The media’s watching Vault!                                                                                               ...
Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library...
Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library...
Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library...
ACKNOWLEDGMENTS                                                                                                           ...
Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
Table of Contents                                                                                                         ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Introduction                                                                                                              ...
Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
LEVER                                                                                                                     ...
Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
The Background of                                                                                                         ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Vault Career Guide to Leveraged Finance                                                                                   ...
Career Guide Leveraged Finance
Career Guide Leveraged Finance
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Career Guide Leveraged Finance
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Career Guide Leveraged Finance
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Career Guide Leveraged Finance
Career Guide Leveraged Finance
Career Guide Leveraged Finance
Career Guide Leveraged Finance
Career Guide Leveraged Finance
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Career Guide Leveraged Finance

  1. 1. The media’s watching Vault! Here’s a sampling of our coverage. “For those hoping to climb the ladder of success, [Vault’s] 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. 2. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
  3. 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 TO CARE LEVER FINAN
  4. 4. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
  5. 5. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library © 2006 Vault Inc. WILLIAM JARVIS FINANCE AND THE STAFF OF VAULT LEVERAGED VAULT CAREER GUIDE TO CARE LEVER FINAN
  6. 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. 7. ACKNOWLEDGMENTS We are extremely grateful to Vault’s 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. 8. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
  9. 9. Table of Contents INTRODUCTION 1 THE SCOOP 3Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library Chapter 1: The Background of Leveraged Finance 5 Leveraged vs. Investment Grade: An Important Distinction . . . . .6 The History of Leveraged Finance . . . . . . . . . . . . . . . . . . . . . . . .10 Leveraged Finance vs. Corporate Finance/Investment Banking .13 Types of Leveraged Finance Deals . . . . . . . . . . . . . . . . . . . . . . . .15 Opportunities In Leveraged Finance . . . . . . . . . . . . . . . . . . . . . . .16 Chapter 2: Major Industry Players 19 Investment Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Commercial Finance Companies . . . . . . . . . . . . . . . . . . . . . . . . . .26 Hedge Funds and Other Institutional Investors . . . . . . . . . . . . . . .28 Private Equity and Financial Sponsors . . . . . . . . . . . . . . . . . . . . .30 Chapter 3: The Products 33 The Leveraged Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 The High-Yield Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Capital Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Chapter 4: Leveraged Finance Groups 45 Structuring/Origination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Credit/Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Ratings and Capital Structure Advisory . . . . . . . . . . . . . . . . . . . .47 Corporate Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 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 LIBRARY ix
  10. 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 . . . . . . . . . . . . . . . . . . . . . . . .53 Chapter 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 63 Chapter 6: What Leveraged Finance Firms are Looking For 65 Personality Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67 The Resume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 Chapter 7: The Hiring Process and Interview 71 The Standard On-Campus Interview/ Recruiting Process . . . . . .74 Lateral Hires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76 Typical Interview Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 ON THE JOB Chapter 8: Leveraged Finance Positions, Pay, and Lifestyle 83 Investment Banks: Structuring/ Origination . . . . . . . . . . . . . . . . .84 Investment Banks: Capital Markets/Loan Sales and Distribution 87 Investment Banks: Credit/Risk/Corporate Banking/Ratings Advisory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89 CAREER x LIBRARY © 2006 Vault Inc.
