The Definitive Guide to Leveraged Finance (LevFin)
- The Leveraged Finance Job Description and Leveraged Finance vs DCM
- Leveraged Finance vs Corporate Banking vs FSG vs Restructuring Groups
- Leveraged Finance Interview Questions: How to Enter the Leverage Zone
- The Leveraged Finance Analyst Role: Workstreams, Projects, and Sample Assignments
- Leveraged Buyout / Take-Private Analysis:
- Market Conditions / Update Presentations:
- Deal Case Studies:
- Internal Memoranda:
- Credit Amendments:
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:
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.”
However, you should still understand bond analysis (covered in the DCM article), how to build an LBO model, and how companies make financing decisions.
You don’t need to know all these topics in-depth, but you should understand, for example, at least the mechanics of a simple LBO model.
We cover these points in the Investment Banking Interview Guide in the Equity vs. Debt section and in more depth in the Financial Modeling Mastery course.
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.
You can find lists of high-yield deals online in various sources; the best sites change periodically, so we’re not linking to anything specific here, but you can find quite a few examples with simple searches.
Finally, if you’re in networking mode, you can go to conferences such as the ones hosted by:
For more on these topics, please see our coverage of investment banking recruitment.
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
Even though Leveraged Finance can sometimes be a “capital markets” group, the hours and lifestyle tend to be worse than DCM and ECM and more in-line with those of M&A and industry groups.
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 careers.
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.
- Distressed Private Equity – Credit analysis is a lot more important here, so distressed PE may sometimes be a bit easier than traditional PE.
- 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.
To learn more about the trade-offs of these options, check out our coverage of the hedge fund vs private equity debate.
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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Do you know why some banks have Leveraged Finance falls under their Commercial Banking line? For example, I see RBC has Leverage Finance falls under their Capital Market team, but CIBC will have LevFin falls under Commercial Banking?
Does that mean the scope of work would be different?
I do not, sorry. There was another comment or question about this point on this page. I would assume that LevFin within commercial banking probably has a somewhat slower pace and may be a bit less focused on LBO deals and more on the use of high-yield debt for other purposes, but I’m not 100% certain of that.
Thank you for the post. It really helps a lot especially for junior people like myself. Do you mind letting me know what loan workout people could end up? I think it does monitoring + restructuring + admin stuffs, but not sure what their role would be and their exit options as well.
I am not really sure about that one because I’m not familiar with the role. I will see if we can research and cover this topic in the future.
Brian great post. I’m noticing that some banks (i.e., CIBC or BMO) here in Canada have Leveraged Finance falls under their commercial banking. Would their work differ from other investment banks? I read their job posting that the type of work is similar, particularly dealing with high-yield bond and such.
Good question. I am not 100% certain of that, but yes, I would assume that LevFin within commercial banking is different and is probably a bit more like corporate banking in terms of pace/hours. But even that is a bit confusing because corporate banking varies wildly based on where it sits within the bank. You probably get similar deal exposure, but the experience might be “discounted” a bit if it’s not officially within IB.
Great post. Not too many IB career sites discuss how important of a skill underwriting a full memorandum is and not just the financial modeling part of it. Does M&I (or any other resource you can point to) have real life examples of these LevFin packages/write-ups? Thanks.
Thanks. It is extremely difficult to find real LevFin write-ups from banks because there are no disclosure requirements for them (unlike with Fairness Opinions for public company deals). So, we don’t have much beyond the examples here and in the DCM article.
Happy new year and thanks a lot for this article.
I’ve been working in an M&A team at a regional BB office for a year now and am considering other opportunities within the bank to diversify my experience and skillset. I am especially interested in LevFin.
As someone who would like to work in PE at some point in the future, how would you value my chances of landing a good PE job in the future after having gained 1+ year of M&A experience and let’s say 2 years of LevFin experience? Thanks a lot.
You have a good chance, but you would have a better chance if you worked in a financial center office rather than a regional one. PE recruiting is sometimes less consistent coming from regional offices, so it’s to your advantage to work in places like NY and London, even if you don’t want to stay there long-term, just to recruit for PE opportunities.
I have the chance to work in Structured Export Finance by a major european bank, whilst I also got another one working in porfoliomangement – LBO / Acquisition Finance, and I was wondering which career path has the best exit chances, growth and compensation.
We haven’t covered structured export finance on this site before, so I can’t really give you an intelligent answer to this question. However, if the LBO / Acquisition Finance role is something like Leveraged Finance, I would almost certainly recommend that role to gain a broader skill set and better access to exit opportunities.
Thanks for the article, it broadened my view on LevFin. My question is that I’m currently working in a Restructuring & Turnaround advisory role with one of the Big 4 in Canada, do you think I still have a shot in making it straight to LevFin, or if I need pivot to Corporate Banking first before making the lateral jump? My end goal is Private Equity, so my another question is, do you think I should just try to go for Private Equity after I’m done with the Big 4.
