Introduction to Corporate Banking

Corporate banking is a financing group which provides lending and ancillary services to large corporate, institutional and government clients while serving as secondary relationship coverage to the investment banking team.

Loan products include revolving credit facilities (RCFs or revolvers), term loans (amortizing term loans, TLA or bank term loans), acquisition financing (equity, debt/bond and asset sale bridge loans), margin facilities and performance, financial and standby letters of credit – which sometimes overlaps with a separate trade finance division.

Aside from the primary industry coverage groups, corporate banks may have sub-segments, with common ones including Real Estate Finance (mortgages, advisory, securitizations), asset-based lending (ABL – lending on assets with a haircut), reserve-based lending (RBL – for natural resources with reserve bases such as oil and gas and mining), and project finance.

Global Corporate Banks

The Corporate Bank’s Role in the Investment Bank

Functionally, corporate banking is similar to (and to some capital markets employees, is essentially the same as) commercial banking. In both divisions, the bank lends money to businesses/corporates/companies, financials or governments and cross-sells ancillary products (accounts, supply chain financing, receivables factoring, letters of credit, etc.). As the client gets larger, the banking group for the client also grows larger, with credit facilities going from bilateral contracts to multiparty (the banking commitments will be syndicated out to several lenders).

However, the way most bulge brackets and Canadian banks view corporate banking is very different from the commercial bank. Corporate banking is a product group in the investment banking division which extends credit (lends or commits money) to institutional or large corporate clients as a relationship anchor for capital markets business, where the lending return is secondary (as it is a lot lower, as discussed below) whereas in a commercial banking relationship, the lending relationship is the driver of the bank’s profitability.

For an explanation to why this is, there needs to be an understanding of how a bank makes money (see our financials section). For lending profits, banks need to borrow capital from a cheaper source and then lend it out at a higher rate. The capital they must hold to lend money to someone else (where there is credit/default risk, amongst other risk) varies depending on how risky the borrower is.

Due to the much lower credit risk of large corporates, and their ability to access capital from a variety of possibly cheaper sources, the lending only return to the investment/universal bank is low relative to a local grocery chain (an exercise in buyer power). Also, for corporates, the products demanded from banks on the lending front are much less lucrative for the bank in terms of interest income. The fees on undrawn revolvers are not commensurate to the risk to the bank.

Once corporates get to a large enough size, they prefer to tap into debt capital markets via bond issuance as it is:

1. cheaper than bank debt for similar tenor (given similar terms);
2. more permanent capital (whereas banks prefer shorter tenor); and
3. less restrictive in terms of covenants (rules that the entity must abide by when indebted).

As such, the product that larger borrowers require from banks are not meant to be permanent capital, but to supplement liquidity (including commercial paper backstop facilities) which are usually revolving lines of credit that remain undrawn. For revolving lines of credit, banks face risk whether or not the facility is drawn because they have committed to provide money given the absence of any default – the problem is that when there is a large draw on a facility that is never drawn, the company’s financial problems are now at the forefront. Meanwhile, when nothing is wrong, banks receive much thinner commitment or standby fees as opposed to the drawn pricing.

Accordingly, the expected capital markets business is paramount to ensuring that the banks are compensated for the relationship. DCM and ECM are fee based and do not require for capital to be held on the bank’s balance sheet, while the costs are limited to overhead and compensation. Astute relationship managers will vie for the customers with capital markets needs, and a good relationship manager is inextricably linked to the product groups.

Corporate Banking Salaries, Applicants and Exit Opportunities

It may be confusing to know that corporate banking (corporate lending) actually is a much larger contributor to a bank’s bottom line than investment banking (strictly the fee-based underwriting and advisory, as corporate banking is usually considered a product group of the investment bank) and has a much higher return on equity than asset management.

However, corporate bankers are generally compensated a lot less than investment bankers (and work a lot less hours) due to the capital requirements for committing loans and the idea that the corporate banking relationship is a lot of recurring fees that would be expected regardless of who sits in the relationship management role. Conversely, it is expected that if a star investment banker leaves, the relationships may leave also. Base salaries are the same across capital markets with $70-90,000 base for analysts, $95-125,000 for associates and so on. Bonuses are 25% to 60% of base salaries.

This is not to discount the value of a good corporate banker, who can be an excellent intermediary between a client and relevant product groups. This deal brokering is much more expected at global banks and Bulge Brackets.

Corporate banks do hire straight from colleges, and not necessarily from target colleges. If you are not going to a top 10 university, an excellent GPA with good extracurriculars can be enough to get you into a good bank. Accountants (from the big 4) and commercial bankers are sometimes hired as associates. You also get the occasional investment banker looking to stay in capital markets but without the same workload.

