Do you want to create more value? How about work less?
You probably don’t associate either one of those with investment banking, and for good reason: banking analysts spend way too many hours on a single model and run through over 77 revisions of a presentation… and that all-important meeting often gets postponed or canceled anyway.
But there is one group where you’ll get a more streamlined experience doing real, value-added work the whole time: corporate banking.
Our interviewee today comes from a corporate banking department that’s separate from the investment banking division you already know, and he’s going to give you a corporate banking crash course.
Today’s interview includes additional technical comments by Angela Choi, who spent some time covering the credit product side of finance and the economics research side of government policy.
While corporate banking may not inspire you to become the next Blake from Mitch and Murray, it also gets you better hours, less stress, and solid exit opportunities.
Here’s what you’ll get in this crash course:
- How our interviewee got into the cash flow game of corporate banking
- What you’ll do and why you want to do it
- How the products you sell in corporate banking actually work
- Transferable skills compared to the traditional investment banking skill set
- Exit plans once you’re done giving away other people’s money
Let’s get started on “converting” this interview into a full-time offer at your next corporate banking interview:
From College to Cash Flow
Q: How did you get started with corporate banking?
A: I had interned before at a credit fund and wanted to get into something more structured where I could do real work (i.e. be busy with modeling rather than be busy with twiddling my thumbs). It’s more interesting to be in a group with deal flow than to be in a group without deal flow.
So when it came time to look at banks, I looked closely at Corporate Banking and Leveraged Finance departments. Of course, I would have been very happy to work on leveraged buyouts, but in a market with few LBOs and many credit amendments [NB: changing the terms of a loan], I’d much rather sharpen my credit analysis skills.
Many analysts and associates complain about tough markets, but I’ve made the most of my experience by staying positive and counting the things that are working out.
There are no tombstones, lucites, or closing dinners when you complete a credit amendment, but at least you’re doing something at work besides “following the markets.”
Q: Wow – not even steak dinners? Let’s continue anyway… so you came from a credit fund, what about everyone else in your group?
A: My group has a couple of more senior staff members who came in from the various credit rating agencies.
Every now and then, someone with an M&A background comes in to interview with my group. But really, my group is after someone who is well-versed in credit analysis.
Once you’ve done it enough, people will respect you for it. Yes… the skill set from M&A is sort of/kind of/maybe transferable, but someone from a competing corporate banking department will get the preference any day of the week.
There is definitely less turnover compared to other departments – most people stay for a while or they leave for a couple of years and come back.
My department prefers people with a background in Leveraged Finance since many of our deals originate from there. MBAs are also favored in the recruiting process, as they seem teachable, approachable, and most importantly of all – personable.
In my department, hardly anyone came from M&A, though some had prior experience working in various divisions within fixed income.
Q: And now… the $745 million dollar question we’ve all been waiting for with 5 years of maturity and L+230 bps interest… What is corporate banking?
A: Corporate banking provides financing to corporations and institutional clients through debt issuances, structured products, or other banking and investment products. These “products” include:
- Secured Term Loans
- Syndicated Loans with Multiple Arrangers
- Structured Finance-type Loans
Some banks operate corporate banking separately from investment banking, while others have the two functions under the same name.
What does a corporate banker actually do?
A: Actually, that’s not quite true. Here’s how these roles are different:
- Equity Capital Markets: You’re focused on origination, in other words selling new stock issuances to investors.
- Debt Capital Markets: You’re also focused on origination, in this case selling investment-grade bond issues to investors.
- Leveraged Finance: Same thing, but now you’re more focused on high-yield bond issues and building LBO models.
- Corporate Banking: You’re focused squarely on the terms of the loans themselves – and your role differs depending on whether or not your bank is an arranger, a participant, an administrative agent, a lender, and so on.
Before we continue, let’s make sure we’re on the same page with respect to “roles”:
- Lead Arranger: Similar to a book runner in equity and debt offerings, this role entails handling a larger portion of a capital raise.
