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    Hi All,

    Long-time user of TSR since my GCSE days (wow that was over 8 years ago!) under a different account, believe it's time to give back!

    I'm currently an Analyst within the Leveraged Finance / Financial Sponsors Group at a BB bank in London. I find this product like sex - risky yet rewarding in many ways.

    Broadly speaking, Leveraged Finance includes three primary security-types: Institutional Term Loans (TLB/TLC), High Yield Bonds and Mezzanine Financing. Such securities are rated below Baa3 / BBB- by the big three credit rating agencies (S&P, Moody's and Fitch) to denote a "non-investment grade credit rating). In laymen terms a credit rating simply denotes the probability of default over a particular time horizon.

    You may ask why a corporate would issue such junk debt? Or what is the corporate using leveraged financing for?

    Overleveraging is a risky and expensive proposition, such financing is typically used for specific projects in which the borrower feels the potential upside from the project is high enough to justify the increased cost of capital.

    Examples of such projects include:

    LBOs: The business model of Private Equity. The increased leverage is justified by the increased returns on equity possible once the debt is paid down. The simplest example... even for your "Average Joe" is the purchase of a 2nd home to renovate . He puts down a minimal down payment (over leverage) then tries to fix the asset and sell it for a profit (or generate higher than expected cash flow to more than offset the monthly payments).

    M&A / Capital Expenditures: If a company identifies an attractive enough acquisition target or capital investment opportunity, they can justify the leverage based on the synergies and growth opportunities they think a potential investment will provide them.

    Re-capitalizations: Equity holders will leverage the Company in order to use the proceeds for a dividend, stock repurchase, equity infusion, or any other transaction that will significantly impact a Company's debt / equity ratio. Recaps are used when the company's current capital mix is equity-heavy enough to justify allowing equity holder to liquidate of portion of their stake


    Refinancing: Either to take advantage of periods of low interest rates in order to swap their existing debt out for *new*... Cheaper debt. Or such companies are are facing a maturity wall, cash flow shortage, or upcoming default event. Refinancing using the LevFin market is somewhat of a "last resort". But. Lacking other options, companies prefer expensive debt that's matures 7 years from now over cheaper debt that matures tomorrow that they don't know if they can repay.

    I hope the above provides a flavour of the Leveraged Finance world, I've been fortunate to work on a range of financings from LBOs for Private Equity firms, Post-IPO Financing for Corporates as well as Refinacings etc.

    I'll hand over the pen to YOU now..

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    (Original post by Indian Merchant)
    x
    hi bud,

    thanks for this thread bro, similar to you been using this site since about y12 and stumbled across ib sub-forum and fell in love. currently a bb m&a offer holder here, looking to exit into a buy-side debt fund/pe 2-3 years into my stint, currently final year at uni.

    have a question that's been tickling my mind overnight and maybe you could help answer it. the existing notion is that it doesn't matter what a companys existing capital structure is in determining an LBO target because post the merger there will be a new capital structure. but surely a company's leverage should be somewhat of a determinent in assessing a company's risk profile (therefore affecting worth or EV).

    although conceptually speaking raising debt = liabilities increase and cash increases at the same amount, but given cash is deducted from the EV calculation you have a net change of 0 (hypothetically), surely then using the EV/EBITDA multiple as a use to calculate company worth in this scenario is flawed as industry multiples doesn't factor in a company's specific beta (leverage) and modelling it mathetmically IRR would remain constant regardless of any existing debt if it's all being refinanced anyway.

    maybe i'm thinking about this in a wrong way.. but my question is essentially why doesn't existing debt matter? because surely that will affect a company's worth (but apparently it doesn't) and will affect the cost of debt funding. because from what i understand a sponsor would inititate a shell company and raise debt from new investors (backed by target LBOs shares), and depending on the target company's profile surely the cost of the deal should somewhat alter the expected returns.

    i just can't get my head around the argument as to why a company's existing debt doesn't matter in deciding good LBO targets.

    sidenote question: how does a sponsor buy-out existing debt holders? for example i'm a pe fund and acquire a company today, is there a legal act that says i can call back any existing bonds for this target company (at x% premium) because to have a new capital structure at prevailing rates at time of acquisition, surely there must've been some call option attached to bonds saying that "if company is taken over, bonds subject to immediate call?" this is more of a practial question as to how it operates in reality.

    wiz
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    where would you recommend living in london? (assuming you're at CW - sounds like CS to me?)
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    Hey thanks for doing this,

    I am currently an incoming IBD summer analyst at a BB, and wanted to know more about why you chose LevFin over M&A.

