moneyto lend and the historical know-how to do so, but they also have the pricelessinvestment banking relationships which they can use to propose financings.Increasingly, leveraged finance is attracting new and different players to theindustry. Competition for providing large financing solutions to companieshas become intense, with many companies even conducting auctions to seewho brings the best financing package to the table. Realizing that they mightbe late to the game, large banks are rapidly bulking up their leveraged financeplatforms in order to take advantage of the abundance of fees for arrangingthese transactions. Although the big firms continue to dominate the industryissuance in loans and bonds, smaller firms have realized they can make anexceptional return on their money and time by providing financing to middle-market companies (middle market is generally defined as a company withless than $500 million in annual revenues and/or less than $50 million inannual EBITDA). For example, by raising $25 million for a company byassembling a syndicate of lending institutions hungry to put idle cash to work,CAREER 12 LIBRARY 2006 Vault, Inc. 24. Vault Career Guide to Leveraged FinanceThe Background of Leveraged Finance 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 firms 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 corporateCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library 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 motivationproviding financing for companiesis 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 andVisit the Vault Finance Career Channel at www.vault.com/finance withinsider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARY 13 25. Vault Career Guide to Leveraged Finance The Background of Leveraged Financegroups dedicated to originating deals (proposing deals to existing or newclients), following the capital markets, trading in and out of loan/bondpositions, selling these products to investors, and monitoring the firmsexposure to loans and bonds of issuers. Naturally, at pure investment bankssuch as Goldman Sachs or Lehman Brothers that do not originate as many ofthese types of debt transactions, there will typically be smaller groupsdedicated to following the markets, in more of a debt capital marketsgeneralist role. However, in both types of institutions, the leveraged financeplatform is typically part of a debt capital markets groupit just depends onCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Librarythe volume of deals to determine how specific and/or large the groups will be.A common misperception is that traditional investment banking only involvesproviding solutions and advice to companies (such as mergers andacquisitions advice). In this regard, leveraged finance is different frominvestment banking, since a leveraged finance bank is not only offeringadvice for a financial problem, but also a product as a solution. However,most people these days broaden their definition of investment banking toinclude both offering advice to companies, as well as executing a financialtransaction, such as an initial public offering (IPO). In this sense, leveragedfinance is identicaljust as an investment bank covers a company in anindustry coverage group and works with its equity capital markets team tostructure an IPO, so does it provide the same service for leveraged financetransactions. In the case of a leveraged finance transaction, the investmentbank also covers the company and works with people from its debt capitalmarkets team to structure a syndicated loan and/or high yield bond.Unlike investment banking, however, there exist a number of other financialinstitutions, such as General Electric or CIT Group, that arrange these similarfinancing packages for companies, but do so without a coverage group or anindustry platform (which an investment bank would have). These financialinstitutions still have relationships with companies, but they dont typicallyprovide M&A or IPO advice like an investment bank. The loan market is aprivate market, and as such is not limited in terms of what type of firm canprovide lending solutions. If youre a treasurer of a multi-billion dollarcompany and you need a large loan for an acquisition, youll go to the firmwith the best interest rate, regardless of whether its an investment bank ornot. In this regard, leveraged finance is more similar to commercial lending(i.e., lending to a company so that they can buy copiers, printers, etc.) than itis similar to investment banking.CAREER 14 LIBRARY 2006 Vault, Inc. 26. Vault Career Guide to Leveraged Finance The Background of Leveraged FinanceDifferent experiences: working in the coveragegroup of an investment bank vs. leveragedfinanceWorking in a coverage group or M&A at an investment bank differs greatlyfrom working in a debt capital markets (DCM) or equity capital markets(ECM). As mentioned earlier (and will be discussed in more detail later),there is more execution of deals in a DCM or ECM role. Whereas someonein this role may not be as familiar with every facet of an industry like theircounterpart in a coverage group, they will generally have more breadth ofCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryfinancial market knowledge.This breadth vs. depth tradeoff is directly related to the amount of transactionexperience offered in leveraged finance. For example, the day-to-day grindmight be a little more hectic in a leveraged finance role, as a deal team couldpotentially be closing two multi-billion dollar transactions on the same daysomething that would be quite unlikely in a coverage role. However, thistransaction-oriented environment involves substantially less idea generationand pitching of ideas to clients than one would find in an investment bankingindustry coverage group. That is not to say that someone in leveraged financewill not do any pitchingquite the contrary. While the industry coveragegroup might come up with and pitch the idea of a syndicated loan or high-yield bond to finance an M&A deal, they will surely bring along theappropriate people from the leveraged finance platform to comment on themarkets, comparable transactions, and provide other relevant advice.If you are beginning your career in finance, it is important to think about yourlong-term career goals when considering a role in investment bankingcoverage versus leveraged finance. If your goal is to work in a specificindustrylets say running a health care companyyou would probably bebetter served in a health care coverage group at an investment bank.However, if you are interested in working at a hedge fund or private equityshop, working in leveraged finance will give you the opportunity to interactwith many of these firms, as you close numerous deals of theirs.Furthermore, you will be trained in certain debt metrics (whats typicallycalled credit training), which are useful in understanding the industry andare not typically emphasized in the coverage side of the bank. This is not tosay that moving from a coverage group to a private equity shop or hedge fundcant happenit certainly does, and even the top tier PE shops and hedgefunds