The Definitive Guide to Corporate Banking
When you hear the words “corporate banking,” you might immediately think of loans.
Or, you might be confused about what “corporate banking” means and how it’s different from commercial banking and investment banking.
In either case, your thinking would be justified.
The corporate banking division at a bank does advise on loan issuances, but the work goes well beyond that.
There are some similarities to commercial banking and investment banking, but there are fundamental differences as well.
We’ll look at all those points and more, including the job description, recruiting, interview questions, compensation, and exit opportunities here:
(Special thanks to Angela Choi for her technical expertise in the area of corporate banking.)
The Corporate Banking Job Description
As a corporate banker, you’ll be like the hub in a wheel for clients who need to access the bank’s products and services.
Your job is to get the other areas of the bank, such as markets, treasury, trade, transactions, and debt capital markets, to assist with deal execution.
These deals are usually credit-related, but there’s a lot more to it than traditional loans.
For example, the corporate banking division also offers cash management (collecting cash and managing changes in foreign exchange rates) and trade finance (e.g., factoring and export credit and insurance) services.
It might also offer services for liquidity management, supply chain finance, and risk management.
Often, these services and loans are not very profitable by themselves, especially in a low-interest-rate environment.
Instead, corporate bankers aim to win and retain clients who then hire the bank for M&A deals, debt and equity issuances, and other transactions with higher fees.
In short, a corporate banker tries to maximize the revenue per client through an expertise in credit.
In the Asia-Pacific region, corporate banking is often called “Relationship Management” or “Coverage Banking,” both of which describe the role more appropriately.
Your clients in corporate banking (CB) could be divided into domestic vs. multinational corporations vs. financial institutions, or they might be divided by revenue, such as $100 – $500 million vs. $500 million+.
At the junior levels, you focus on crunching the numbers, assessing companies’ risk profiles, and executing deals.
As you move up, the role turns into a sales job – just like any other role at an investment bank.
The two main branches are relationship management (retaining existing clients and suggesting additional services/products to them) and business development (winning new clients), and many roles are a hybrid of the two.
Corporate Banking vs. Investment Banking
Investment bankers advise companies on mergers, acquisitions, and debt and equity issuances and earn high fees from one-off deals in the process.
You focus on winning repeat business from clients over the long term rather than earning high fees from a once-in-a-decade $50 billion M&A deal.
The other difference is that you’ll never work on the other services offered by CB, such as cash management and trade finance, in investment banking.
You will also earn significantly less money in corporate banking and you will not have access to the same breadth of exit opportunities, but in exchange for that, you will have a much better work/life balance.
Note that at some banks, corporate banking is a division of investment banking – in which case there will be more overlap, and the rules above may not apply as readily.
Corporate Banking vs. Capital Markets
CB and Equity Capital Markets (ECM) are completely different because ECM bankers advise clients on equity issuances such as IPOs and follow-on offerings, while CB does credit-related deals.
There’s more overlap between CB and Debt Capital Markets (DCM), but the difference lies in the products: You advise on investment-grade bond issuances in DCM, while you work on Term Loans, Bridge Loans, Revolvers (or revolving lines of credit), and the other services clients might need in CB.
Corporate Banking vs. Leveraged Finance
Leveraged Finance focuses on high-yield bond issuances that are often used to fund transactions such as mergers, acquisitions, leveraged buyouts, and recapitalizations.
By contrast, the credit facilities you arrange in corporate banking are used mostly for “everyday purposes,” such as a company’s working capital requirements.
Also, everything in corporate banking is investment-grade and intended for safer, relatively healthy companies.
Corporate Banking vs. Commercial Banking
Commercial banking is broader than corporate banking and services clients such as individuals and small businesses that are “below the bar” for corporate banking coverage.
For example, you might work on a $50 million loan for a small business in commercial banking, but a $500 million loan for a public company would be more common in corporate banking.
Commercial banking also includes services such as checks and credit cards that corporate bankers do not offer.
Finally, commercial banking is not tied to the capital markets and investment banking as closely as corporate banking is.
However, this distinction gets confusing because some banks combine their corporate banking and commercial banking groups, or they label their corporate banking teams “commercial banking” and create separate CB teams that are more about risk management.
So… read the fine print closely.
How to Become a Corporate Banking Analyst: Who Gets In?
Entry-level professionals tend to be a 50/50 split between undergrads/recent grads and those with several years of work experience.
That experience might consist of work at a credit rating agency, a credit research firm, or other departments at the bank, such as commercial banking.
This experience must be related to accounting, finance, or risk analysis – you’re not going to break in after spending 2-3 years at a marketing agency or a newspaper (for example).
At the undergraduate level, your grades and school reputation do not need to be quite as good as they do for investment banking roles at top firms.
For example, if you have a 3.4 GPA, you majored in accounting at a public university ranked #20-30 in the country, and you have 1-2 accounting or credit-related internships, you would have a good shot at corporate banking roles.
With that same profile, you would be far less competitive for investment banking roles.
The “minimum” requirements for undergrads and recent grads are probably around a 3.2 GPA, a reputable-but-not-Ivy-League school, a finance/economics/accounting-related major, and 1-2 internships.