  11. 11. Vault Career Guide to Leveraged Finance Table of Contents Commercial Banks and Commercial Finance Companies . . . . . .90 Chapter 9: The Leveraged Finance Career Path 95 Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95 A Day in the life of a Leveraged Finance Structuring/ Origination Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96 Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library A Day in the Life of a Leveraged Finance Structuring/ Origination Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103 Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106 Managing Director/Group Head . . . . . . . . . . . . . . . . . . . . . . . . .107 Final Analysis 111 About the Author 112 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 LIBRARY xi
  12. 12. Introduction Right now, it seems like every other headline in The Wall Street Journal is a blockbuster M&A event, a multi-billion dollar LBO, or a rise from bankruptcy by a fallen corporate angel. Much as they did in the late 1990s, both investors and corporations have cash burning holes in their pockets because of positive economic conditions, and are subsequently pushing the financial markets near new heights. Like the late 90s, the result is recordCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library M&A activity, a boom in hedge fund activity, a rise in venture capital spending, a return to the buyout activity of the late 1980s, and a general feeling of excitement on Wall Street. But unlike the late 1990s, this flurry of financial activity is somewhat tempered, as today bankers distinctly remember the subsequent massive economic downturn of only a few years ago and its effects on global financial markets. Nevertheless, the major forces that have spurred this investment activity, such as historically low interest rates, low credit default rates, and healthy cash balances are making Wall Street an exciting place to be. Because of low interest rates, relatively few bankruptcies, and investors’ hesitation to invest in the equity markets, no area has seen more activity than debt markets. This activity has manifested itself into record global borrowings, as global credit issuance is expected to exceed $7 trillion in 2006, dwarfing its $2 trillion level in 1995 and far surpassing its $4.5 trillion level in 2005. A vast majority of this activity has been spurred by the field of leveraged finance. With financial institutions eager to lend money and borrowers excited to capitalize on market conditions, the effects in just the past few years are easily identified: the second, third, and fourth largest LBOs of all time, record fundraising by hedge funds and private equity shops, M&A activity levels reaching the highs of 1999/2000, all-time-low borrowing costs for companies, and off-the-charts volume in the high-yield bond and syndicated loan markets. For all of these reasons and many more that we will discuss in this Vault Guide, leveraged finance is a good place to be. Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARY 1
  13. 13. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
  14. 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. 15. Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library
  16. 16. The Background of Leveraged Finance CHAPTER 1 The financial markets can be divided into two major sections: debt and equity. Under this overarching organization structure, think of leveraged finance as the intersection of investment banking, commercial banking, hedge funds, private equity, and sales & trading on the debt side of the financial markets.Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library Generally speaking, leveraged finance is a platform in all major investment and commercial banks. It is a function that taps into two major financial markets (the high-yield bond market and the leveraged loan market—more on those later), is accessed by nearly all private equity shops and hedge funds on a regular basis, and has been one of the booming profit centers of Wall Street for the past two decades. For analysts and associates, it has become a prime training ground for the most elite private equity shops and hedge funds. Subsequently, for careers on Wall Street, leveraged finance is one of the most sought-after fields. Why leveraged finance? Along with its role as a potential springboard to careers in private equity and hedge funds, leveraged finance is also unique from a career perspective because it provides a vantage point into most of the other areas of investment banking, as well as sales & trading. For analysts and associates, working in leveraged finance allows one to see what else is out there career-wise in the financial markets, without ever having to leave the field. Another advantage of working in leveraged finance is that in general, it is an area of investment banking that is focused on closing transactions. In a corporate finance role within a coverage team in an investment bank (a team that covers a specific industry and pitches deals to companies in that industry), one analyst might close one or two deals a year in an investment bank. By contrast, in leveraged finance, it’s feasible to close five to 10 transactions a year. Leveraged finance affords analysts and associates a continually busy pace and good deal and client exposure along the way. Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARY 5
  17. 17. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance Major deals One of the great advantages to working in leveraged finance is that you will typically work on notable transactions. As an analyst or associate in a major leveraged finance firm, you may even see at least one of your deals make the cover of The Wall Street Journal. Notable brands like RJR Nabisco, Burger King, United Airlines, Domino’s Pizza, and Sony MGM have all accessed the leveraged finance markets. From multi-billion dollar leveraged buyouts to major corporate restructurings, there are plenty of headline transactionsCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library across the field. Leveraged vs. Investment Grade: An Important Distinction The difference between leveraged and investment grade debt is an extremely important concept to understand. By definition, “Leveraged finance” is debt issued for clients that are considered “leveraged,” not “investment grade” by the two major rating agencies, Standard & Poors and Moody’s. In other words, it is debt for clients considered a higher credit risk by the rating agencies. A typical rating agency grid appears on the next page. The solid bold lines denote the “investment grade” vs. “leveraged” threshold. CAREER 6 LIBRARY © 2006 Vault, Inc.