seek people with very specific industry knowledge. However, its Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 15 27. Vault Career Guide to Leveraged FinanceThe Background of Leveraged Financedefinitely the case that your exposure (most likely in late-night financialmodeling revisions) to the private equity shops will be higher in leveragedfinance groups when compared to your exposure working in an industrycoverage group. In an industry where relationships are everything, thisexposure will definitely matter.Types of Leveraged Finance DealsCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryThere are a wide variety of deals executed within leveraged finance. Mostcommon are syndicated loans and high-yield bonds for working capital orgeneral corporate purposes (day-to-day financing needs). However, inleveraged finance youll also find leveraged buyouts, when private equityshops and financial sponsors use borrowed money to purchase companies.There are also corporate restructurings and DIP (Debtor-in-Possession)facilities, where companies are entering/exiting bankruptcy and are trying toavoid Chapter 7 bankruptcy (liquidation). In this case, the companies willwork with both the financial institutions leveraged finance groups and thefederal bankruptcy court to get financing packages in order to stay inbusiness. Leveraged finance also covers dividend transactions, whereloans/bonds are used to pay out the owners of a business, recapitalizations,where a companys financial structure is changed, IPO/spin-off financings,where the proceeds of a loan/bond are in tandem with an IPO or a spin-off ofa business unit, and even general debt refinancings, where an existingloan/bond is taken out with a new loan/bond. Examples of each of these typesof deals is discussed in more detail in Chapter 5.Opportunities In Leveraged FinanceThere are so many different areas within leveraged finance and so manyrelated to the field that there is place for almost everyone. For example, thereis deal origination, for the person who enjoys managing numerous processessuch as putting together presentations, financial modeling, and pitching.There is also capital markets work (for both syndicated loans and high yieldbonds) for the person who enjoys understanding the flow of the markets andconducting research about the markets trends. For the person who enjoys theasset management aspect of managing a firms exposure to the syndicatedloan/high yield bond markets, there are positions in internal credit/portfolioCAREER 16 LIBRARY 2006 Vault, Inc. 28. Vault Career Guide to Leveraged Finance The Background of Leveraged Financemanagement work. Finally, there is a sales & trading function for bothsyndicated loans and high yield bonds.However, very generally speaking, leveraged finance refers to the dealorigination functionwhen a team goes out to pitch a client, wins themandate, structures the loan/bond, markets it to investors, sells it, and thencloses and funds the transaction. This role as an analyst or associate caters tothe individual who enjoys managing numerous deals throughout this process,who is a jack-of-all-trades from financial modeling to talking to investmentCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryfirms, and who thrives in the pace of a seemingly never-ending day.Furthermore, when considering if leveraged finance is/is not the field for you,it is important to realize that some firms are organized in a typical investmentbanking cubicle/office atmosphere, whereas some are organized liketrading floors. Some people feed off the energy from a football field-sizedarea crammed with people chatting all day long, while others would prefer thequieter nature of a cube or an office, where personal phone calls are not heardby your neighbors and neighbors neighbors. This type of setup can make asubstantial difference in the day-to-day enjoyment of someones role inleveraged finance.The culture of leveraged finance depends almost entirely on the culture of thefirm in general. At a pure investment bank such as Goldman Sachs, youmight find the culture to be almost entirely opposite from that of thecommercial lending arm of a larger financial institution, such as GeneralElectric Commercial Finance. Whereas one might be very rigid andhierarchical, the other might be golf-shirt and khakis on Fridays, where ananalyst can chat it up with any managing director at any time. This kind ofspecific nuance is covered in the next chapter. EBITDA In leveraged finance, there are some common terms and phrases, from revolving credit facility to senior debt, that you will learn as you read this guide and learn more about the world of leveraged finance. However, no term is more important than the word EBITDA. Companies live and die by it. The leveraged finance markets are built around it. Basically, EBITDA is a relative measure of a companys financial health. It can be compared across industries and company sizes. Even you, as an individual, can calculate your own EBITDA. Called EBITDA, because it represents Earnings Before Interest, Taxes, Depreciation, and Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 17 29. Vault Career Guide to Leveraged FinanceThe Background of Leveraged FinanceAmortization, it measures a companys earnings from its operations.What gets paid right after the costs of operating a company? Theinterest on debtwhich is precisely why leveraged finance bankers anddebt players care. EBITDA is a proxy of how much debt any onecompany, or individual, can afford.For example, lets pretend you operate a lemonade stand. You probablybought lemons, water, cups, ice, a stand, and some poster board foradvertising. Lets also say you paid someone to help you operate thestand. Finally, lets say you sold all of your lemonade. If you were toCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryhave paid these costs and come out positive, you would have made anoperating profit. But you still have not paid interest on your credit cardfor the stand, nor have you paid the taxes on your income. Ignoring thedepreciation on your lemonade stand (since you never factored that costin because it was not a real cost to you) the amount of profit you haveleft is your EBITDAbefore you pay either interest or taxes. EBITDA isyour cash flow available for all sorts of thingsbuying another lemonadestand, paying off debt on your credit card, or even just paying your taxesand pocketing the rest.When comparing companies and evaluating their operating health, mostleveraged finance bankers are concerned with a companys adjustedEBITDA (the amount that can be considered regular EBITDA year-over-year, adjusted for abnormalities and one-time costs), as well as thecompanys revenue. The EBITDA margin (EBITDA / Revenue) is a simplecalculation of how adept a company is at converting its revenues intowhat really mattersEBITDA. From EBITDA, one can determine howmuch debt a company can support (leverage ratios), as well as howmuch interest it can pay (interest coverage ratios). This, in turn,determines purchase prices for LBOs, the size of bond/loan offerings,and even the size of exit financings. In the world of leveraged finance,no other financial term is as significant.CAREER 18 LIBRARY 2006 Vault, Inc. 30. Major Industry Players CHAPTER 2 In order to understand the leveraged finance industry and determine where you would like to work within it, it is important to understand the different players in the industry and the markets they serve. As in investment banking, in leveraged finance there are typically three types of players: those that originate and structure deals (called the sell-side), those that invest into those deals (called the buy-side), and the clients that receive the financing.Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library The sell-side is comprised of investment banks and commercial finance companies, the buy-side is comprised of investment firms such as hedge funds and insurance companies, and the clients include both large corporations and private equity shops. It is important to note that even though one firm might be a particularly large player (buyer, seller or client) in the leveraged loan market, it might not so be in the high-yield bond market. In this chapter, well review some of the major players on both the sell-side and the buy-side. The specific firms we mention are chosen based on the league tables of the sell-side firms and on reputation for the buy-side firms and private equity shops. Although a good starting point for considering potential employers, these lists should be considered in light of a particular firms culture and the emphasis it places on its leveraged finance group versus its other operations. As this book is more focused on sell-side firms than those on the buy-side, in Chapter 4 you will find a more detailed discussion of the sell-side-an overview of the typical groups/departments within those organizations. For a more comprehensive overview of buy-side firms and private equity shops, check out the Vault Career Guide to Hedge Funds and the Vault Guide to the Top Private Equity Employers. Investment Banks There are a few distinct types of investment banks in the world of leveraged finance: first, the bulge bracket investment bank with a large commercial banking operation; second, the standalone investment bank that typically provides advisory solutions for clients; and third, the investment bank that does have a commercial presence, but is considered boutique or regional.Visit the Vault Finance Career Channel at www.vault.com/finance withinsider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARY 19 31. Vault Career Guide to Leveraged FinanceMajor Industry PlayersThe bulge-bracket investment bank with asubstantial commercial banking operationTop firms Bank of America JPMorgan Chase Citigroup Wachovia Deutsche BankCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryThese are truly the dominant players in the industry. These are firms that havebeen lending to companies for years; therefore, their relationships withissuersboth on the investment banking side and the commercial bankingsideare very strong. In other words, they that not only have they been aclients commercial bank (lending institution) for many years, but they alsohave a history of providing financial and M&A type advice to thesecorporations. Therefore, when one of their clients needs a loan or bond, theseinvestment banks are typically called upon to provide their advice andexpertise-as they have been for many years. These investment/commercialbanks place a large amount of emphasis on their leveraged finance operationsbecause of the substantial amount of fees generated from these transactions.Most of these firms have dedicated leveraged finance professionals in all of themajor financial market locations: New York City, Chicago, Houston/Dallas,Los Angeles/San Francisco, London, and Hong Kong.Typically, these firms will have an entire leveraged finance platform underthe debt capital markets heading within the corporate finance section of theinvestment bank. Some of these firms have entire teams dedicated solely tooriginating deals, while others will align this origination responsibility intotheir industry coverage groups. Regardless of how it chooses to structurethese operations within their organization, the bulge-bracket investment bankwith a substantial commercial banking operation will have resourcesspecifically dedicated to: Originating transactions Following the capital markets Monitoring the client portfolio and outstanding exposure to certain clientsand financial markets Interacting with the rating agencies Selling and trading both the syndicated loan and the high yield bondCAREER 20 LIBRARY 2006 Vault, Inc. 32. Vault Career Guide to Leveraged Finance Major Industry PlayersBecause of the vast expansion of the field of leveraged finance, as well as theincrease in size and scope of the financial markets, these types of firms areredefining stereotypical investment banking: they are becoming one-stopshops for clients. As the commercial banking operations of these firms havebecome more integrated with their investment banking operations, a clientcan rely on one banker to get nearly everything it needs, including M&Aadvice, a syndicated loan, a high-yield bond, an IPO, or even savings andchecking accounts. Furthermore, clients can now count on one banker toknow everything about their companies, which creates a very trustingCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryrelationship. Since most of these clients started at one point or another witha small loan from one of these banks, it comes as little surprise that leveragedfinance contacts are very often the managers of these extremely valuablerelationships. Needless to say, this is very good exposure for a youngleveraged finance analyst or associate.Also, generally speaking, because the leveraged finance operations of thesefirms started as part of their commercial banking operations, the leveragedfinance groups in these types of investment banks will typically have more ofa commercial banking feel: a little more laid-back and a little bit lesshierarchical than their M&A counterparts. However, they still all fall underthe same corporate finance umbrella within the investment bank and theyinteract with their corporate finance colleagues just about every minute ofevery day.Typically, these firms will place analysts and associates directly from theircorporate finance investment banking programs into their leveraged financedivision, just as they would place analysts/associates into any other industrycoverage group. Furthermore, analysts and associates are treated exactly thesame as their other corporate finance peers in just about every aspect.However, unlike at a coverage group, where an analyst or associate mighthave a substantial amount of down time during the afternoons beforeworking through the night, there tends to be more of a fire-drill, non-stopnature to the leveraged finance work environment. Working on multiple dealsand managing numerous processes from pitch to close is a non-stop, full-timejob. Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 21 33. Vault Career Guide to Leveraged FinanceMajor Industry Players The standalone investment bankTop firms Credit Suisse Lehman Brothers Goldman Sachs Merrill Lynch Also players in the leveraged finance industry, albeit on a significantlyCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library smaller scale, these firms have quite a different approach. Whereas an investment bank with a strong commercial banking presence (such as JPMorgan Chase and the other banks discussed in the previous section) seeks to maximize the number of companies it lends to in order to broaden its commercial banking presence, a standalone investment bank such as Goldman Sachs seeks to use its balance sheet in order to drive other fee- related events. Without a commercial banking presence, these pure investment banks would rather allocate their balance sheets to larger fee- events for revenue generation, such as proprietary trading, rather than investing and structuring syndicated loans or high-yield bonds for their clients. This is not to say that these firms do not arrange syndicated loans and high- yield bonds. On the contrary, they do and they are quite good at it. As just a pure matter of transaction volume, however, they just do not have the breadth of experience or leveraged finance market presence. However, they will seek to do this type of arranging of financing for firms where an obvious M&A relationship, or other type of fee relationship, exists. For this reason, a much larger portion of the leveraged finance deals handled by a standalone investment bank will be LBO, IPO, spin-off, or M&A-related. (The firms bankers in other departments will be generating fees for work on these larger deals that have a leveraged finance component.) In contrast, a firm such as JPMorgan Chase or Bank of America will arrange a syndicated loan or high- yield bond for just about any client of the investment or commercial bank for any reason, whether it be as part of an LBO, IPO (or other larger deal), or something simpler like a debt refinancing that is not related to another fee- related event. Also, as a syndicated loan tends to require more of a capital commitment than a high-yield bond due to the sheer size of the loans, these standalone investment banking firms tend to be more active in the high-yield bondCAREER 22 LIBRARY 2006 Vault, Inc. 34. Vault Career Guide to Leveraged Finance Major Industry Playersmarket than in the syndicated loan market. Furthermore, on average,syndicated loans tend to be less profitable than their high-yield bondcounterparts, especially those that are not event-driven. Where a firm mightearn $1 to $2 million for arranging a $100 million syndicated loan for an LBOfinancing, raising that same amount using high-yield bonds could earn thebank anywhere from $3 to $5 million, possibly more. In this situation, thestandalone investment bank has made a quantity vs. quality tradeoff, optingfor the market with substantially less volume but a high rate of return for itsown money and time. This is especially true in the event of a generalCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryrefinancing, when these bonds and loans tend to earn substantially less.Every firm has internal metrics for the rate of return it must earn for its ownbalance sheet, for these firms, that rate is typically much lower than theinvestment banks with commercial banking divisions.Organizationally, these firms typically place their leveraged finance platforminto the debt capital markets portion of the corporate finance division of theirinvestment banks. Unlike their counterparts with commercial bankingoperations, they typically do not have full teams dedicated to originatingtransactions. Most of the deal origination at standalone investment bankscomes from an investment bank client coverage team; the market commentarywill from a debt capital markets group. Although a profit center for theinvestment bank, the leveraged finance group at a standalone investment bankwill have substantially less transaction volume than the same groups at I-bankswith a commercial banking presence. Also, absent this presence, theseleveraged finance groups typically have a culture nearly identical to the rest ofthe investment bank.At the standalone investment bank, the overall lifestyle will be similar to theinvestment bank with a large commercial banking presence. Analysts andassociates are also part of the investment banking corporate finance programand are expected to work long hours. The only difference between aleveraged finance group at a standalone I-bank and a similar group at aninvestment bank with commercial banking operations is the pace of the day,since teams at standalone firms are generally working with fewer leveragedfinance deals. However, the deals are also generally more complex, as theyare event-driven (as discussed earlier). Subsequently, the analyst/associatesjob is less about managing a variety of processes and more about workingthrough the nuances of a particular deal. This often translates into morecomplex financial modeling, more intense due diligence, more complicated Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 23 35. Vault Career Guide to Leveraged FinanceMajor Industry Players presentations for lenders, and more intricate offering memorandums. Also, since this type of leveraged finance platform might span multiple debt markets, it is also possible that an analyst/associate here might see other types of debt transactions, including high-grade bonds, private placements, investment grade syndicated loans, and even mezzanine debt tranches. The regional or boutique investment bank with a commercial banking presenceCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryTop firms ABN AMRO PNC Jefferies & Co SunTrust KeyBank Wells Fargo National City These firms, which do have both investment and commercial banking presences, are also players in the leveraged finance market. However, they typically arrange financings in the large cap space for clients where they have a distinct relationship, or they compete in the exceptionally profitable middle market space. Larger firms in this category (such as ABN AMRO, Barclays, and SunTrust) often have full-scale leveraged finance platforms, but they might find themselves investing in these loans and bonds more often than actually arranging them. The same is somewhat true of the smaller lending operations, such as Jefferies, yet they generally compete for financings in the middle market space. A substantial difference between the large investment banks with commercial banking arms and the smaller investment and commercial banks is the seemingly limitless balance sheet ability the larger firms have to invest and seek to put to work. Although they still have tens or maybe even hundreds of billions of dollars to potentially lend, these large regional banks will arrange financing typically only for local companies where they can leverage the power of their relationship for future ancillary business, such as checking/savings accounts or other treasury business, such as hedging and foreign exchange. In this sense, their relationships, rather than the fees of event-financings, drive their lending rationale. Furthermore, they seek to place their capital to work in