- Agent: Similar to a co-manager in equity and debt offerings, this role entails handling a much smaller portion of a capital raise.
- Administrator: Monitors interest payments and debt principal balance.
Any bank staffed on a corporate banking mandate will aim for a lead arranger role, or will aim to have the most responsibility on the assignment (doesn’t this sound familiar to how employee staffing works?).
Typically, the more responsibility a bank receives from the client, the greater the fees the bank will receive. Beyond that, who gets what percentage of the transaction, or the economics of the deal, is contingent upon the relationship itself.
Often, the corporate banking team works with the coverage team who will, in turn, speak with the clients, and a capital markets team who will syndicate the loans in the market.
In that case, the corporate banker negotiates commitment papers and structures the terms of the loan.
Q: So how would a deal work and what would corporate bankers do?
A: In a loan origination assignment, the corporate banker maintains relationships with their corporate clients. As bankers seek to win repeat business within their coverage areas, great measures are taken to grow and enhance existing relationships.
From a business perspective, this means creating a strong understanding with new subsidiaries that clients may acquire, and on a personal level, this means building rapport through market updates and discussions on potential acquisition targets.
From there, corporate bankers negotiate the terms of the loan, draft the term sheet and credit memo, and see the process through to funding.
Depending on the bank, a risk management or portfolio management group can be responsible for reviewing credit ratings and analyzing the creditworthiness of companies. In such a setup, a team will be tasked with assembling credit memos and managing the modeling aspect.
In addition, the same group is tasked with marking to market securities and hedging the decisions of a corporate banking department. In this case, your role as a corporate banking professional would be to focus on origination. Essentially, origination is just marketing – a term referring to how the team tries to bring in deals.
Just as capital markets assignments involve many banks, syndicated loans are a large portion of our business. Any syndicate develops in order to spread the risk among several parties, and to prevent the burden of financing the mandate fall upon just one party.
Here are the most common deal types in the corporate banking department:
- Term Loans: You lend a fixed amount of money that requires annual principal repayments.
- Bridge Loans: Quick financing until a more permanent funding source can be originated. In some cases, a financial sponsor might use this resource after a bond offering is launched and before the proceeds are raised.
- Revolvers: Client pays a commitment fee for access to a credit line that can be drawn from as needed; often used to meet short-term borrowing needs if expenses or mandatory debt repayments are higher than usual. Sort of like a “credit card” for a company.
- Letters of Credit: A written agreement in which the bank backs payment in case the borrowing company defaults.
- Facilities - Asset-Based Loans (ABLs): Use inventories or receivables to ensure payment is made; see the previous coverage of Structured Finance on this site.
The Art of the Loan
Q: Let’s talk about money… how much do you get paid on these deals?
A: Depending on the type of transaction, deal fees range from 1.5 – 2.5% of the face value of the loan. The upfront fee and annual fees are smaller than the underwriting fees. The size of a deal can range from the tens of millions to over a billion dollars.
The fees are very low compared to other investment banking offerings because the loans act as a way to “stay in touch” with the client. The pricing also depends on:
- Sector: Some sectors are simply more “speculative” than others… use your imagination.
- Funded or Unfunded: This refers to how much of the loan the client will actually use. For example, Revolvers are often issued with the expectation that the client will only draw on a certain amount (often less than 10%), and the fees may be based on that. The bank itself will pay investors a portion of the syndicate loan or the Revolver to make sure the interest expense is covered. So, bottom-line: many types of credit lines are not fully funded. This treatment does not apply to Term Loans, however, since they’re always fully funded.
- Secured or Unsecured: Whether or not the debt is backed by the borrower’s collateral. Usually, firms support debt through via revenue generation (structured finance-type loans) or with assets (normal collateral).
What moves the market for corporate banking products?
A: The London Interbank Rate (LIBOR) sets the baseline for interest expenses in my area. As you probably guessed, basis points (1bps = .0001 = 0.01%) are added for the risk of the company, sector, and geography.