Banks do offer internships in corporate banking, but the process is not as structured or accelerated as it is for investment banking internships.
So, you may have to do more of the networking and application legwork yourself.
Sometimes banks also refer to this area with slightly different names, such as “Global Banking” or “Global Banking and Markets” or “Relationship Manager,” depending on your region.
Corporate Banking Interview Questions
Interview questions for these roles could be summarized as: “Accounting and financial statement analysis, credit analysis, and fit questions.”
They’re a smaller subset of the standard questions in IB interviews because you’re unlikely to get anything about valuation or DCF analysis, merger models, or LBO models.
Common Fit Questions and Answers
Walk me through your resume / tell me about yourself.
See our walk-through, guide, and examples.
What does a corporate banker do? How does this division fit into the bank as a whole?
See everything above.
Why are you interested in our bank specifically?
See this article.
Why corporate banking rather than investment banking?
Don’t say that you “want to work on deals but have a better lifestyle” – instead, say that you like how the corporate banking role is central to everything at a bank, and you want to manage long-term client relationships rather than just working on one-off deals.
What are your strengths and weaknesses? / Give me an example of a time when you led a team.
See our walk-through, guide, and examples.
Common Accounting Questions and Answers
Walk me through the 3 financial statements and how you link them.
What is EBITDA, and how do you calculate it starting with Net Income or Operating Income?
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization” and it’s a proxy for the recurring cash flow from the core-business operations of a company. You can compare it to the company’s Debt or Interest Expense to assess its creditworthiness.
For the calculations, see our tutorial (start with Operating Income on the Income Statement, add D&A on the Cash Flow Statement, and then look for potential non-recurring charges to add back).
If you start with Net Income instead, add back income taxes, reverse Interest & Other Income/Expense, and then add D&A from the Cash Flow Statement (and then look for non-recurring charges, time permitting).
What happens on the statements when Accounts Receivable or Depreciation goes up by $10?
Common Credit Questions and Answers
How would you evaluate the creditworthiness of a company?
One approach is the “5 C’s”: Look at the company’s Character (track record of repaying debt), Capacity (stats like Debt / EBITDA and EBITDA / Interest), Capital (contribution from the company’s assets), Collateral (what the lender can claim if the loan is not repaid), and Conditions (purpose of the loan).
In practice, at the corporate level, you’ll conduct both financial and industry/qualitative analysis of the company.
The financial analysis might focus on whether or not the company can maintain its targeted credit stats and ratios even in downside scenarios, and the probability of default.
The industry/qualitative analysis might focus on the points that impact risk for lenders: for example, a high percentage of locked-in or recurring revenue, industry leadership in a high-growth market, and low CapEx requirements will boost creditworthiness, and the opposite will reduce it.
What are maintenance and incurrence covenants?
Maintenance covenants relate to financial metrics that the company must maintain after it raises debt – for example, it must maintain Debt / EBITDA of less than 5x and EBITDA / Interest of at least 2x to avoid penalty fees. These are most common on “bank debt” issuances such as Revolvers and Term Loans.
Incurrence covenants relate to specific actions that a company must take or not take. For example, if the company sells assets, it must use 50% of the proceeds to repay the lenders. These are more common on high-yield bonds.
A company has EBITDA of $100, Debt of $500, and a pre-tax Cost of Debt of 6%. Its maximum Debt / EBITDA is 6x, and its minimum EBITDA / Interest is 2x. What are the EBITDA ‘cushions,’ and what do they tell you?
The company’s Debt / EBITDA is $500 / $100, or 5x, and 6x would represent EBITDA of ~$83, so the company has an EBITDA cushion of ~$17 there.
The company’s Interest Expense is $500 * 6% = $30, so its EBITDA / Interest = $100 / $30 = 3.3x.
2x EBITDA / Interest would mean EBITDA of $60, so the EBITDA cushion is $100 – $60 = $40.
These cushions indicate how close the company is to violating its covenants and, therefore, how much risk there is for the lenders.
What’s the difference between Revolvers and Term Loans?
They’re both forms of Senior Secured Debt with floating interest rates and maintenance covenants, but Revolvers are more like “overdraft accounts” for companies.
If a company needs to borrow beyond its current capacity, it can do so by drawing on its Revolver, which is usually undrawn at first. The company then pays interest on the drawn portion until it can repay that amount (there are commitment/undrawn fees as well).
By contrast, Term Loans are drawn initially and amortize over time – anywhere from 20% per year over five years (fully amortizing) to 1% per year until maturity (closer to “bullet maturity”). The company pays interest on the full principal remaining in each period.
Corporate Banking Products: Loans, Fees, and Written Documents
It’s difficult to describe service such as cash management and trade finance because banks do not publicly disclose the documents for them, so we’ll focus on the most common loans here instead:
- Term Loans: See above. You lend a fixed amount of money that the client draws on upfront and that requires annual principal repayments.
- Bridge Loans: Quick financing until a more permanent funding source is put in place. A financial sponsor might use a bridge loan after a bond offering is launched and before the proceeds are raised.
- Revolvers: See above. The client pays a commitment fee for access to a credit line that can be drawn on as needed; often used to meet short-term borrowing needs if mandatory debt repayments or capital costs exceed the company’s available cash flow.