    I've always had my mind originally set on M&A but I am finding LevFin more and more interesting every time I read into it. Soon I must rank my team choices and want to ensure I make a fully informed decision on what to put as my first choice, LevFin or M&A. I find both interesting and feel like I would enjoy either. I was wondering what you would say the benefits/disadvantages of choosing LevFin over M&A are and vice versa?

    Secondly, would it be possible to go through a typical day to day, or as close to a typical day as can be, as I assume it is quite varied!

    Lastly, how's the work life balance and hours in LevFin, is it as intense as M&A?

    Thank you.
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    Thanks for doing this!!

    How did you get interested in Leveraged Finance? Was this group always your top preference, and why did you pick leveraged finance over M&A, or were you in a situation where you were happy to go into either M&A or Leveraged finance but happened to end up in Lev Fin, and now you love it?

    Strong exit opportunities into PE/HF for all leveraged finance analysts across all BB’s, or only specific banks, e.g. JPM, CS, DB? Would you say sponsors is better for a PE exit, and LevFin better for a HF exit?

    How did you/(would you if you could go back) prepare for your BB summer internship?

    Your outlook for the lev fin/sponsors teams in terms of fees and deal flow over the next 3/4 years?
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    (Original post by gr8wizard10)
    hi bud,

    thanks for this thread bro, similar to you been using this site since about y12 and stumbled across ib sub-forum and fell in love. currently a bb m&a offer holder here, looking to exit into a buy-side debt fund/pe 2-3 years into my stint, currently final year at uni.

    have a question that's been tickling my mind overnight and maybe you could help answer it. the existing notion is that it doesn't matter what a companys existing capital structure is in determining an LBO target because post the merger there will be a new capital structure. but surely a company's leverage should be somewhat of a determinent in assessing a company's risk profile (therefore affecting worth or EV).

    although conceptually speaking raising debt = liabilities increase and cash increases at the same amount, but given cash is deducted from the EV calculation you have a net change of 0 (hypothetically), surely then using the EV/EBITDA multiple as a use to calculate company worth in this scenario is flawed as industry multiples doesn't factor in a company's specific beta (leverage) and modelling it mathetmically IRR would remain constant regardless of any existing debt if it's all being refinanced anyway.

    maybe i'm thinking about this in a wrong way.. but my question is essentially why doesn't existing debt matter? because surely that will affect a company's worth (but apparently it doesn't) and will affect the cost of debt funding. because from what i understand a sponsor would inititate a shell company and raise debt from new investors (backed by target LBOs shares), and depending on the target company's profile surely the cost of the deal should somewhat alter the expected returns.

    i just can't get my head around the argument as to why a company's existing debt doesn't matter in deciding good LBO targets.

    sidenote question: how does a sponsor buy-out existing debt holders? for example i'm a pe fund and acquire a company today, is there a legal act that says i can call back any existing bonds for this target company (at x% premium) because to have a new capital structure at prevailing rates at time of acquisition, surely there must've been some call option attached to bonds saying that "if company is taken over, bonds subject to immediate call?" this is more of a practial question as to how it operates in reality.

    wiz
    One of the characteristics of a potential LBO candidate is the company's Pre-LBO leverage. Hypothetical scenario; You're grinding away as an Analyst looking at a potential LBO candidate. Currently the company is levered with net debt at 2x EBITDA and purely owned by its Management team. Looking at the company's current balance sheet, Equity is around 4x EBITDA. Assume current EV at around c.6x EBITDA. Let's be ignorant and assume a PE firm comes in and buys the company at face value of 6x EBITDA. It chooses to rollover the company's existing 2x net debt. Now it has 4x of Equity to fund. It can either add more debt to fund this 4x of equity or put all cash in. The additional cash raised from the increase in liabilities will increase cash at first but then remember you have to fund the acquisition of the company, so cash goes down and equity goes down. So if we start with a company that as £200m of current net debt, £400m of equity so £600m EV. PE firm comes in, it agrees to buy the company at £600m, it rolls over the £200m of debt and has £400m to fund through more equity or debt. Further we always assume £0m cash on the balance sheet post-acquisition for this purpose.