other areas of the bank and opt not to enter the highly competitive large cap leveraged finance space. At any rate, theCAREER 24 LIBRARY 2006 Vault, Inc. 36. Vault Career Guide to Leveraged Finance Major Industry Playersfinancing packages are still comprised of leveraged loans and high-yieldbonds and are structured for the same clients and for the same purposes as arethe large investment and commercial banks.Even further down the scale of size, many smaller boutique investment bankshave formed lending units by raising a specific amount of funds (typically $1 to$5 billion) for the sole purpose of arranging financing packages for clients. Likethe pure investment banks, they too are not chasing a quantity of transactions;instead, they are typically seeking event-driven deals. In order to distribute theirCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Librarycapital wisely, these firms tend to work with smaller companies in the middlemarket space. However, they still arrange financing for the same variety oftransactions that the larger players do and they tend to interact with the same top-tier private equity shops and hedge funds. On occasion, they will even workwith venture capital firms, which is something that the larger leveraged financeshops very rarely do. Also, these smaller lending institutions tend to own alarger piece of the financing package than their larger leveraged financecounterparts and they tend to syndicate to a much smaller investor universe.At these firms, the workplace culture is typically more laid-back than at the pureinvestment banks and in general is more similar to a commercial bankingoperation. Also, with less deal volume than their larger counterparts, one cangenerally expect to close fewer transactions at these firms, yet be much moreacutely involved in every piece of the leveraged finance process. With much lesstransaction volume, analysts and associates at these shops typically become evenmore involved in every aspect of the process and this will add to the depth oftheir working experience. . Also, with generally fewer people in the leveragedfinance groups, analysts/associates have an opportunity to take on a substantialamount of responsibility and even truly develop client relationships.Junior resources at these firms are also sometimes considered part ofcorporate finance programs as investment bankers, and sometimes they arenot. This distinction depends entirely on the firm, as do the culture and hours.Hours tend to fluctuate with the peak times of a deal, such as the closing andfunding of a transaction Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY25 37. Vault Career Guide to Leveraged FinanceMajor Industry PlayersCommercial Finance CompaniesIf you were to take a brief look at the descriptions of commercial financecompanies on their web sites, you would find that these firms pridethemselves on providing lending, leasing, and other types of financialsolutions for clients. This is quite a different approach from a standaloneinvestment bank that provides advisory work and securities products to itsclients. Subsequently, for the leveraged finance platform of a commercialCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryfinance company, everything from the client base to the product offerings isdifferent from the investment banking firms. In no specific order, majorplayers in this field include GE Commercial Finance, CIT Group, andCapitalSource.These firms typically work very frequently with smaller mid-cap companies,providing everything from financing for heavy equipment to multi-milliondollar revolving lines of credit. Due to the nature of these product offeringsand the size of these clients, most of these firms leveraged finance teams playonly in the syndicated loan market, and stay out of the high yield bondmarket. Naturally, if a firm is already providing smaller loans for other typesof financing needs for a company, a syndicated loan makes sense to providefinancing for a companys larger financing need. However, it is notuncommon to find some of the larger players, such as GE CommercialFinance and CIT Group, to be co-leading a multi-billion dollar transactionalongside a large investment bank. These leveraged finance deals would besourced from their large cap teams.On the whole, the leveraged finance platform at a commercial financecompany would be smaller than that of an investment bank. Whereas thelargest investment banks might have a few hundred individuals in the U.S.dedicated solely to sourcing and structuring deals, even the largestcommercial finance companies might have fewer than 100. With somewhatless volume, these professionals typically have more all-encompassing roles,as compared to their investment banking counterparts. Where someone couldexpect to find both a capital markets team and a sales team at a largeleveraged finance shop, these functions are typically combined in thecommercial finance companies and the smaller investment banks.Furthermore, at the smallest commercial finance shops, the deal origination,structuring, credit, capital markets work, rating agency presentation, andclosing responsibilities might all fall on the shoulders of a three- or four-CAREER 26 LIBRARY 2006 Vault, Inc. 38. Vault Career Guide to Leveraged Finance Major Industry Playersperson deal team. In contrast, at a large investment bank, there wouldundoubtedly be a team for each of the aforementioned responsibilities.Culturally, these firms will be very different. Although generating millions ofdollars of fees, these teams are still treated somewhat differently from thoseof an investment bank. Armed with corporate cards, BlackBerrys andexpense accounts, the lifestyle is still more than adequate for those seekingcorporate perks. However the basic pay scale tends to be different. Forexample, while a first-year analyst in an investment bank in a good year couldCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryexpect to clear $100k, the first-year counterpart at a commercial financecompany might expect $55-65k. A third-year analyst at an investment bankmight expect to near $200k in compensation in a hot market, while hiscommercial finance peer could expect $75-85k. This discrepancy onlybecomes larger as the market remains hot and investment banks continue topay accordingly. And at the upper ranks of managing director, wherecompensation is typically derived from the amount of revenues brought intothe firm, this pay discrepancy between the two types of firms is furtherexacerbated. However, remember that compensation at the junior levels isrelated to office hoursthose investment banking analysts earning $100k aretypically earning about the same per hour as their counterparts at commercialfinance companies.Most of the pay and lifestyle discrepancies tend to reflect the relative size ofthe firm and the atmosphere of the group. If you were working at acommercial finance company and every other division left at 5 p.m. sharp onFriday, you would have a tendency to do the same. With the 8 a.m. to 6 p.m.lifestyle somewhat more prevalent in greater Corporate America, it comes aslittle surprise that commercial finance