And yes, even after the scandal(s), lenders and borrowers still use LIBOR almost universally – mostly due to tradition and the lack of a stronger standard.
The situation is quite analogous to the credit rating agencies’ mistakes on collateralized debt obligations (CDOs). Unless they really messed things up, their operations will continue to be open for business.
There’s some “circularity” in assessing how this market works. Supply is dictated by, of course, the health of the finance sector, which corresponds to the ability of borrowers to repay their borrowings.
A good example of this concept is the bankruptcy of CIT Group (FKA: Commercial Investment Trust). Upon the initial announcement, investors became concerned about the availability of loans for mid-cap industrial firms.
If mid-cap industrial firms don’t have loans to pay for capital equipment purchases, production falls, layoffs occur, and the ability to generate cash flow to repay debt weakens.
So it’s sort of a “giant loop” in this industry, where investors’ appetite for debt depends on companies’ ability to repay debt… which in turn depends on investors’ appetite for debt in the first place.
If you are running Excel for this situation, please make sure to turn on manual calculation and iterations!
Q: Who are your clients? Or more broadly speaking, what types of companies want corporate banking products?
A: It depends greatly on the year, what the market is doing, and how various sectors are performing.
But generally, capital-intensive sectors tend to see more deals (because they need to borrow to fund operations, and since they also have more collateral to pledge).
Q: Do you have any materials on the technical side of corporate banking to share with our readers?
A: The individual borrowers have to develop materials for anyone interested in contributing to the capital raise.
Here are a few example presentations to different audiences:
- Debt-Oriented Investors: [Revolving] Credit Facility: by Smurfit-Stone Container Corp.
- Lenders: Lender Presentation: by WireCo World Group
- Rating Agencies: Rating Agency Presentation: by San Francisco International Airport
You will have a hand in developing these materials, and sometimes it’s a big hand if you are the lead left arranger investment bank; other times you’ll just accept a bag of money and call yourself a right book runner (laughs).
As a corporate banking professional, however, you’ll have much more responsibility in developing the Confidential Information Memorandum (CIM) or bank book.
Any CIM describes the transaction, the company (history, situation overview with key clients, financials), and the sector itself. Here are some examples for you (notice the absence of “projections” and the presence of a pro-forma capitalization structure in each one of these):
- Sunrise Medical: by Deutsche Bank
- Pivdennyi Bank: by LBB, LandesBank Berlin, Standard Bank, and VTB
- Walter Investment Mgmt: by Credit Suisse, RBS, Bank of America Merrill Lynch, and Morgan Stanley
- Reynolds American: by Lehman Brothers, JPMorgan, and Citi
- Tribune: by JPMorgan, Merrill Lynch, Citi, and Bank of America
- Calpine [selected pages]: by Goldman Sachs, Credit Suisse, Deutsche Bank, and Morgan Stanley
- ISS Holding A/S: by Citi, Goldman Sachs, and Nordeo
Q: Awesome! Thanks for sharing all those with us.
What can you tell us about the technical and financial modeling aspects of your role?
It’s part of risk control – you wouldn’t want to underwrite a debt raise if the company isn’t going to be able to pay back investors.
The internal memo is pretty straightforward: i) Executive Summary, ii) Transaction Overview, iii) Company Overview, iv) Financial Information, and v) Loan Comparables.
The “comparables” don’t include multiples like Enterprise Value / EBITDA as you would find in a set of equity comparables. Instead, as a corporate banking professional you would focus on debt comparables, which include items like:
- Debt Rating
The relevant metrics might include:
- Total Debt / EBITDA
- Net Debt / EBITDA
- Net Debt / Free Cash Flow
- EBITDA / Interest Expense
- Free Cash Flow / Interest Expense
As you may have noticed, a junior corporate banking professional focuses almost exclusively on credit analysis – and he/she cares about these metrics mostly on a historical basis.
Q: Ok, that was a pretty thorough walk-through of the key skills you would gain as a corporate banking professional, but how do you determine which companies receive loans in the first place?