- Letters of Credit: Written agreements in which the bank backs payment in case the borrower defaults.
- Asset-Based Loans (ABLs): These use inventory or receivables to ensure payment is made; see the previous coverage of Structured Finance on this site.
These loans are often syndicated, i.e., a group of banks will jointly issue the loan to the borrower to distribute risk.
Fees tend to be significantly lower than the ones on M&A deals and IPOs because the deals are more straightforward and they serve a different purpose: staying on the client’s radar and generating future business.
When you work on these loans, your bank could assume a few different roles:
- Lead Arranger: Similar to a bookrunner in equity and debt offerings; in this role, you’ll handle a larger portion of a capital raise.
- Agent: Similar to a co-manager in equity and debt offerings; you’re responsible for a much smaller portion of a capital raise.
- Administrator: Monitors the interest payments and debt principal repayments.
The more responsibility your bank has, the higher the fee.
Fees may also be split with industry coverage, capital markets, and other teams at the bank, depending on the nature of the deal and who sourced it.
Much your work as an entry-level professional is similar to the tasks in other credit-related groups like DCM and LevFin: debt comparables, committee materials describing a client’s business to win deal approval, and presentations and information memoranda for clients.
The financial modeling includes similar elements, such as a Sources & Uses schedule, Pro-Forma Capitalization table, and analyses of key leverage and coverage ratios as well as liquidity metrics such as the Revolver Availability.
The key difference in corporate banking is that you tend not to use projected financial statements in lender presentations and other documents.
You focus on the company’s historical performance and what it will look like immediately after the debt issuance takes place.
Also, you’ll sometimes draft Ratings Agency Presentations, or RAPs, which are shown to credit rating agencies to demonstrate stable cash flows and low volatility.
Your task is to prove your client deserves a higher credit rating, which will result in a lower cost of borrowing.
Here are a few examples of lender presentations and memos by industry:
Technology / Payment Processing / FinTech:
- Vantiv / Worldpay by Morgan Stanley and Credit Suisse – For an acquisition, so it’s slightly different from the usual CB deals.
Restaurants / Retail:
Chemicals / Materials:
- Lenders Presentation by Credit Suisse for Rockwood (Note the “Financial Targets,” but lack of specific projections)
- Walter Investment Management by Credit Suisse, RBS, Bank of America Merrill Lynch, and Morgan Stanley
Power & Energy:
- WireCo WorldGroup (This one is also for an acquisition)
Corporate Banking Salary, Hours, and More
First, note that there is a big difference between banks that classify corporate banking within investment banking and ones that place it in commercial banking or other groups.
If your bank puts CB within IB, you’ll tend to earn significantly more; if corporate banking is within commercial banking, you’ll earn less.
In the first case – CB within IB – base salaries for Analysts tend to be slightly lower than investment banking base salaries (think: a $5-10K discount).
However, bonuses tend to be far lower, and they’re often capped at a relatively low percentage of base salary regardless of your performance.
In investment banking, full-year bonuses for Analysts often represent 70-100% of base salaries, and that only climbs as you move up the ladder.
But in corporate banking, your bonus will be much lower – perhaps 35-45% of your base salary.
So, as of 2018, you will most likely earn around $100K USD all-in, as opposed to the $140K – $160K that First-Year IB Analysts might earn.
Your base salary will increase as you move up, but there will be a modest discount to IB pay at each level and a significantly lower bonus as well.
For example, MDs in corporate banking won’t earn in the low millions USD as some MDs in investment banking would. A more realistic range would be ~$500K – $600K (with about 50/50 base/bonus).
Associates might earn bonuses representing 50-70% of their base salaries, but not 100%+ as in investment banking.
That’s a rough idea of compensation for the “corporate banking within investment banking” case.
If it’s the “commercial banking” case, Analysts might earn ~$70K all-in and not reach $100K until they become Associates. Directors might earn in the $300K – $400K range.
There’s a lot of confusion about this point because people don’t understand that different banks classify corporate banking differently, so be careful whenever you see compensation numbers online or in surveys.
In exchange for lower total compensation, you get a nice work/life balance: the average workweek might be around 50-55 hours.
There will be occasional spikes when deals heat up, but you’ll still have a good amount of free time.
Corporate Banking Exit Opportunities
So… decently interesting work, good hours, and the potential to earn in the mid-six figures once you reach the top levels.
What’s not to like?
The main disadvantage is that corporate banking doesn’t give you access to the same exit opportunities as investment banking. In fact, it’s not even close.
For example, it is almost impossible to move directly from corporate banking to private equity, hedge funds, or corporate development.
Even credit-focused exit opportunities like mezzanine funds and direct lenders are unlikely because you won’t have the depth of modeling and deal experience they’re seeking.
If you want to pursue those opportunities, you’re better off moving into investment banking first.
If you stay in CB, the exit opportunities are similar to those offered by DCM: Treasury roles in corporate finance at normal companies, credit rating agencies, or credit research.
If you make it to the Relationship Manager level and you develop a solid client list, other options might be private wealth management or private banking.
After all, you’ll know many executives who need someone to manage their money, and you’ll be familiar with all the departments at your bank.