    On your side question; Leveraged Loans are used for LBOs more commonly than HYBs. If the PE firm acquires a company with no or little debt then it's fine. If the acquisition target has debt outstanding then it can be bought back at normally at 101 or a certain % premium to it's trading price.
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    (Original post by Breakingbank)
    Hey thanks for doing this,

    I am currently an incoming IBD summer analyst at a BB, and wanted to know more about why you chose LevFin over M&A.

    I've always had my mind originally set on M&A but I am finding LevFin more and more interesting every time I read into it. Soon I must rank my team choices and want to ensure I make a fully informed decision on what to put as my first choice, LevFin or M&A. I find both interesting and feel like I would enjoy either. I was wondering what you would say the benefits/disadvantages of choosing LevFin over M&A are and vice versa?

    Secondly, would it be possible to go through a typical day to day, or as close to a typical day as can be, as I assume it is quite varied!

    Lastly, how's the work life balance and hours in LevFin, is it as intense as M&A?

    Thank you.
    I did a M&A internship and couldn't stand doing mundane tasks such as putting together potential trade buyer lists or sponsors that may be interested in buying the target for sale. Also I didn't want to be pigeon-holed into a Sector team. I wasn't really thrilled by big jumbo M&A deals that were purely financed by vanilla debt or cash. I wasn't even thrilled by a lot of the work I did in M&A, always trying to paint a rosy equity story, b/s accretion / dilution analysis, b/s IMs or wasting time on pitchbooks on things that may or may not happen.

    In LevFin you kind of escape this b/s. You work on real deals that your M&A / Sector teams bring. They've done the hardwork in terms of trying to put an EV on a target. Your job is then to go find LBO comps in that industry and try come up with a reasonable leverage multiple on how much debt to put into the target. My favourite part is looking deep into the company's financial statements and building a projected LBO model to see if they can service debt and run some credit stats. Then I kind of become a mad hatter and apply harsh sensitivities to try break the model. When I get bored of the more project event-driven LBO work. I may go work on a pitch or do a High Yield Bond issuance for a corporate client. Hence I get a mix of work between flow and project based. PE firms don't usually :innocent::innocent::innocent::innocent: around, when they're interested in acquiring a potential company and they come to you for financing advice, it's usually a home run as long as there bid wins. The process I find as less bureaucracy and paperwork than you'd find in a M&A deal. I'm more interested in a company's cash flow than the nuts and bolts of its strategy, the overall business etc. Exit opps IMO are far better, I've had friends go into PE, Debt Funds, Sales, Trading, M&A.
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    What uni did you go to?
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    Over a year since I posted. The European and US Leveraged Finance Market had a very good 2017 indeed against a backdrop of low rates, tourist capital looking for yield and overall market conditions. 2018 will bring a host of challenges as the ECB and Fed look to slowly tighten accommodative monetary policy as well as an environment where Financial Sponsors have an abundance of capital which has led to acquisitions being done at the top end of valuation multiples and hence trying to squeeze every last cent of leverage in.

    Interesting year ahead, Happy to answer any questions.
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    Hi, thanks for doing this btw.

    I'm currently an A-level student on track to do well at A-levels and get into a target uni for economics andI'm considering IB or related finance/business careers. A few questions:

    1) Do you have any advice for me, given my current age & position?
    2) What are your biggest regrets/things you would have done differently with regards to your career and education?
    3) What are some of the things you have done that have aided you the most?

    Thanks
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    (Original post by Indian Merchant)
    Over a year since I posted. The European and US Leveraged Finance Market had a very good 2017 indeed against a backdrop of low rates, tourist capital looking for yield and overall market conditions. 2018 will bring a host of challenges as the ECB and Fed look to slowly tighten accommodative monetary policy as well as an environment where Financial Sponsors have an abundance of capital which has led to acquisitions being done at the top end of valuation multiples and hence trying to squeeze every last cent of leverage in.

    Interesting year ahead, Happy to answer any questions.
    Are you still in LevFin? Planning on staying or moving to the buy side?
    and for pure PE exits would you say that LevFin>M&A?

    Thanks for doing this
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    Hi,

    Thanks for doing this. So between LBO and DCM, am I right to say the nature of work/products are identical, except the credit rating? IG vs Non-IG?

    Do you work with the ECM guys? Currently leaning towards doing that for the summer at a BB, but heard about how ECM is 'boring' as most of the work is done by the industry teams etc and you don't learn too much which leads to weaker exit opps. Any thoughts on this?
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    (Original post by TheGuy264)
    Hi, thanks for doing this btw.