  18. 18. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance Standard & Poors (S&P) Moody’s AAA Aaa AA+ Aa1 AA Aa2 AA- Aa3 A+ A1 A A2 A- A3Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library BBB+ Baa1 BBB Baa2 BBB- Baa3 BB+ Ba1 BB Ba2 BB- Ba3 CCC+ B1 CCC B2 CCC- B3 B+ Caa1 B Caa2 B- Caa3 CCC Ca C D/C D C Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARY 7
  19. 19. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance How’s your credit? How are these ratings assigned? A company is analyzed by the rating agencies and is assigned a rating(s) based on these agencies’ assessment of the company’s credit risk. The rating agencies assess the quality of the company’s operations, its future potential, past track record, and financial health. Once this analysis is completed, the agencies assign ratings to the company and monitor the company going forward. Anything under a certain rating threshold is considered “leveraged.” A company that chooses not to 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 shouldn’t necessarily be the case. Millions of people have loans for their homes. In this sense, they are borrowing money and are “leveraged,” as most of them do not have the cash on hand to pay off their loans immediately. Just because someone has a home loan or a car loan, or does not have much cash on hand, does not mean they are not worth lending to. If that were the case, no college student would have a credit card. The more debt someone has in relation to their cash or future earnings potential, the more “leveraged” they are.”Investment grade” companies are the least risky of those in the debt markets. They are typically your long-standing, exceptionally stable companies, such as General Electric, Pfizer, John Deere, and ExxonMobil. Their credit history is outstanding and they have the ability to borrow large amounts of debt at any time, since they typically have the cash on hand to pay back those loans at any given time. Of these thousands of companies, only a handful have the highest debt rating (“Triple A”). To illustrate the difference between investment grade and leveraged, consider the following example. Suppose you have a rich friend who asks to borrow money from you for lunch. You’d probably not hesitate to give him $10 or so, because you know you’re likely to be paid back immediately (and probably without having to hound him for the money). That friend would be considered “investment grade.” Now consider the college buddy who always asks to borrow money for beer runs, yet amazingly can never “remember” to pay you back. That college buddy would be considered “leveraged.” CAREER 8 LIBRARY © 2006 Vault, Inc.
  20. 20. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance Ratings determine access to financial markets Of course, there are advantages to being investment grade. Since investment grade companies are consider much less risky, they have the ability to access a number of other financial markets, including the commercial paper market. Furthermore, these investment grade companies are typically able to get much larger amounts of debt than their leveraged counterparts. For example, as a triple-A rated company, General Electric has syndicated loan facilities of over $20 billion, not to mention any other debt, such as bonds or commercialCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library paper. In contrast, the largest syndicated loan package for a leveraged company is probably somewhere near $6 to 8 billion. It is important to note that entire financial markets exist for companies in both of these buckets (investment grade and leveraged). When it comes to bonds, there is a high grade market for investment grade companies, and a high-yield market (also known as junk bonds) for leveraged companies. For loans, there is a high grade syndicated loan market (also known as the investment grade syndicated loan market) for investment grade issuers and a leveraged loan market for those companies that are considered leveraged. For companies that are not rated, their access to either market is determined by their financial ratios, while crossover companies typically access the market that plays to the better of their ratings. The field of leveraged finance is concerned with riskier companies that typically seek funded debt as a necessary piece of their capital structures. Because syndicated loans and high-yield bonds are necessary for these companies’ operations, leveraged finance can be a little more exciting and adventurous. In the leveraged finance world, you will encounter companies that put together comprehensive financing packages to exit bankruptcy just hours before a federal court would have forced them to liquidate, private equity shops that push the limits of corporate finance by strapping nearly incomprehensible amounts of debt on companies, multinational corporations avoiding hostile takeovers by issuing large amounts of debt in order to execute share repurchase plans, and well-known organizations that need every single dollar available to them in order to keep their lights on and factories working. These types of complex transactions are part of the day- to-day life of those working in leveraged finance. Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARY 9
  21. 21. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance The History of Leveraged Finance Loans for companies Leveraged finance originated from what would historically be thought of as commercial banking. As companies needed money, they would typically go to the loan officer of their local bank to obtain financing. Much like you might need a loan to buy a house or car, companies have always needed loansCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library to buy properties or even fleets of cars. Lending institutions generally distributed these loans in certain sizes and interest rates to companies, based on the company’s risk and size. Very similar to how a JPMorgan Chase, Wachovia, Bank of America, or Citigroup would give a home loan with a certain interest rate to someone based on their personal credit score, these institutions structured loans for corporate clients. Typically, the less credit risk a company presented, the more money these banks would lend. This type of lender-client relationship has existed for centuries. But in the past few years these lending institutions have evolved, as have the needs of their clients. In the late 1990s investment banks and commercial banks were able to once again legally merge due to the repeal of the Glass-Steagall Act. This means that investment banks are now not only able to provide financial advice to clients, but also utilize the know-how of their commercial banking division to deliver that financial solution. Together, this has allowed companies to access the financial markets even more readily and has fundamentally changed the investment banking relationships on Wall Street. During the past few decades, the fundamental loan product has also changed. The original loan between two parties, referred to as a bilateral loan, was becoming obsolete. Clients were becoming larger and their financing needs were growing. Subsequently, lending institutions started finding others to provide the loans alongside them. Instead of bearing the risk of an entire $1 billion loan, they found they could significantly diminish their risk by “syndicating” this loan exposure to others. With institutional investors also seeking new ways to place money into the financial markets, the syndicated loan became a prime source of investment. Subsequently, the syndicated loan market exploded in volume, so much in fact that a secondary loan trading market was created out of it. Today, as opposed to a bilateral relationship with a single lending institution, a company that “issues” a loan can have hundreds of investors in its syndicated loan. This investor interest not only CAREER 10 LIBRARY © 2006 Vault, Inc.