Many professionals end up staying in corporate banking for the long term because it offers a nice work/life balance, reasonable advancement opportunities, and high pay at the mid-to-top levels.
Corporate Banking: Final Thoughts
If you are looking to work crazy hours and make the most amount of money humanly possible in the finance industry, then corporate banking is not for you.
But if you want a good work/life balance, you’re interested in credit and the other services a bank might provide, and you like the idea of relationship management, then it’s a good fit.
It can also be a solid way to get into IB through the side door, but if you want to make that move, you have to do it quickly, or you risk getting pigeonholed.
If you understand all that, you can never be confused about corporate banking again.
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Equity Research Careers: A Day in the Life, Advancement, Compensation, and Exit Opportunities
So, you won equity research interviews by networking aggressively…
You presented 2-3 well-researched stock pitches and passed your interviews…
…and despite MiFID II and rumors of the industry’s demise, research teams still exist at banks.
What happens when you start your equity research career, how much will you work, and what exit options will you get?
All good questions – so we’ll answer all of those and more here:
What To Expect In An Equity Research Job
Similar to other public-markets roles, you might arrive at work a couple hours before the market opens. In New York, that means “around 8:00 AM.”
Once you arrive at your desk, you’ll spend some time catching up on emails from traders and salespeople, reading the news, and monitoring overnight market developments.
The rest of the day is a mix of keeping things up to date (e.g., financial models), researching companies, and finding new companies to initiate coverage on.
The best and most experienced Associates also interact with clients and set up management meetings between companies and buy-side firms, and these are the real moneymakers for equity research careers in the post-MiFID II environment.
Doing the work required to initiate coverage and building the initial model can take months, so teams need to balance that with other tasks, such as client summits and conferences.
Professionals in equity research careers are best-known for insightful reports, but these reports do not necessarily take up the bulk of staff time.
That said, if the group is working on a detailed “thought piece” that reaches counter-consensus conclusions, that can consume a lot of time and effort. But it can also be worth it if it results in more viewership and client interactions.
Your time allocation during the day depends heavily on the industry you’re covering and how the Research Analyst (read: your boss) likes to run things.
In some teams, Associates spend 75% of their time modeling, but in others, it might be closer to 25% – and that percentage often changes over time.
Often, junior team members get tasked with modeling or grunt work, especially in larger teams, and senior members spend more time talking to investors and companies.
Equity Research Hours
If it’s a normal day, you might leave around 8:00 PM, which means ~12-hour workdays.
However, hours get significantly worse during earnings season, which happens once per quarter, and during industry conferences.
Unforeseen news events and developments, such as regulatory changes, M&A deals, earnings pre-announcements, or Amazon entering your space, can also make the hours worse.
Earnings season is busy because you have to update all your models and issue new reports with new estimates, and industry conferences are busy periods because you run around meeting people during the day and then do your actual work at night.
In both those periods, the 12-hour days can easily turn into 16-hour+ days, so the job will approach investment banking hours.
If you experience consistent mid-intensity stress levels in banking, equity research careers give you low-intensity stress most of the time, with occasional spikes to high stress.
As with any other public-markets roles, your schedule can be tough if your time zone doesn’t match the time zone of the major financial center in your region.
For example, if you’re on the West Coast of the U.S., you can look forward to waking up at 4 AM and arriving at the office by 5 AM each day.
Finally, the hours can get worse as you advance because Analysts have to travel and interact with clients while still assuming responsibility for published research.
Equity Research Careers: Example Reports and Other Deliverables
The published reports represent the “deliverables” that most people associate with equity research.
We linked to a few examples in Part 1 of this series on equity research recruiting:
- Morgan Stanley – Update on Lululemon Athletica
- Morgan Stanley – Initiating Coverage on Citizens Financial Group
- RBC – Initiating Coverage on Waddell & Reed Financial
- Lehman Brothers – REIT Sector Overview
- Lehman Brothers – Initiating Coverage on CBS Corp
You can divide these reports into three broad categories:
- Initial Opinion / Initiation of Coverage (IOC): This one is the first report ever published by the team on a specific company. It tends to be long (dozens of pages or more), and it has a lot of industry/market data, detailed rationale for the projections, information on competitors, the company’s valuation, and more.
- Industry Overview / Primer: This type of report also tends to be long (dozens of pages) because it covers an entire industry, such as U.S.-based pharmaceutical companies or European ground transportation companies (read: trucking). There will be sections on trends and key drivers/metrics, risk factors, legislation, and overall valuation levels, followed by shorter sections on specific companies.
- Company Note: This report is shorter (5-10 pages) and is issued when a company reports earnings, hosts an investor day, presents at a conference, or makes an announcement that impacts its strategy, such as an acquisition or the launch of a key product.
The “Initiation of Coverage” and “Industry Overview” reports consume a lot of resources, so teams must weigh the benefits carefully before deciding to invest the time and effort in creating them.
A typical research team covers around a dozen companies, so if your sector is “Large-Cap European Airlines,” your coverage list might include the Lufthansa Group, Ryanair, IAG (British Airways, Iberia, and others), Air France-KLM, EasyJet, Turkish Airlines, Aeroflot Group, Norwegian Air, Wizz Air, Pegasus, Alitalia, and TAP Air Portugal.