    I'm currently an A-level student on track to do well at A-levels and get into a target uni for economics andI'm considering IB or related finance/business careers. A few questions:

    1) Do you have any advice for me, given my current age & position?

    Try focus on securing Spring Internships in your first year of Univetsity. This will make the process considerably easier. A few banks now have programmes aimed at A-level students, so look into these too. Failing a Spring Internship, trying look at other ways to gain some sort of Finance exposure, whether that’s work experience with a local accountancy firm in your area or reaching out to boutique firms in London.

    Also do some research into the various divisions within IB and where you think your skill set lies. I’ve seen a host of Analysts who are more suited to the flow of Sales and Trading come into IB, eventually they burn out and leave.

    2) What are your biggest regrets/things you would have done differently with regards to your career and education?

    I would’ve enjoyed my time as a student more, the markets don’t switch off for anyone and will always be there. As long as you have drive and commitment, you can break in through numerous ways.

    3) What are some of the things you have done that have aided you the most?

    Work Experience and lots of it. After my A-levels, I worked in a outbound sales call centre over the summer, this taught me persistence and not accepting NO for an answer as well as Sales skills. I’ve also had work experience in a range of Finance related internships. This gave me a lot of talking points for interviews and showed passion from a young age. Being a banker is essentially being a salesman as you climb up the ladder.
    Thanks
    See answers above
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    (Original post by xtrembob)
    Are you still in LevFin? Planning on staying or moving to the buy side?
    and for pure PE exits would you say that LevFin>M&A?

    Thanks for doing this
    I’m still thinking about it, the good thing about Leveraged Finance is that it opens a range of exit oops. I’ve had friends and colleagues go into Sales, Trading, LevFin at other banks, CLO Funds, Pension Funds, High Yield Funds, Private Debt and Private Equity.

    I would say LevFin as you learn LBO Modelling and work on deals for PE firms from a debt perspective but M&A gives you a holistic overview in terms of the overall picture and management strategy etc.
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    (Original post by makrxx)
    Hi,

    Thanks for doing this. So between LBO and DCM, am I right to say the nature of work/products are identical, except the credit rating? IG vs Non-IG?

    You can when High Yield DCM which is Non-IG bond issuance for Corporate Issuers. While LevLoans supporting LBOs are more akin to the hours and work as M&A, I.e more project based than market driven.

    Do you work with the ECM guys? Currently leaning towards doing that for the summer at a BB, but heard about how ECM is 'boring' as most of the work is done by the industry teams etc and you don't learn too much which leads to weaker exit opps. Any thoughts on this?

    Don’t waste your time with ECM, right now equity markets are overvalued, the work is not as technical as M&A or LevFin and the hours have the worst of markets and IBD. I.e, 7.30am start and finish after midnight. Exit opps are also bad, unless you want to be a salesman or maybe investor relations at a corporate firm.
    See above
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    (Original post by Indian Merchant)
    I’m still thinking about it, the good thing about Leveraged Finance is that it opens a range of exit oops. I’ve had friends and colleagues go into Sales, Trading, LevFin at other banks, CLO Funds, Pension Funds, High Yield Funds, Private Debt and Private Equity.

    I would say LevFin as you learn LBO Modelling and work on deals for PE firms from a debt perspective but M&A gives you a holistic overview in terms of the overall picture and management strategy etc.
    Thank you for your detailed answer.
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    (Original post by Indian Merchant)
    See above
    Thanks! Are you able to describe a little on what do the ECM guys do or where do they come in, when you work with them on a deal?

    As for the hours, is that necessarily reflective across different banks? I read on WSO that it's a slightly early start at 7.30, but you also finish slightly later than markets around 8pm or so and no weekends. Of course unless there are many live deals I'm guessing.

    Lastly, how is the ECM team in your firm? Have they grown of late since you joined because of the rosy Equities environment? And do they tend to trim headcount should a crisis happen and deal flow dry up?
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    thoughts on dcm > lev fin?

    investment grade is what i'll be doing this summer so is it a logical switch to go to high yield next?
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    are the hours / lifestyle better in lev fin than m&a? how have you found it?

    Also, do you by any chance know if you do a summer internship in lev fin do you only get a grad offer for that or could you change to m&a easily?

    cheers mate
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    (Original post by tazza ma razza)
    thoughts on dcm > lev fin?

    investment grade is what i'll be doing this summer so is it a logical switch to go to high yield next?
    They're totally different forms of debt and require different levels of analysis, doable though.

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