Demystifying Investment Banking: A Day in the Life of a Leveraged Finance Analyst? (Part 2)

Welcome back to episode 2 of our mini-series on leveraged finance. In part 1, we talked about what exactly is leveraged finance and the primer on credit rating agencies and how they work and the state of the market. So go back and listen to that if you haven't already done so. In this episode, we're now going to look at it more from a careers perspective. So what kind of things does a leveraged finance analyst do all day. We'll also look at a primer on capital structure. How does it differ from some of the other roles within IBD? And then of course, some career advice from our Head of Corporate Finance, Stephen Barnett. How are you?

Yeah, I'm pretty good. Thank you. And I'm, uh, I'm looking forward to diving into the world of leveraged finance again. I know from episode 1, this is a complex subject and may require a second listen or maybe a bit of Q&A that we can help you out with. It's not the most intuitive maybe area of finance for people that are new to IBD, but hopefully it's quite rewarding. And as we'll discuss on this part of the podcast, there's a lot to be said for a career in leveraged finance.

Okay. So I think from episode 1, people probably got a little bit of an idea about what would entail in terms of skillset to work in this area, but why don't you kind of demystify that, break it down? What exactly would an analyst in a LevFin team be doing day to day?

Yes, absolutely. So a leveraged finance team analyst, remember this is a product group within IBD, within the investment banking division. And it does depend, my caveat is it does depend on the type of institution that you're working for. But the general rule of what you would do all day is there's more modeling in leveraged finance than certainly debt capital markets and equity capital markets. And the modeling, when I say modeling, I mean financial modeling, looking at forecast financials and doing things like leveraged buyout models, which are a staple of the world of private equity and leveraged finance. This modeling is just more interesting than other modeling. And you become maybe a bit of a, a bit of an expert because you are modeling complex companies that again have got relatively high risk. And maybe there's an issue with that company, which means that they are in the highly levered space and then non-investment grade. So you're going to be doing a lot more stress testing in your models. So that means looking at different scenarios, looking at different interest rate scenarios, different management cases. So when you do a model, you look at maybe the management case, the base case, the upside case, and the downside case, and you'd really be interrogating the forecast of this company based on these different business cases. And because again, this is a lending role, you are looking at protecting against the downside of a default. And this modeling therefore needs to be really, really robust and really, really significant to get investors comfortable with investing in that particular company. And again, remember, one of the big parts of every leveraged finance team is their relationship with private equity firms that are looking to buy companies. So you are also almost taking on a little bit of an M&A role from a financing perspective and trying to figure out the debt capacity and returns analysis for a private equity buyout. So there's loads of interesting stuff there. Once you've done the modeling, you're going to be working on things like pricing. So you're pricing the deal. What I mean by that is you're setting an appropriate interest rate or appropriate coupon for that particular tranche of debt, for that particular debt instrument. Usually based, usually a floating rate note or a floating rate instrument, which means that you have your base, your floating base rate, which used to be LIBOR, but it's not anymore. And then you have your premium on top of that. So out of all of this modeling comes what you would consider to be the price or the, the price of the instrument or the interest rate on the instrument. You'll be doing a lot of credit rating analysis as we discussed in the first part of the podcast. If you take on this much debt, how will it affect your credit rating? Will you go from a BB to a BB? What will that do to your existing debt? What will it do to the way that the market perceives you? And then finally, you'll be spending quite a lot of time on legals, on setting out the terms for this particular leveraged loan. So it could be covenants. So covenants meaning the, basically the terms by which a company issues debt. They can be restricted covenants. What are the things that a company can't do? They can be positive covenants. What are the things that a company can do? They could be financial covenants. What are the financial limits that the company must not exceed within the terms of this issuance? So it gets a little bit more legal and a little bit more like, all right, we need to make sure that you exist within the parameters of what we consider to be the existing credit, credit rating in order for us to feel happy lending to you. So it's pretty technical stuff, but if you think about it as a proving ground for understanding finance and understanding investment banking, it's pretty good.

What, what, what was the typical hours then that someone in this role would do?

It's pretty, it's pretty comparable with M&A. It's long, long hours, lots of modeling, lots of, lots of pitch decks. And you do, you do more deals than you would do in M&A. So you're almost always working on a deal. You might do 10 to 20 deals a year as opposed to maybe 2 or 3. And therefore the The deadlines will come up thick and fast, and there won't be that many periods of time where you're just sat twiddling your thumbs waiting for the next piece of business to come in. So again, not for the faint of heart, but certainly a great learning experience.

I'm assuming from the skills, the intensity, the accelerating then your experience, and then the connection to private equity. Is that all— is that a kind of a relationship that can lead to career prospects later on down the line?

Yeah, it really does. And, and the more technical the team, the more it opens you up to careers in private equity and, and, and again, more, more maybe, maybe the private credit side, which is obviously a massive, a massive growth area across private equity firms and actually investment banks as well. So you land here and your options after 2 or 3 years. Pretty nice. Okay.

Well, look, just for continuity, going to break the structure a little bit because just while we're talking about this, so how is it actually different from M&A then? You just said the hours intensity is pretty similar. So is it right to just conclude then that it's just more technical?