You focus on names that buy-side investors are interested in – in Europe, they’re paying you directly for the research, and in other regions, they’re making trades through your bank and generating commissions, and you encourage those trades with research.
Some boutique and middle-market firms focus on lesser-known names because they can add more value when they’re not team #37 covering the same company.
Your team might decide to initiate coverage on a new company when a firm you cover is acquired or gets de-listed, or because the company’s strategy or business model changes, or because your team gets additional headcount.
When that happens, you can expect to do a deep dive on that single company and its sub-industry for weeks or months until you have a detailed projection model and qualitative research to back up your assumptions.
The Equity Research Hierarchy and Promotions
In research, the most senior team member is the “Analyst,” and below that are the “Research Associates.”
Each team usually has one Analyst and 2-3 Associates, with one Associate for every 7-10 names under coverage.
This system is a bit confusing because “Analyst” and “Associate” are just the titles used on published reports.
Internally, the hierarchy is still similar to the one in investment banking, where you advance from Associate to VP to Senior VP/Director to MD.
The difference is that Analysts can be different levels: VP-level Analysts vs. MD-level Analysts, for example.
The total headcount across equity research at all banks in the U.S. is an order of magnitude smaller than the investment banking headcount: Hundreds of professionals rather than thousands.
That smaller industry size and the historically lower turnover mean that it’s often difficult to advance in equity research careers by staying at the same bank.
Sometimes you may get lucky and find an opportunity if your Analyst suddenly leaves, but you’re more likely to get promoted by joining a different bank.
To advance, you must build a reputation instead of burying yourself in Excel all day. No one cares how fancy your model is – they care how good your insights are.
Many Associates struggle to move up because they don’t take the time to get to know management teams and institutional investors.
If you don’t perform well enough to advance, you won’t necessarily be fired dramatically; research professionals are cheaper than bankers, and there’s no fixed 2-year or 3-year program.
At the junior level, people tend to stick around for 2-4 years before moving to another firm or leaving their equity research careers behind.
Equity Research Salary and Bonus Levels
As of 2018, Associates in major financial centers tend to earn between $125K and $200K USD in total compensation, with about 75% of that from their base salaries.
Post-MBA and graduate-level hires earn in the middle-to-high-end of that range, and possibly slightly above it.
As with investment banking compensation, you’ll probably earn below this range in London for a variety of reasons (GBP/USD, Brexit, MiFID II, pay is almost always lower in Europe, etc.).
VP-level professionals earn between $200K and $300K, again with 75%+ from their base salaries.
However, at smaller banks, VPs could earn below this range – something closer to the Associate compensation range is possible at the lower end.
Directors might earn between $300K and $600K, with 50-75%+ of that in base salary. At this level, the year-end bonus starts to make a huge impact on total compensation.
Finally, MDs could earn between $500K and $1 million, with base salaries in the $250K – $600K range.
Back in the dot-com boom of the late 1990s, some Analysts earned $10 million+, but these days, it’s a great outcome if an MD-level Analyst clears $1 million.
To earn in the low millions (say, $1.0 – $2.5 million), you’d likely have to be one of the top few Institutional Investor-ranked Analysts.
With MiFID II, these numbers will almost certainly fall – especially in Europe.
Equity research careers have always paid less than ones in investment banking, and that difference is likely to widen over time.
Historically, bonuses were based on 1) Analyst rankings such as the Institutional Investor Poll (II) Greenwich Poll; 2) the performance of Buy/Hold/Sell calls; and 3) revenue indirectly generated via trading commissions and investment banking fees (e.g. from companies going public or public companies issuing follow-on offerings through the bank).
With MiFID II, the basis of compensation will presumably shift to the amounts buy-side firms are spending directly on research.
The research reports themselves are not necessarily that expensive, but interactions and management meetings, non-deal roadshows, and conferences add up, and in some cases, buy-side firms end up spending more and consuming less.
Buy-side firms spend this money because many of their professionals cover breadth rather than depth, and sell-side Analysts might know specific companies in more detail.
Research compensation is likely to become more lopsided, with the top-ranked groups garnering the bulk of the fees and lower-ranked firms fighting over the scraps.
Equity Research Exit Opportunities
The bad news is that it is almost impossible to break into private equity directly from equity research.
Yes, a few people have done it over the years, but it’s far easier to transfer into investment banking first if you want to go that route.
You do not work on mergers, acquisitions, or leveraged buyouts in equity research, which makes your skill set not-so-useful for PE roles.
It’s far more common to move to hedge funds or asset management firms since there’s a direct skill set overlap – you analyze public securities and make investment recommendations in each one.
Within that category, long/short equity funds are the most natural fit for equity research professionals, while global macro funds are the worst fit because you work on the “micro” level in most equity research groups.
Other types, such as merger arbitrage and event-driven funds, could be a good fit depending on the sector you covered and the importance of deals, news, and events in that sector.
Some professionals also leave their equity research careers and move into corporate strategy because their coverage and analysis of companies is typically higher-level, which fits right in with strategy.
In those roles, you might also be in charge of competitive intelligence, monitoring your firm’s peer group, and publishing internal reports.
