Leveraged Finance vs. Corporate Finance/Investment Banking

by Derek Loosvelt | March 10, 2009

Are the leveraged finance and investment banking the same animal? Sort of. As leveraged finance was originally a commercial banking function, most of the premier leveraged finance shops can be found within the investment banks of the largest finance institutions, such as JPMorgan Chase, Bank of America, and Citigroup. Because of the sheer amount of leveraged finance deal volume at these institutions, there will typically be entire floors and groups dedicated to "originating deals" (proposing deals to existing or new clients), following the capital markets, trading in and out of loan/bond positions, selling these products to investors and monitoring the firm's exposure to loans and bonds of issuers. Naturally, at pure investment banks such as Goldman Sachs or Lehman Brothers that do not originate as many of these types of debt transactions, there will usually be smaller groups dedicated to following the markets, in more of a debt capital markets generalist role. However, in both types of institutions, the leveraged finance platform is typically part of a debt capital markets group--it just depends on the volume of deals to determine how specific and/or large the groups will be.

A common misperception is that traditional investment banking only involves providing solutions and advice to companies (such as mergers and acquisitions advice). In this regard, leveraged finance is different from investment banking, since a leveraged finance bank is not only offering advice for a financial problem, but also a product as a solution. However, most people these days broaden their definition of investment banking to include both offering advice to companies, as well as executing a financial transaction, such as an initial public offering (IPO). In this sense, leveraged finance is identical--just as an investment bank handles a company in an industry coverage group and works with its equity capital markets team to structure an IPO, so does it provide the same service for leveraged finance transactions. In the case of a leveraged finance transaction, the investment bank also covers the company and works with people from its debt capital markets team to structure a syndicated loan and/or high-yield bond for the company's financing needs.

Unlike investment banking, however, there exist a number of other financial institutions, such as General Electric or CIT Group, that arrange these similar financing packages for companies, but do so without a coverage group or an industry platform (which an investment bank would have). These financial institutions still have relationships with companies, but they don't usually provide M&A or IPO advice like an investment bank. The loan market is a private market, and as such is not limited in terms of what type of firm can provide lending solutions. The bottom line is that if you're a treasurer of a multibillion-dollar company and you need a large loan for an acquisition, you'll go to the firm with the best interest rate, regardless of whether it's an investment bank or not. In this regard, leveraged finance is more similar to commercial lending (i.e., lending to a company so that it can buy copiers, printers, etc.) than it is similar to investment banking.

Different experiences: working in the coverage group of an investment bank vs. leveraged finance

Working in a coverage group or M&A at an investment bank differs greatly from 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 someone in this role may not be as familiar with every facet of an industry like their counterpart in a coverage group, they will generally have more breadth of financial market knowledge.

This breadth vs. depth tradeoff is directly related to the amount of transaction experience offered in leveraged finance. For example, the day-to-day grind might be a little more hectic in a leveraged finance role, as a deal team could potentially be closing two multibillion-dollar transactions on the same day--something that would be quite unlikely in a coverage role. However, this transaction-oriented environment involves substantially less idea generation and pitching of ideas to clients than one would find in an investment banking industry coverage group. That is not to say that someone in leveraged finance will not do any pitching--quite the contrary. While the industry coverage group 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 the appropriate people from the leveraged finance platform to comment on the financing markets, comparable transactions, and provide other relevant advice.

If you are beginning your career in finance, it is important to think about your long-term career goals when considering a role in an investment banking coverage group versus leveraged finance. If your goal is to work in a specific industry--let's say running a health care company--you would probably be better served in a health care coverage group at an investment bank. However, if you are interested in working at a hedge fund or private equity shop, working in leveraged finance will give you the opportunity to interact with many of these firms, as you close numerous deals of theirs. Furthermore, you will be trained in certain debt metrics (what's typically called "credit" training), which are useful in understanding the industry and are not typically emphasized in the coverage side of the bank. This is not to say that moving from a coverage group to a private equity shop or hedge fund can't happen--it certainly does, and even the top-tier PE shops and hedge funds seek people with very specific industry knowledge. However, it's definitely the case that your exposure (most likely in late-night financial modeling revisions) to the private equity shops will be higher in leveraged finance groups when compared to your exposure working in an industry coverage group. In an industry where relationships are everything, this exposure will definitely matter.

Types of Leveraged Finance Deals

There are a wide variety of deals executed within leveraged finance. Most common are syndicated loans and high-yield bonds for working capital or general corporate purposes (day-to-day financing needs). However, in leveraged finance you'll also find leveraged buyouts, when private equity shops 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 to avoid Chapter 7 bankruptcy (liquidation). In this case, these struggling companies will work with both the financial institutions' leveraged finance groups and the federal bankruptcy courts to obtain financing packages in order to stay in business. Leveraged finance also covers dividend transactions, where loans/bonds are used to pay out the owners of a business' recapitalizations, where a company's financial structure is changed; a IPO/spin-off financings, where the proceeds of a loan/bond are in tandem with an IPO or a spin-off of a business unit; and even general debt refinancings, where an existing loan/bond is taken out with a new loan/bond.

Opportunities In Leveraged Finance

There are so many different areas within leveraged finance and so many related to the field that there is place for almost everyone interested in corporate finance. For example, there is deal origination, for those who enjoy managing numerous processes such as putting together presentations, financial modeling and pitching. There is also capital markets work (for both syndicated loans and high-yield bonds) for those who enjoy understanding the flow of the markets and conducting research about the market's trends. For others who enjoy the asset management aspect of managing a firm's exposure to the syndicated loan/high-yield bond markets, there are positions in internal credit/portfolio management work. Finally, there is a sales and trading function for both syndicated loans and high-yield bonds.

However, very generally speaking, leveraged finance refers to the deal origination function--when a team goes out to pitch a client, wins the mandate, structures the loan/bond, markets it to investors, sells it, and then closes and funds the transaction. This role as an analyst or associate caters to the individual who enjoys managing numerous deals throughout this process, who is a jack-of-all-trades from financial modeling to talking to investment firms, and who thrives in the pace of a seemingly never-ending day. Furthermore, when considering whether leveraged finance is or is not the field for you, it is important to realize that some firms are organized in a typical investment banking "cubicle/office" atmosphere, whereas others are organized like trading floors. Some feed off the energy from a football field-sized area crammed with people chatting all day long, while others prefer the quieter nature of a cube or an office, where personal phone calls are not heard by your neighbors and neighbor's neighbors. This type of setup can make a substantial difference in the day-to-day enjoyment of someone's role in leveraged finance and usually can be researched by talking to those currently at leveraged finance firms, as well as talking to HR departments at individual firms.

The culture of leveraged finance depends almost entirely on the culture of the firm in general. At a pure investment bank such as Goldman Sachs, you might find the culture to be almost entirely opposite from that of the commercial lending arm of a larger financial institution, such as General Electric Commercial Finance. Whereas one might be very rigid and hierarchical, the other might be golf-shirt and khakis on Fridays, where an analyst can chat it up with any managing director at any time.

Filed Under: Finance


The Role of the Private Equity Firm Sales & Trading and Investment Banking

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