shops do not expect all-nighters fromtheir analysts. Also, working every weekend is not usually expected ofanalysts and associates at commercial financial companies and juniorresources are certainly not on call on weekends the way their investmentbanking counterparts are. Still, while nobody will dispute that investmentbanking analysts and associates work completely insane hours, it should benoted that the hours in commercial finance are not a cakewalk either. Whenclosing a deal or in the middle of a long-due diligence process, a commercialfinance analyst can expect 80-hour workweeks.Commercial finance companies also boast an overall more relaxedatmosphere. Many former investment bankers come to these commercialfinance shops to find a more relaxed collegial atmosphere, with khakis and Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 27 39. Vault Career Guide to Leveraged FinanceMajor Industry Playersgolf shirts as opposed to Hermes ties and Gucci loafers. Lunch outside theoffice, as opposed to at ones desk, is a more typical occurrence at acommercial finance company. For many, this lifestyle tradeoff of acommercial finance atmosphere versus I-banking is worth every singlepenny, and more.Hedge Funds and Other InstitutionalInvestorsCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryHedge funds and institutional investors represent the buy-side of leveragedfinance. Responsible for a large amount of the growth in the leveraged loanand high-yield bond markets, these investors are now placing billions ofdollars in the markets. As investors have chased places to put idle funds towork, the markets have responded with more liquidity than ever, increasinglycomplex products, and more innovative financial structures. Subsequently,these investors have put the supply/demand equation into a seriousimbalance, thus making this an issuers market. Now, companies that wouldordinarily find themselves bankrupt in any other market are findingthemselves with multi-million dollar syndicated loans and high-yield bondsat all-time record low interest rates.One of the primary reasons institutional investors are interested in thesyndicated loan market and high-yield bond market is the relative value theseproducts offer to other asset classes. Furthermore, the products in thesemarkets trade off the underlying value of the creditthis means that a firmtypically only has to do their due diligence on a firm once, with the ability toinvest in multiple places in the capital structure of a firm. No longer areinvestors limited to playing in either the equity of a company or the bonddebt; instead, they have a variety of options. Whereas one investor might beinterested in debt of a company, it might find the risk/reward tradeoff of thesecurity of a syndicated loan more appropriate to its risk appetite, as opposedto an unsecured, higher-interest-paying senior note.These same investors also have the option to play in the increasingly growingbond and loan secondary markets, as these markets have also boomed due tothe rapid expansion of their primary markets. Investors tend towards theleveraged loan and high-yield bond markets since they typically movetogether. For example, if a company is downgraded by the rating agencies,CAREER 28 LIBRARY 2006 Vault, Inc. 40. Vault Career Guide to Leveraged Finance Major Industry Playersthus suggesting that its risk profile is greater than its peers offering debt at asimilar interest rate, the trading levels of its leveraged loan and high-yieldbond are likely to fall to reflect this negative change. Institutional investorsanticipating this change might seek to sell their positions in these firms and/orshort these markets. This type of credit prowess rewards the institutionalinvestor that has done its homework.Reflecting the global financial markets, institutional investors tend to belocated all across the globe. It is not uncommon for an investor to be locatedCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryin Miami Beach, FL, Los Angeles, CA, or Greenwich, CT. Organizationally,these firms tend to run fairly lean, only hiring individuals that can addimmediate value to their firm. As a growing number are playing in both theprimary and secondary leveraged loan and high-yield bond markets, they areseeking individuals with prior credit experience. Individuals working inleveraged finance have become a highly sought after commodity for hedgefunds. Some of these funds play entirely in the leveraged finance markets,while most of the large firms typically have a set amount of their assets undermanagement invested into the markets.For these institutional investors, the gateway to entry into the leveraged loanand high-yield bond market comes from either the firm originating thetransactions, or the firm administrating the transactions. When a leveragedloan deal is structured, marketed, and syndicated many of these investors aregiven the chance to invest in the loan. Similarly, when the high-yield bond ismarketed, these institutional investors are given the opportunity to buy intothese bonds. On the secondary side, as a firm finds an interest in theoutstanding leveraged loan or high-yield bond of a firm, it would call itsrelationship manager at its investment bank to place a trade. When placingsuch a trade, it is not atypical for the order amount to be multiple millions ofdollars. So a one-point move in the trading level of a position can have amajor financial impact on a firm.Without league tables to rank the buy-side firms, it should be noted that themajor institutional investors in the high-yield bond market are typicallyinsurance corporations, money managers, and investment corporations, suchas Fidelity, PIMCO, and AIG. Though hedge funds play in this financialmarket quite frequently, only the large ones are generally targeted in theroadshow offering process. In contrast, on the leveraged loan side,institutional investors tend to include all of the above players, as well as quitea few hedge funds, including large firms like Highland Capital, Eaton Vance, Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 29 41. Vault Career Guide to Leveraged Finance Major Industry PlayersVan Kampen, and SAC Capital. All of these investors, and more, are targetedin the loan syndication process.Culturally, it is tough to stereotype the institutional investor universe, as thesize and investment nature of the firm can have a dramatic impact on theirorganization. (The Vault Career Guide to Hedge Funds is a good resource foranyone seeking to understand more about these firms.) However, becausehedge funds generally represent an improvement in hours and, in some cases,also represent a step up in pay, many former leveraged finance analysts andCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryassociates seek careers at hedge funds. With a firm understanding of credit,interaction with the leveraged finance markets, a wide arsenal ofrelationships, and an understanding of a variety of transactions, the juniorresources at top-tier leveraged finance shops are frequently contacted byheadhunters and other placement professionals for positions at top-tier buy-side shops. In