Some research professionals also decide to attend business school, and if they do, they’re viewed similarly to other high-performing financial professionals.
One challenge is that it can be harder to get solid recommendations in equity research because team sizes are smaller, and the Analyst calls all the shots.
So, if your Analyst relationship isn’t great, you may have to request recommendations from other groups or people outside the firm.
It’s not uncommon to ask another Associate, a salesperson, or a trader for a recommendation for this reason.
Are Equity Research Careers Still Worthwhile?
Going back to that question we posed in Part 1, our most frequent query about equity research careers goes something like this:
“Everyone says the industry is dying! Should I still go into it? Won’t the new regulations, falling commissions, and passive investing destroy everything?”
And the answer remains the same: The industry won’t go away overnight, but it is less appealing than it once was.
However, that matters a lot more for Senior Analysts with 10+ years of experience whose business models are being pulled out from under them.
If you’re at the undergrad or MBA level, you could still make a solid case for working in equity research for a few years and then using the skill set to move into another industry.
You’ll do more interesting work than in investment banking.
You’ll have more of a life, with saner, more predictable hours and occasional stressful periods.
You’ll build a solid network of buy-side professionals and company managers.
And you might even be able to sneak in through the side door – like an undervalued stock.
Numi Advisory has provided career coaching, mock interviews, and resume reviews to over 600 clients seeking careers in equity research, private equity, investment management, and hedge funds. With extensive firsthand experience in these fields, Numi offers unparalleled insights on how to ace your interviews and excel on the job.
Numi customizes solutions to each client’s unique background and career aspirations and helps them find the path of least resistance toward securing their dream careers. He has helped place over 150 candidates in leading buy-side and sell-side jobs. For more information on career services and client testimonials, please contact numi.advisory@gmail.
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The Definitive Guide to Leveraged Finance (LevFin)
The Leveraged Finance or “LevFin” group is not a big deal; they just happen to close big deals.
And as a result, the Internet seems to be in love with this team.
It’s not just because of those big deals, though; there’s also the perception that Leveraged Finance is one of the best groups for exit opportunities into private equity.
You do credit analysis, you work on leveraged buyouts, and you might get more deal experience than bankers in industry or M&A groups.
What’s not to love?
Let’s just say that you should read the fine print before assuming that Leveraged Finance is the best group ever:
(Special thanks to Kai Liang for his expertise on the Leveraged Finance discipline.)
The Leveraged Finance Job Description and Leveraged Finance vs DCM
At a high level, LevFin is similar to what you do in Debt Capital Markets (DCM): Provide strategic advice to companies on raising debt.
That means pitching to current clients and prospective clients, executing debt issuances for clients, and working with other groups to provide critical market information and transaction case studies.
The key difference is that DCM focuses on investment-grade debt issuances that are used for everyday purposes, while LevFin focuses on below-investment-grade issuances (“high-yield bonds” or “leveraged loans”) that are often used to fund control acquisitions, leveraged buyouts, and other transactions.
“Below-investment-grade” means anything with a Ba1/BB+ credit rating or lower.
Firms in this category tend to be riskier than “blue-chip companies,” with less consistent operating results, higher leverage, and a higher chance of default.
As a result, their debt issuances must offer higher yields than those of investment-grade companies.
Because of this difference, most of your clients in LevFin will be companies or private equity firms rather than sovereigns, agencies, or supra-nationals.
Common uses of debt for LevFin clients include:
- Leveraged Buyouts – A private equity firm uses a combination of cash and debt to buy a company, improves it, and then sells it again. It’s house-flipping on a much larger scale.
- Mergers & Acquisitions – A company identifies another company or business unit it wants to acquire, raises debt to do the deal, and holds the target for the long term.
- Capital Expenditures – If a company wants to build a new factory or develop a new asset that’s not a part of its everyday business operations, it might raise debt to do so.
- Leveraged Recapitalizations – The client wants to raise debt to repurchase shares or issue dividends.
- Refinancings – If a company’s debt is about to mature, it almost always raises new debt to pay off and replace the old balance.
Since each deal may be a special case, the analytical work in Leveraged Finance is often more involved than in DCM.
You must understand not only the credit markets and companies’ operations, but also how major transactions affect companies and their credit profiles.
It’s more about presenting custom solutions to clients rather than offering the same products with slight variations.
Leveraged Finance vs Corporate Banking vs FSG vs Restructuring Groups
Since we just explained the differences between Leveraged Finance and DCM, we’ll now compare it with a few other debt-related groups.
- LevFin is different from corporate banking because corporate banking involves debt such as Revolvers and Term Loans, as well as supplemental services that investment banks can offer to clients, while Leveraged Finance deals with more junior and syndicated debt.
- There is some overlap with the Financial Sponsors Group (FSG) because both teams work with private equity firms. Financial Sponsors may focus on maintaining relationships with private equity firms, while Leveraged Finance might do more of the credit/LBO analysis for deals. But the work varies heavily by bank, and different teams “run the model” at different firms.
- There is some overlap with Restructuring as well, but LevFin works with different types of companies: those that are highly leveraged but not yet in distress.
Banks with strong Balance Sheets also tend to have strong Leveraged Finance teams because they can take on more risk for clients.