A: We have proprietary software for a Portfolio Risk Management system that aggregates and averages expected yields on different types of notes.
We will usually run the loan product through to look at the market spread for a given instrument and duration. Afterward, we run a model to calculate the marginal return on capital and economic contribution.
We have certain minimum thresholds for return on capital and the net revenue we receive on deals. So, like any other deal in finance, it comes down to: “Where can we get the best return with the least amount of risk?”
The most lucrative deals, as you would expect, are the loans we underwrite ourselves.
Underwriting fees for Term Loans are significantly higher than upfront and annual fees for Revolvers, and also have the advantage of being fixed amounts.
Beyond the origination, loans are constantly being amended and extended or refinanced with new facilities, which factors into the revenue structure as well.
Getting In and Getting Out
Q: How can readers get prepared to become corporate banking analysts?
A: The focus is very much on the debt side of the balance sheet. Leveraged Commentary & Data is used quite a bit in leveraged finance to keep track of leveraged loans and the like.
BMO Capital Markets provides a free weekly newsletter, and if you have a Bloomberg Terminal, you can use the screen LSRC <GO> to search for corporate loans. When it comes to industry overviews, LeveragedLoan.com and Standard & Poors have assembled useful primers.
Most of your learning will take place on the job.
In my department, the training materials were rudimentary at best, and the bulk of the education came from participating in deals.
The senior banker is the greatest asset in your development, and most of your knowledge will come from exposure to different loan facilities that you will write credit memos for.
Q: What are the typical hours for a corporate banker? You said “half the work” in the beginning, so I have high expectations…
A: Corporate bankers are at the mercy of their clients and luckily, this means summers are typically slow seasons.
Hours vary greatly depending on your outstanding deals and expected close dates, but on a normal day, they can be anywhere from 9:30 AM to 7:00 PM and later. When a deal is closing, late nights to overnight stays at the office are common.
Q: Um, that doesn’t sound like anything close to “half.” What’s the deal?
A: Oh, it’s not – it’s just that you won’t see constant 80-100 hour workweeks here unless you’re in the middle of closing a deal. A “normal” week might be more like 50 hours, so it’s still much better than investment banking.
The main difference is that unlike in banking, you’re not that busy all the time, which creates much better hours overall.
Q: Let’s talk compensation…. what’s the deal here?
A: Think of it this way: the bonus pool depends on how well your group performs. And your own bonus is tied to how well you perform.
Analyst and associate salaries are comparable with those in investment banking… there’s actually a quote from Liar’s Poker that I’m quite fond of: “He hadn’t told me what I would be paid, nor had I asked, because I knew, for reasons that shall soon emerge, that investment bankers didn’t like to talk about money.”
NOTE: Based on the comments below, the interviewee here was referring to BASE SALARIES, and NOT all-in compensation.
In most cases, the all-in compensation will be significantly below what entry-level bankers earn because bonuses are lower. It’s still good money for an entry-level job, but you will not make the same six-figure+ all-in compensation right out of school.
Q: That’s a thin explanation, but I we’ll run with it for now. What banks dominate this market?
A: The benefit of working at large banks is that size helps to execute larger deals. JPMorgan, Citi, and Bank of America Merrill Lynch (all commercial banks with large Balance Sheets) dominate the syndicated market and most deals will involve multiple major players.
Other firms can be quite well-known in this area as well, such as CIT Group, which focuses on sponsor-backed companies. GE Antares Capital’s Underwriting Department also competes heavily in the loan space.
Q: So what’s the evolution of a credit analysis professional? Where do you go after receiving a full-time corporate banking offer and working there for a while?
A: Corporate banking professionals target the same exit opportunities that the traditional investment banking and Leveraged Finance professionals do, but with a more credit or debt-oriented focus. So mezzanine funds and credit funds are very common.
You’ll see these professionals transfer mostly in the latter category.
Commercial banks are also interested in the credit analysis skill set, as are other corporate banking departments.
Q: Thanks so much for your time.
A: Glad to add some value to your work.