  22. 22. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance opened up the syndicated loan market, but it also made other financial markets more transparent, due to the emergence of the relative value of products across asset classes. Although still issued in a very small number of situations, the bilateral loan for the multi-billion corporation is now essentially obsolete. The bond market In addition to being able to take out loans from banks, companies that areCustomized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library large and stable enough have historically also had access to public bond markets. To do this, companies enlist investment banks to issue bonds to investors that promise a set interest rate of return on investment. Investors independently analyze the company issuing a bond and determine the interest rate that makes it worthwhile for them to take on the risk of the company not making its scheduled payments. If acceptable to enough investors, the bond is issued; these investors have essentially lent the company money through this bond issuance. Being able to issue bonds has made it possible for companies to raise money for acquisitions, to invest in capital projects, or to refinance existing debt. Together, the bond and loan represent the major financial instruments in the world of leveraged finance. The expanding market of debt The bond and the syndicated loan markets have also evolved and expanded over the past few decades. In 2005, the U.S. syndicated loan market reached issuance volumes near $1.6 trillion, nearly doubling its $800 billion volume in 1995. In 2005, the high-yield bond market also more than doubled in volume in the past 10 years, reaching approximately $100 billion, versus $40 billion in 1995. A vast majority of this evolution is due to exceptional credit conditions, fewer bankruptcies, record low issuance rates, and the relative value of the asset classes as investment areas for institutional investors. This relative attractiveness of the debt markets is especially strong in light of the equity market downturn in the early 2000s. With security and near- guaranteed returns, the debt markets have seemed exceptionally more attractive from an investment standpoint. If you knew that you could get 7 to 10 percent annual return investing in the loan of a relatively stable company, wouldn’t you put your money there, as opposed to buying shares in the equity Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more. CAREER LIBRARY 11
  23. 23. Vault Career Guide to Leveraged Finance The Background of Leveraged Finance markets, which present greater risk? Furthermore, if a company defaults on the loans, they are typically secured by the assets of the company, whether those be airplanes, property, or even hamburgers. In contrast, if the stock of a company loses all of its value, there is little to no recourse. As for high-yield bonds, although not typically as secure as investment grade bonds, they’ll typically offer investors a return of 8 to 12%. Also, just like investment grade bonds, high-yield bonds are “senior” to the equity of a company, and thus are paid off first in the event of a bankruptcy liquidation.Customized for: Audrey Chen (jchen59@wisc.edu) University of Wisconsin - Madison MBA Career Services Online Career Library Good news for the banks Also, it is important to note that these lending transactions are very profitable for institutions that arrange them, not just the institutional investors. For the largest deals, this can mean tens of millions of dollars in arrangement and syndication fees. For example, it was estimated that the fees for the financing of the famed 1989 leveraged buyout of RJR Nabisco by Kohlberg Kravis Roberts (immortalized in the book Barbarians at the Gate) were somewhere in the hundreds of millions of dollars. Thus, armed with large balance sheets and subsequently the ability to lend money to numerous companies, the bulge bracket investment banks with historically strong commercial banking arms (JPMorgan, Bank of America, Citigroup) have become the dominant players of the leveraged finance industry. Not only do these banks have the money to lend and the historical know-how to do so, but they also have the priceless investment banking relationships which they can use to propose financings. Increasingly, leveraged finance is attracting new and different players to the industry. Competition for providing large financing solutions to companies has become intense, with many companies even conducting “auctions” to see who brings the best financing package to the table. Realizing that they might be late to the game, large banks are rapidly bulking up their leveraged finance platforms in order to take advantage of the abundance of fees for arranging these transactions. Although the big firms continue to dominate the industry issuance in loans and bonds, smaller firms have realized they can make an exceptional return on their money and time by providing financing to middle- market companies (middle market is generally defined as a company with less than $500 million in annual revenues and/or less than $50 million in annual EBITDA). For example, by raising $25 million for a company by assembling a syndicate of lending institutions hungry to put idle cash to work, CAREER 12 LIBRARY © 2006 Vault, Inc.

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