In the U.S., for example, JP Morgan and Bank of America Merrill Lynch tend to be among the strongest banks in this area, followed by the other large commercial banks.
At some banks, LevFin is more of a markets-based role, and some firms label it “Leveraged Debt Capital Markets” or “Leveraged Finance Origination & Restructuring” or other, slightly different names.
At other firms, Leveraged Finance might be classified under investment banking and work more closely with the M&A team.
Working in a markets-based team won’t necessarily kill your exit opportunities, but it’s less than ideal if your goal is private equity.
Leveraged Finance Interview Questions: How to Enter the Leverage Zone
Not much is different about the recruiting process for LevFin groups.
Recruits include students who interned in the group and received full-time return offers, bankers transferring in from different groups, and sometimes professionals with experience in credit rating agencies, corporate banking groups, or other credit roles.
The main difference in the recruiting process is that you’re likely to receive a higher percentage of technical questions, especially since there are so many courses, books, and guides that teach these concepts.
You’re less likely to receive questions about macro topics, such as the activities of central banks, trade policies, or FX rates because Leveraged Finance is more “micro-focused.”
You should also be prepared to discuss debt market trends; you can find some good resources via the links below (search the name and the current year to find more recent versions):
- PwC – European Leveraged Finance Update
- Thomson Reuters – Year-End Leveraged Loan Update
- LCD Market Primers – Syndicated and High-Yield Bonds
To understand leveraged loans at a high level, take a look at the Leveraged Loan Primer on LeveragedLoan.com.
And to prepare for deal discussions, take a look at the list of high-yield deals on Credit Market Daily and research what you find there.
Finally, if you’re in networking mode, you can go to conferences such as the ones hosted by:
The Leveraged Finance Analyst Role: Workstreams, Projects, and Sample Assignments
You complete similar types of assignments in Leveraged Finance as you do in DCM, and investors in both areas care most about avoiding losses since their upside is capped.
If you’re interested in credit analysis, you can find great examples in the DCM article.
The main differences are:
- You Do More In-Depth Financial Modeling – Since you work with less creditworthy companies, you must put more effort into stress-testing them by examining different scenarios and seeing how the company’s credit stats and liquidity hold up.
You’ll spend more time building different financing scenarios, such as subordinated notes vs. mezzanine vs. preferred stock, and comparing the results. Finally, you’ll also build models for transactions such as leveraged buyouts and M&A deals.
- You Focus More on Credit Documents, Credit Amendments, and Other Agreements – This part may seem less interesting than financial modeling, but it’s even more important because you must understand the terms of debt issuances if you want to do any credit analysis. And there is no way to “learn” these skills other than by reading through dozens of examples.
- You Work with Financial Sponsors as Well – In DCM, your clients are almost always the companies or other entities issuing debt. But in Leveraged Finance, financial sponsors (mostly private equity firms) might also hire your bank to fund their deals. As a result, you also learn how PE firms execute transactions.
Here are a few examples of different types of analysis from Leveraged Finance teams:
Leveraged Buyout / Take-Private Analysis:
In this one, you build a 3-statement model for a company, assume the PE firm uses a combination of debt and equity to purchase it, and then sells the company at the end of a 3-to-7-year period.
You focus on the IRRs and cash-on-cash multiples and attempt to show that the deal works under different scenarios, such as Base and Downside cases. Here are a few examples from some leading leveraged finance teams:
One difference in Leveraged Finance is that you’ll pay more attention to the credit stats and ratios because you focus on the financing of deals.
Even if a deal produces reasonable equity IRRs, lenders might reject it if the EBITDA / Interest ratio falls to too low a level (N.B.: This is but one consideration).
Lenders do not benefit at all from a high equity IRR, but they do stand to lose a lot if the company defaults on its debt.
Market Conditions / Update Presentations:
In these presentations, you show the [potential] client information about recent issuances, net flows into high-yield and leveraged-loan mutual funds, prevailing interest rates, issuance volumes, and other market stats.
The goal is to say, “Now is a great time to pursue a transaction!”
After all, if you are a banker, any time is a great time to pursue a transaction.
Here’s an example from Barclays:
Deal Case Studies:
With these, once again, you present evidence that now is the right time to pursue a deal.
In this case, it’s because other, similar companies have raised debt at similar terms and had successful offerings.
Common information includes the transaction value, multiples, credit ratings, and debt terms (interest rates, yields, original issue discount, LIBOR floor, call premiums, etc.).
Here are a few examples:
Similar to the documents outlined in the DCM article, you’ll also produce quite a few memos in Leveraged Finance, primarily to provide a narrative for transactions.
For example, you might describe your client’s industry, its growth prospects, its products/services, its competitors, its customer concentration, and its percentage of recurring revenue.
You’ll also describe the transaction itself, including a Sources & Uses schedule, a capitalization table, post-deal credit stats and ratios, and the operating metrics and credit stats/ratios for comparable companies.
These memos might be used internally to win approval from your bank’s credit committee, or they might be used externally to help the sales team pitch new syndicated offerings to institutional investors.
You might also take a look at an existing loan, review the terms thoroughly, and file an “amendment” to change its terms on behalf of a client.