It's really, it's really interesting. So With M&A, there is definitely more of a strategic side. So if you've got your strategy hat on, one of the funnest things about M&A is working on a buy-side transaction. So working on behalf of a company that's buying another company and actually trying to get into the shoes of that acquirer and thinking, all right, what does this acquirer want? You know, what deals can we bring this person and what deals can we bring this team? How can we get the best structure that works for this company. So you're really on the strategy side, maybe lends itself a little bit more to the MBA type or the business and finance type. Whereas leveraged finance is definitely technical, probably pure play finance and a little bit of maths, more transactional, more, more, probably more modeling. So yeah, a little bit different. Again, both teams you're going to get very, very ambitious, high-quality people, and you're going to have really, really good career prospects. Now, leveraged finance has quite significant overlaps with other teams, so let's just deal with that very quickly. So leveraged finance sits within IBD. It sits across from debt capital markets. That wall is the wall between investment grade and non-investment grade. So debt capital markets are dealing with investment-grade bond issuances from the likes of Apple, the UK, Germany, Alphabet, et cetera. And then when companies drop below investment grade, that's where the leverage finance team gets involved. I would say quite frankly that leverage finance is more interesting because you're dealing with so many different types of complex companies and you're having to be quite creative with the way that deals are structured. You're dealing with private equity firms, you're dealing with high yield bond issuers from the likes of Brazil all the way through to Vietnam Airlines, like we discussed on the last podcast. So it gets really, really interesting and a little bit more, probably a bit more technical and a bit more fun. It also differs from what's called the financial sponsors group. This gets quite confusing. Now remember, Leverage Finance is a product team and there are sector teams. And we spoke about FIG, the Financial Institutions Group, that deals with things like banks. Now the Financial Sponsors Group is another sector team that deals with private equity firms and any other similar alternative asset manager. So what might end up happening within a massive bulge bracket bank is you've got your FSG, your Financial Sponsors Group. Which is, which has got the relationship with the private equity firm, and they get in touch with the leverage finance group when they're like, all right, a buyout's about to happen. Can we facilitate a transaction putting in these different types of debt into this private equity buyout? So again, you'll be dealing with the sector teams, namely the financial sponsors group, but again, it does fit. With all of these different parts of the investment bank, but it's just really good to kind of try and get our head around it.

Okay. And then I know we want to talk about capital structures, but just before we scare anyone, perhaps we could, just to add on to what you were saying, a couple of things I noted down here. So would leverage finance teams hire directly? Can you do an internship in that area? Or is it something then that you kind of cross over into having started somewhere more vanilla?

You'll get hired into it, uh, you'll get hired into it from an intern level or from a graduate level. And again, it's a little bit of the luck of the draw as to where you're placed in your spring week. You can talk about how much you enjoy private equity and, and much like with the different teams, you can position yourself. And once you are there as a graduate working in M&A, let's say, you might make it very, very clear that I'm really, really interested in leveraged finance and I'd love to see myself there one day. And you can probably get there after 2 or 3 years. So yeah, you don't have a lot of agency in the early years, but you can navigate your way there.

And then my final one on this is what could someone do in order to best position themselves for this area? So I guess twofold, is there any like places to go for resources or things that you read or engage with? What news, podcasts, things like that? Or is there more thinking more top level? Is there just certain skills that someone can do really like double down on Excel, certain types of maths that they need to be super sharp on, those sorts of things?

Yeah, I think, I think there's a couple of things with regards to skills. That are really important. The first is your core technical financial modeling skills. And the best thing that I would do, I would look up a paper LBO example. So a paper LBO is the way that a lot of private equity firms assess juniors, junior people coming in as an associate level. And it's essentially a You have to build a leveraged buyout model with financing and returns projections and things like that based on a load of inputs that are provided for you. And it's a really good way of really getting your head around the relationship between what you know, what you can forecast, and what the outputs are. So definitely look up paper LBOs as a good skill. The second, and I'm going to marry this with my primer on capital structure. The second is to get really, really familiar with what's called a capital structure. So every company has a capital structure, which means how does it fund its operations? You can fund your operations with a mixture of equity, which is the most risky. If you're an equity holder, you're not going to get paid. You're going to get paid out last, but you get a load of upside, more risk, more reward. And at the other side, it's your senior secured bank debt, the most safe form of lending where you are the one that gets paid out first if the company goes bankrupt. And in between, the world of leveraged finance really gets busy. So in between, there are all of these different kinds of products that basically play on this relationship between risk and reward. So the more risky, the more it looks like equity. The safer it is, the more it looks like debt. And there are all of these different tranches that sit in between normal debt and normal equity. And I'm not going to spend a lot of time, but if you want to get interested in this kind of stuff, start with mezzanine finance. Then you can get really interested in things like hybrid debt, PIK, payment in kind, toggle notes, unitranche, all of this stuff. I'm not, I'm not going to go there today, But that's where you should be thinking from a skills perspective. In terms of resources, again, your normal watering holes in with regards to the information that you seek. But I would also be looking at things like Bloomberg Deals and the FT and paying particular focus on high yield bond issuances, on leveraged finance transactions, on private equity deals and how they're financed, just to try and get yourself a little bit more familiar with this space.

Thank you, Steven. That's an amazing summary, and I think we should wrap it up there. It's a really good way to surmise the capital structure because I know it does get very deep. But yeah, the way that you kind of framed it there, I think is a good place to start. And some of those resources I strongly suggest that you check out. But Steven, thank you for this two-parter, and yeah, look forward to our next conversation.

Thanks so much, Ant.