Exit opportunities for corporate banking professionals are good. Corporate bankers can lateral easily into credit funds, debt capital markets and other debt related jobs. Exiting to investment banking (in the same industry) and sales (on the trading floor) is also possible.

Day-to-Day in Corporate Banking

As a junior corporate banker, your days are significantly shorter than your counterpart in investment banking, especially when there is no deal imminent. Your day to day tasks include the following:

• Prepare internal credit submissions (i.e. company, industry and financial analysis and modeling)
• Monitor market/industry conditions the performance of the team’s loan portfolio
• Maintain updates on client, industry and market performance, particularly in connection with any signs of potential deterioration or developments requiring amendments/waivers to existing loan documentation
• Maintain and update presentation materials and internal spreadsheets
• Liaise and be primary contact with back and middle office functions

Our interview with a corporate banker covers the day-to-day tasks in more detail.

Interview with: Corporate Banking Associate

Corporate Lending Basics

For corporate loans, these topics matter to current and prospective lenders as well as to clients.

Borrower and Structural Subordination

The actual entity that the money is committed to. This matters to lenders as an holding company (the HoldCo or main, publicly listed company) may be structurally subordinated to the operating subsidiary (OpCo) – this affects the relative risk for the banks, and guides the other data that is covered. New issues by borrowers also will affect existing credit by lenders – if there is already lending to the HoldCo, lenders may not allow additional debt that is junior to the new debt at the OpCo level.

External Credit Rating and Grid Pricing

S&P, Moody’s and DBRS (sometimes Fitch) ratings for the long-term credit outlook of the borrower. The rating will be used to determine the pricing for the loan. If an entity is split rated, the appropriate rate will be outlined in the Loan Agreement or Credit Agreement (for example, if S&P is BBB+ and Moody’s is BBB, the company may borrow at the BBB+ rate. If S&P is BBB+ and Moody’s is BBB-, the company may borrow at a BBB rate. If S&P is BBB+ and Moody’s and DBRS are BBB, the company may borrow at the BBB rate). This arrangement is known as using a ratings grid.

If a company is not rated, or the credit rating is far from what banks have under internal models (for example, an entity is rated BBB+ but leverage for most banks implies a BB rating), banks may push for a leverage grid for pricing – which will have different levels of pricing based on debt to EBITDA (where definitions may vary) or debt to equity.

Loan Tenor

The length of the loan. The longer the loan, the higher pricing generally must be to cover the higher cost of funding for banks. The longest bank loans usually go out is 5 years. Common facilities range from 1-5 years with 1+1 facilities also becoming popular (one year + 364 day term out – where the loan will transform into a term loan if not extended).

Credit Facility Type

Common credit facilities include revolvers (operating, liquidity, working capital, borrowing base, for reserves and receivables), term loans, delayed draw term loans, and bridge loans.

The transaction can also be discussed (new loan or extension).

Pricing and Fees

Pricing at the current level of the pricing grid (ratings or leverage) for drawn (any portion of the loan that being utilized) and undrawn (unutilized capacity) revolver capacity and an upfront fee (a fee for committing to the revolver which is paid on the entire commitment at the beginning of the loan or extension.

Bookrunners and Lead Arrangers

Very important information for the syndications team as this goes into marketing materials such as league tables or credentials. This will usually be the lead relationship bank for the client, or if this is a for an acquisition will reflect the bank that is in charge with advisory or generating the corporate finance idea.

Syndications

What is Loan Syndications?

Loan syndications is the division that underwrites and syndicates loans for the corporate banking division in the investment bank. The syndications team of the primary relationship bank of a corporate or government (the lead bank, which usually translates to titles including agent, lead arranger and bookrunner) will help structure loans, distribute loans and advise on bank debt solutions.

Although syndications is usually grouped under the corporate banking umbrella, professionals in syndications will tell you they work in syndications instead of corporate banking (or even classic investment banking when the group is called Syndicated & Leveraged Finance – but don’t be fooled! There is barely any leveraged finance in Canada).

For most small businesses that go to their local commercial bank, a loan is a bilateral contract between the business and the bank. Once loans get to an institutional size, from $50 million to $20 billion dollars (some revolvers – Shell, Glencore, Walmart), both the borrower and the banks prefer to spread the loan over a syndicate of lenders as this lowers the credit exposure of the bank to the company and allows the company to have a capital markets relationship with several lenders.

Syndications Salaries, Applicants and Exit Opportunities

Syndications professionals have a role more similar to a debt desk on the floor and are compensated closer to debt capital markets than to corporate banking. Base salaries are the same across capital markets with $70-90,000 base for analysts, $95-125,000 for associates and so on. Bonuses are ~40-60% of base salaries.

Syndications is not usually a group that hires straight out of university (although there are exceptions). Professionals are always on the phone with clients and other banks (for information), so presentable and sharp staff are required. As such, syndications will either pluck top performers from corporate banking or investment bankers looking to stay in capital markets but without the same workload.