these positions, these junior resources now become clients oftheir former leveraged finance peers, investing in transactions they very wellmight have structured when on the other side of the fence.Private Equity and Financial SponsorsPrivate equity firms are the final major player in the leveraged financemarkets (aside from the companies that actually issue the high-yield bonds orleveraged loans). Typically using money from lending transactions in orderto buy firms, private equity shops are clients of those arranging leveragedfinance transactions. Often, their funds are also investors in their own andothers transactions, further illustrating their dependence on the leveragedloan and high-yield bond markets.When a private equity shop seeks to purchase a company through a leveragedbuyout, it typically attains a syndicated loan and/or a high yield bond from aleveraged finance firm. Like individual homeowners who will pay 25% ofthe purchase price from his or her own pocket and borrow the remaining 75%,private equity shops also borrow money when executing an LBO (thisprocess is covered in greater detail in Chapter 5). With these borrowed funds,private equity shops are able to leverage their own money and executemarket-changing transactions. At the center of this execution is the leveragedfinance firm, lining up this necessary financing.CAREER 30 LIBRARY 2006 Vault, Inc. 42. Vault Career Guide to Leveraged Finance Major Industry PlayersWhether large or small, leveraged finance firms typically line up in droves toprovide this financing, as it is generally a very large fee event for a firm. Theapproximately $25 billion LBO of RJR Nabisco by KKR in 1989 (still themost notable private equity transaction in the leveraged finance markethistorically), generated hundreds of millions of dollars of fees for the lendinginstitutions. Since those early LBO days, with the rapid expansion of theleveraged loan and high-yield bond market, there has been a flurry of buyoutactivity. Numerous private equity firms have raised multi-billion dollarinvestment funds in the past few years in order to continue to executeCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Librarymultibillion dollar LBOs, such as the $15 billion purchase of Hertz, or the$11.3 billion purchase of SunGard. With LBO volume nearly $150 billionannually, up from $40 billion in 2000, and private equity fundraising volumenearing $500 billion, up from approximately $200 billion in 2000, LBOactivity is only expected to continue long into the near future. Needless tosay, the field of leveraged finance is eagerly anticipating this activity.No target is off-limits for private equity firms armed with such financing.These firms will even enlist the bank accounts of rival firms in order toexecute mega-LBOs. Recent corporate divestitures and secondary buyoutactivity, where a firm is bought by one private equity shop and later sold toanother, have also become a rapid source of expansion in the private equitymarkets. Cross-border transactions have also boomed in the past few years.Finally, auctions, where multiple private equity firms compete to win aproperty have become a market standard for corporations seeking to findthe highest bidder. Needless to say, as the cash balances of these firms remainrobust, buyout activity will only continue to become more innovative andaggressive.Leveraged finance firms execute many other types of transactions forfinancial-sponsor owned companies other than LBOs. Very common instrong financial markets, many private equity shops will seek to take some oftheir money off the table though leveraged loans or high-yield bonddividend transactions. Financial sponsors also will execute the sameleveraged finance transactions for their portfolio companies as any othercorporation would, including debt refinancings, recapitalizations, IPO/spin-off financings, and M&A transactions.Career-wise, private equity shops tend to be another major career alternativefor those in the leveraged finance field. An investment banking professionalwho has completed the analyst program at a top-tier leveraged finance group Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 31 43. Vault Career Guide to Leveraged FinanceMajor Industry Playersseeking a slight career transition might seek out a two-year program with thebig names in private equity, including KKR, Blackstone, Bain Capital,Madison Dearborn, Carlyle, Texas Pacific Group, Hicks Muse, JPMorganPartners, and Thomas H Lee. With financial-sponsor transaction experience,a firm understanding of the lucrative buyout process, and interaction with theleveraged finance markets, a career in private equity can be a comfortablecareer fit for a former leveraged finance banker. Although the hours mightnot be drastically better than the in investment banking, private equity firmsgenerally pay at the top end of the Wall Street scale, assist with MBACustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Libraryapplications to top-tier programs such as Wharton and Harvard BusinessSchool, and many even allow carry in the firms funds (a share of the firmsprofits). These are the typical reasons why some seek a change of pace intothe private equity field.The leveraged finance players providing the bulk of the financing money forprivate equity transactions also happen to be the firms with the largest balancesheets and top-notch financial sponsor coverage teams. At the top of this listare familiar leveraged finance names, such as JPMorgan, Deutsche Bank,Bank of America, Citigroup, Credit Suisse, Goldman Sachs, and LehmanBrothers. As the nature of LBO transactions tends to favor purchasing stablecompanies (whose earnings can be used to pay of the loans used to purchasethe company), there tends to be more activity in the large cap space when itcomes to LBOs. The major leveraged finance players in the industry alsohave the ability to offer their financial sponsor clients a wide variety offinancing solutions across both debt and equity markets, which is not typicalof a large commercial finance operation.Still, though they do not generally compete in the large cap LBO spacebecause they place less emphasis on serving private equity shops, commercialfinance companies are active in the middle market LBO arena. Examples ofthese include GE Antares, CIT Group, CapitalSource, Ableco-Dymas, andMadison Capital.CAREER 32 LIBRARY 2006 Vault, Inc. 44. The Products CHAPTER 3 As discussed earlier, there are two major financial products that drive the leveraged finance industry: the leveraged loan and the high-yield bond. In this chapter, we take a detailed look at the key characteristics and the issuing process for the leveraged loan, and compare it to the high-yield bond. It should also be noted that mezzanine capital also plays a part in theCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library leveraged finance industry, yet they are not typical of 99% of the industrys transactions. The Leveraged Loan What it is A leveraged loan is a loan arranged by a financial institution for an issuer, which is syndicated to a broader set of investors. Leveraged loans range in size from $1 million to $5-$7 billion and are generally arranged as part of a financing package for an issuer. This instrument is almost always considered senior secured debt (secured by the assets of the company), but on rare occasions can be senior unsecured debt. Due to the need for material non- public information (such as forward-looking company financials) in order to structure and complete a deal, the syndicated loan market is a private market. Exceptionally large, the U.S. leveraged loan sees nearly half a trillion dollars in annual new issuance volume, representing thousands of transactions. Key characteristics Underwritten vs. arranged: Leveraged loans are either arranged by a financial institution on a best-efforts basis, where there is no guarantee that a certain amount of financing will be raised, or they are arranged on an underwritten basis, where the arranger provides the entire financing upfront and syndicates its exposure to other firms. The former example can be likened to the good old college try, whereas the latter example is a guarantee to an issuer that it will receive a certain amount of funding. Underwritten financings typically occur when a financing is necessary to a certain event (such as an acquisition). Because of the large commitments ofVisit the Vault Finance Career Channel at www.vault.com/finance withinsider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARY 33 45. Vault Career Guide to Leveraged Finance The Productscapital from financial institutions that are required for underwrittenfinancings, and because the arrangers of underwritten financings assume therisk of syndicating the loan to investors, they are typically more expensive foran issuer (the organization borrowing the loan) than a best-efforts loan. Inthe best-efforts case, the financing firm is only responsible for the amount ithas itself committed to the transaction, not the entire amount.Structure: Syndicated loans typically come in one of two forms: Revolvingcredit (RC) facilities and term loans. They are generally issued together andCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Librarycomprise the different tranches (pieces) of what is known as a loanpackage. RC facilities are similar to credit cards, while term loans aresimilar to a standard car loan:The revolving credit facility: similar to credit cardsA revolving credit facility is an unfunded financial instrument that can bedrawn upon at the issuers discretion, just like a credit card. Also like a creditcard, RC facilities have annual administration costs, a fee for drawing onthem (similar to an APR for holding a balance) or an annual fee if unused.RC facilities are usually provided by standard commercial banks, much likethe credit card industry.At the end of their duration, the balance of a revolving credit facility is due,just as with a credit card. Also like a credit card, an RC can also be refinancedwith a lower interest rate before the end of its duration. RC facilities aregenerally rated by the major rating agencies, which like the credit score of anindividual in the credit card application process, typically plays a large role indetermining loan sizes and interest rates.Unlike credit cards which have an essentially unending duration, RC facilitiesare issued in durations of 5 to 7 years, based on an issuers needs. Also,companies typically have only one revolving credit facility, whereas manypeople have multiple credit cards. RC facilities are dominated in a specificcurrency, whereas credit cards can be used across currencies. Finally, the RCis a floating-rate instrument with a fixed rate spread above LIBOR (LondonInterbank Offered Rate). Typically, the credit card has a fixed APRpercentage that does not fluctuate with any other interest rates.The term loan: similar to car loansThe term loan is a fully funded instrument, which is drawn from the momentit is issued, much like a car loan. In this case, there are no undrawn or drawnfees, but annual administration fees do exist. Like a regular car loan, the termCAREER 34 LIBRARY 2006 Vault, Inc. 46. Vault Career Guide to Leveraged Finance The Productsloan is issued for a duration of anywhere from 5 to 7 years, depending on theneeds of the issuer. Also like the car loan, the term loan is paid off over time(amortization) with a balloon-payment at the end of its duration. However,typically this annual rate of amortization is 1% of the loan, as opposed tomuch higher rates for car payments. Finally, the term loan is also a ratedinstrument by the rating agencies, which like an individuals credit score inthe car loan application process, will play a large role in determining loansizes and interest rates.Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career LibraryUnlike a car loan, term loans are generally invested in by institutionalinvestors, rather than commercial banks, hence why they are typicallyreferred to as institutional tranches. As with the RC facility, term loans arealso floating-rate instruments with a fixed rate paid above LIBOR (LondonInterbank Offered Rate), as opposed to a fixed interest rate for a car payment.There are a variety of term loans, including term loan As (issued to higher-rated credits with shorter durations, typical commercial bank investors, andlarger amounts of amortization), term loan Bs (with longer durations,institutional investors, and less amortization), and 2nd lien term loans (withsimilar structures to term loan Bs, but with less security than other termloans).ProcessThere is a somewhat standard process involved when a company attempts toissue a leveraged loan. In many cases, loans do not make it through thisprocess. Also, in many cases the terms of the loan are fundamentally alteredduring the deal lifecycle.A backup in a financial market can also keep a product from being executed.During the high-yield market back-up of 2005, JPMorgan became notoriousfor structuring and executing syndicated loan transactions that would take theplace of high-yield bonds for issuers. In this case, the process of issuing aproduct must be somewhat flexible, as must be both the arranger and theissuer.For syndicated loans, the standard issuance process generally takes anywherefrom 8 to 12 weeks from pitch to close. Heres a look at the standard process:a) The pitch: In this phase, a financing firm has proposed a leveraged finance product to an issuer (a company). Through regular dialogue with Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more.CAREERLIBRARY 35 47. Vault Career Guide to Leveraged Finance The Products the company, either a coverage team or a leveraged finance relationship manager has found that a syndicated loan and/or high-yield bond might be the right financial solution to the issuers needs. In such a case, the coverage investment banker will bring along the appropriate people from leveraged finance, including a senior member of an origination team and a capital markets expert to pitch the financing idea to the client.In this phase of the process, the pitch has generally gone through many latenight iterations in order to contain the most updated relevant marketCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online C