What is Leveraged Finance?
Leveraged finance (“LevFin”) is in its official capacity a debt capital markets (DCM) group. However, when investment bankers refer to DCM they are almost always referring to investment grade debt capital markets. Levfin is in practice treated as a separate product group.
Functionally, the two roles end up doing the same thing. They are responsible for coverage and execution when it comes to issuing debt. In terms of coverage, this entails providing Debt Capital Markets updates (or Leveraged Capital Markets Updates) while providing advisory on what times to issue, where bonds are expected to price, which investors to speak to and how to structure the deal based on company needs.
However, where investment grade term loans (bank term loans, amortizing term loans, term loan A) generally stick with the banks and accordingly will be covered by loan syndications in corporate banking as well, leveraged finance will also be the relationship manager for leveraged loans.
However, in getting to this execution, the inputs are very different. Due to the importance of financial covenants at issuance and the credit risk of these companies, a lot of firm specific financial modelling has to be conducted in order to generate the appropriate marketing materials for the potential investor base. Alternatively, investment grade DCM will have a focus on rates while the amount of credit work is de minimis.
Levfin bankers will have work that resembles classic investment banking, spreading leveraged debt comparables, modeling out cash flows, running leveraged buy out math to solve for IRRs when looking for a private equity sponsor or when looking at possible dividend recapitalizations.
As such, recruitment will focus on the micro side of debt as opposed to the macro. Interview questions will be split between markets, such as where BB or B loans and bonds are trading at in terms of yield-to-worst – and more traditional investment banking questions focused on LBOs (and to some extent M&A).
Sample Leveraged Finance Interview Questions
- What are BB and B rated loans trading at?
- What are BB and B rated bonds trading at? For these two questions, you can easily find them S&P’s high yield bond website as well as from a Bloomberg terminal
- What are some covenants you would see in a term loan B/institutional term loan? What are some you would see with a high yield bond? What about for bank debt?
- What are different characteristics you would see between bank debt/institutional term loan B/high yield bonds?
- What is a leverage covenant? What range is leverage for BBB?
- What is an equity clawback?
- What is an add-on?
- Why can two debt issues by the same company trade at different prices?
- Who are some major high yield investors?
- What should trade higher all things equal, a 1L or unsecured bond for the same company?
- What are some embedded options in high yield bonds?
- What does that do with the convexity of the bond?
- What is yield to worst and why is this more often quoted than yield to maturity (YTW vs YTM)
- What is a hard call? What is a soft call? What is a make whole?
- What is a maintenance covenant and what is an incurrence covenant?
- What is a PIK toggle?
- What are some recent leveraged loan transactions we have bookrun? What are some high yield bond transactions where we acted as lead arranger?
- What has happened to credit spreads over the last 6 months? Do you expect them to tighten or widen?
- What is a junk bond that you would buy?
- Walk me through a conversation with a client where we are advising them to refinance their debt
Careers in Leveraged Finance and Exit Opportunities
As one would surmise, exit opportunities for leveraged finance are also much more broad than IG DCM. Also, hours tend to be longer as more inputs are needed to get to the output in contrast with DCM. Compensation is similar to investment banking and higher than DCM.
As the credit worth done is more rigorous, credit funds, hedge funds, private equity, corporate banking, other investment banking groups are all options for levfin bankers whereas DCM would solicit more attention from investment grade credit funds and macroeconomic focused shops.
Leveraged Finance League Tables
Given the different skillset required, the levfin capabilities of banks will be very different. League table topping big banks in the leveraged finance space may not be as strong in the investment grade space and vice versa. For example, Jefferies does very well in junk bond issuance but is not a big player in investment grade debt.
Likewise HSBC and the major Japanese banks such as Bank of Tokyo-Mitsubishi UFJ Securities and Mizuho Capital Markets are strong in investment grade but have limited capabilities in levfin. The usual suspects Bank of America Merrill Lynch and JP Morgan will excel at both. Morgan Stanley and Goldman Sachs have strong franchises here as well – but given the link between IG DCM and credit, they will not lead as often like BAML or JPM.