Exit opportunities for syndications professionals are good, despite the lack of credit analysis compared to corporate banking (to be frank, corporate bankers who deal with mostly investment grade credit do not do real credit analysis), as the loan structuring and pricing translate well to any job which requires legal due diligence in the investment decision (although not as great as DCM). Syndications professionals can lateral easily into debt capital markets, corporate banking and credit funds.

Day-to-Day in Syndications

When no deal is imminent, the syndications desk has the junior bankers busy hashing together league tables (especially to make the bank look good) and updating their tombstones/credential list. Basically, this is a page of 15 deals the company has recently done in a sector (where they were lead arranger or bookrunner) which is used in marketing materials.

They will also prepare generic Bank Market Updates or Loan Market Updates which discusses syndicated loan pricing for AA, A, BBB companies, syndicated loan volumes (and what type and purpose – commercial paper backstop revolver, working capital revolver, term loan A, term loan B, bridge debt) and whether it is a good time to refinance or extend.

It is important to remember that syndications is not responsible for primary coverage with the clients – that goes to corporate banking, and corporate banking is also in charge of writing new credit (a credit team will handle annual reviews) and cross-selling trading floor products (swaps, FX). Industry updates and analysis will also be covered by corporate banking.

The Loan Syndication Process

If a client needs a new loan, the relationship bank’s syndications team will hold hands with them throughout the process and give out an idea of whether or not the proposed loan would clear given the ideal bank group (the syndications team may also advise on which banks to include, and at what “bite size”) and the terms and conditions the company wants (which credit will in turn have a dialogue with syndications to see if they are comfortable with it themselves, nevermind pitching it).

After drafting up Term Sheets and coming to the loan structure that the client likes (a 5 year, unsecured revolver with no limitations on merger, cross acceleration with a basket of $500 million, no financial covenants, ratings grid – pricing is based on external credit rating agencies like Moody’s – or leverage grid – pricing is based on Debt/EBITDA or some other metric, which is much more bank friendly), the lead bank begins to market the loan.

A teaser is sent out to the banks. Banks that indicate interest will receive a Confidential Information Memorandum (CIM) or Offering Memorandum (OM), which will be put together by the lead banks – these will give a more comprehensive overview of the company, industry, financials, projections, the need for capital, the credit and anything else that may be relevant.

The banks will meet at a Lender’s Meeting, after which credit agreement negotiations begin with the broader prospective bank group. What covenants, cross-default provisions, material adverse change clauses and everything else is hammered down here to ensure that lawyers are comfortable and the loan will clear.

Once this is done, fee letters are sent out (upfront fees for new money in the loan) and the banks each fight with their credit teams who fight with their risk teams to get the deal approved and over the line. Then the deal is signed and executed and the loan is funded.

Types of Syndicated Loans

The most common loan product is the corporate revolver. The revolver can be seen as a giant credit card for a company with an annual fee (the upfront fee), interest that ticks whenever it is drawn (drawn margin) and interest that is charged on the unutilized portion (undrawn margin).

Although revolvers are great from a league table perspective and a relationship perspective (if you are high up on the syndicate), these are poor from a return perspective – especially if companies can fund more cheaply using commercial paper and are just using the revolver as a backstop. Liquidity backstop revolvers are great for companies but awful for banks, as they do not get drawn fees because the revolver is never utilized, but if the company gets into trouble, they are legally obligated to allow the company to draw.

Banks much prefer term loans, especially for acquisition financing. Term loans for capital structure (company wants to use for capital expenditures) are better than revolvers, but the debt stays on the bank’s balance sheet (and larger corporates tend to be lower returning loans compared to commercial banking loans). Term loans are split into amortizing (Term Loan A) or bullet (Term Loan B). Term Loan B’s do not really exist in the Canadian market and issuers will go to the US to market that sort of debt.

Acquisition term loans that are meant to be taken out shortly after an acquisition is closed (bridge loans) through debt capital markets (debt bridge) or equity capital markets (equity bridge) are preferred, as banks will get league table credit, fees for the bank debt issuance, fees for the DCM/ECM issuance and have the debt off their books, and possibly fees for the advisory portion assuming the investment banking division was the adviser

Related Reading for Corporate Banking

Corporate Banking

Interview with: Loan Syndications Associate in Hong Kong · Preparing for Corporate Banking Interview · Types of Revolving Loans · Common Negative Covenants for Corporate Banking (and Bonds) and CoC · Acquisition Finance: Bank Debt · Corporate Banking Interview Questions · Corporate Banking in China · How Much Do Corporate Bankers Make? · Corporate Banking and Loan Syndications in Canada · Corporate Banking Deal Screening ·