You file this amendment most often when a company needs additional time to repay a loan; in that case, you might offer lenders a higher interest rate in exchange for additional years until maturity.
Credit amendments are not complete transactions in the same way that leveraged buyouts or M&A deals are, but they still generate fees for the bank.
Leveraged Finance Loans
We covered the key terms of debt issuances in the DCM article, so refer to that for a summary.
In most cases, you’ll be working with high-yield bonds and leveraged loans in LevFin.
“High-yield bonds” is a broad category, but it generally includes junior debt instruments that have fixed coupons (e.g., 7.0% rather than L+200 bps) and incurrence covenants rather than maintenance covenants.
“High-yield” refers to any below-investment-grade issuance that offers higher interest rates as a result of higher default risk.
Within that category, there are various types of issuances, such as Senior Unsecured Notes, Unsecured Notes, Subordinated Notes, and Mezzanine, each with slight differences.
For example, Mezzanine sometimes has equity warrants attached, which allows investors to receive a small percentage of company equity upon exit.
Leveraged loans are different from high-yield bonds because the coupon is generally floating, they carry maintenance covenants, they are secured by assets, and there may be a small amount of amortization.
They’re closer to Term Loans, but traditional Term Loans are for investment-grade companies with less leverage, and they carry lower interest rates.
The main point here is that the terms vary far more in Leveraged Finance than they do in Debt Capital Markets.
For example, if a highly leveraged company wants to refinance but might have trouble meeting its cash interest payments, you can’t just propose new debt with slightly different terms.
Instead, you might think about the yield that current investors are receiving and propose a significantly different structure that would still provide a similar yield.
For example, you could propose a new loan with a lower interest rate, a portion of Paid-in-Kind (PIK) interest that accrues to the loan principal, and a small percentage of equity upon maturity.
The annualized cash yield will be lower, but the IRR to lenders might be similar (assuming the company survives).
You would be unlikely to propose this type of deal in DCM because investment-grade bonds do not have PIK Interest or equity warrants.
Leveraged Finance Salary, Hours, and More
That happens because there’s a relatively high volume of deals, the analysis can be more in-depth, and you work on transactions that are more complex than simple debt or equity issuances.
Also, many of your clients will be private equity firms.
Everyone in private equity works long hours, so they also expect their bankers to work long hours, which results in a lot of late nights and last-minute requests.
At some large banks, the hours in LevFin are slightly better, so you might have a bit of free time on weekdays and more free time on weekends.
However, these groups also tend to do less modeling work and are closer to markets-based teams.
At the Analyst and Associate levels, compensation in Leveraged Finance is similar to compensation in any other group.
The pay ceiling for Managing Directors and other senior bankers is a bit higher than in groups such as ECM or DCM, so a good result would be in the low millions USD.
However, some people also argue that a long-term career in Leveraged Finance is riskier than one in DCM because if there’s a recession, high-yield issuances will decline more than investment-grade issuances.
Leveraged Finance Exit Opportunities
The Internet seems to be in love with Leveraged Finance, with countless threads and articles arguing that it’s a great way to get into private equity.
There is some truth to this claim because LevFin is a better option than DCM or ECM.
However, it’s still not as good an option for private equity exits as solid M&A or industry teams.
You focus on the credit side of deals in LevFin, which is important, but not the #1 factor for most PE firms.
Also, individual Leveraged Finance groups vary widely, with some offering more in-depth modeling and deal work than others.
The headhunters that control many PE exits do not understand these nuances, so even if you worked in a highly technical group, you might not be able to convince them of your skills.
To be clear, plenty of Leveraged Finance bankers do get into private equity.
It’s just that it’s not as easy and direct a path as the online masses like to claim.
Other exit opportunities include:
- Direct Lending Funds – These have grown rapidly and filled in the gaps left by traditional banks; if you know credit analysis, you’re a perfect fit.
- Credit-Focused Hedge Funds or the Credit Arms of PE Firms – Your skill set is highly relevant because you’ll be analyzing the creditworthiness of companies in these.
- Mezzanine Funds – If you worked in a modeling-focused group, you’d be a good fit here because mezzanine funds do a lot of deals.
- Distressed Debt Funds – This one is less likely than the others because it requires knowledge of the bankruptcy and restructuring processes, which you don’t necessarily get in LevFin. But the credit analysis skills are relevant.
Aside from these, you could also move to a different group at your bank or a normal company in a corporate finance role.
Leveraged Finance Careers: Final Thoughts
Leveraged Finance is a solid group that positions you for a nice set of credit-related exit opportunities.
You’ll have more options than you would in ECM or DCM, but in exchange for that, you’ll also work a lot more.
You’ll gain some useful skills, particularly with reading and understanding loan documentation, and you’ll work on major transactions that are good for deal discussions in interviews.
Keep in mind that:
- Leveraged Finance groups vary widely. At some banks, LevFin is more of a markets-based role, and at others, it is more modeling and deal-intensive.
- It’s not quite as good for private equity exits as the Internet seems to believe. Yes, many LevFin bankers do get into PE, but you would have just as good a chance, if not a better one, coming from a solid M&A or industry group.
If you understand all that, you’ll be able to leverage your experience in this group like a pro.
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