Your chances will be higher if you do IB first. Some people get into PE from the Big 4 firms, but in a market like Canada, it’s very difficult because there are so few firms and open positions each year. I don’t think corporate banking would be helpful at all. I would just try to move to LevFin or even something like Restructuring within IB at a large bank.
Have a decade’s experience in corporate banking in Asia . Post an Ivy League MBA in PE real estate moved to mid market Lev fin as junior director In Europe but at a predominantly corporate bank. Have substantial documentation and modelling experience . Trying to figure out the best exit from LevFin to Real estate IB, or DCM or sustainability linked levfin in the current market . What would make most sense – want to exit and stay in the area for a decade and grow. Focused on banking and not credit funds unless KKR and blackstone or Apollo/Ares .
I’m not sure what your question is. Are you asking about which of REIB, DCM, or sustainability-linked LevFin is the best exit opportunity from LevFin?
If so, I can’t really answer that because I don’t know what your goal is – A buy-side role? Higher compensation? Better work/life balance? In general, DCM is better if you want a somewhat better lifestyle at the expense of lower pay, while REIB may give you slightly broader buy-side exit opportunities (and higher pay at the senior levels). I can’t speak to sustainability-linked LevFin or DCM.
Thanks Brian. Very good article.
If you’ve Lev. Fin offer in major US firm such as GS/MS vs. Industry IB from European firms such as CS/Barclays, which one would you recommend based on better career opportunities?
Probably the GS/MS offer, not really because of the group, but because of the somewhat better brand name.
Thank you so much for the insight and the article! I am currently a first year leverage credit research analyst in a BB (not JP/BoA) and I was looking to lateral to the Leverage Finance group in these two banks. My goal is to ultimately move to PE and I thought levFin would give me great exits before reading this article. I can do internal transfer to a traditional IBD group in my bank (I can move as a first-year associate or third-year senior analyst but have to complete the two year program in research). I am wondering which option will open more doors for me in PE recruiting? Thank you so much again!
LevFin is fine for PE exits. The point in this article is that it’s not the be-all, end-all group for PE exits as people on the internet like to claim. Any strong industry group at the large banks also works. It just depends on whether you want to specialize in a certain industry.
Thanks! What do you think of a lateral move from leveraged credit research to levfin?
It sounds plausible, but I don’t have firsthand stories or accounts of people making that transition. You can probably get better data if you do a search on LinkedIn.
Great Content! Was recently offered a summer credit risk position at JPM in 2022. If my end goal is to break to into IB, do you know how I would go about lateraling?
Network with people in credit-related groups like DCM and LevFin, but accept that you might have to do something like corporate banking first to gain more relevant experience. Not sure how realistic it is to go directly from credit risk to IB, but it might work? (No supporting interviews or stories offhand)
Thanks as usual for the great content. I will be joining a BB as a post MBA associate in their sponsors and lev fin team in London. My previous background encompass strategy consulting and entrepreneurship.
My end goal would be to join a special situation fund. I was wondering if Lev Fin would be the right Team to join.
LevFin is a decent choice but probably not the best choice for special situations since special situations is most closely related to restructuring / distressed. But buy-side recruiting usually comes down to the name and reputation of your bank and your own skills in case studies/interviews, so you can potentially get into special situations from LevFin.
How much harder is it for a LevFin analyst to break into MF PE? Is a discount applied to LF candidates relative to M&A?
I don’t think you can quantify that in any meaningful way as it depends more on your bank and deal experience (and undergrad, GPA, etc.). Even if you look at LinkedIn and try to survey peoples’ profiles, you can’t get an answer because you don’t know the # of applicants from all different groups that applied vs. the # that won offers. So… I would relax and aim for the best offer you can with your background.
Hi! Great overview. Very informative. What do you think risk management for a LevFin group would entail?
Not really sure of that one, sorry. Risk management for LevFin usually means credit risk… so evaluating the chances of companies defaulting on their bonds.
What do you think of a Lateral move from commercial credit analysis to levfin? I see some posts saying it’s common and some saying otherwise. I work at JP/BoFA
Hmm… I wouldn’t say it’s “common,” but it is doable. It would probably be easier to move to something like DCM first. LevFin tends to be more competitive and assumes more technical knowledge going in.
Can you exit to Corporate Development from Leveraged Finance?
Yes, but your chances would be higher coming from a strong industry group.
Great overview! How would you decide about a career in Leveraged Finance vs. Direct Lending Fund?
There are so many Funds at the moment who knows if they will be there in some years? I assume Banks to be more stable in this regard, but they do care far more about compliance and are less flexible than the funds.
What is your take on that?
Thanks and best regards
I am bearish on direct lending because companies and governments are already over-leveraged, and many funds won’t survive the virus crisis (especially if they’re PE-owned). So Leveraged Finance is more stable, and I’m not sure there is a huge compensation difference as you advance, as direct lending pays less than traditional PE anyway.
Hi Brian! Great insights
Just one question, what do you think are the prospects of LevFin and the roles within it, in the medium-long term, in relation to automation?
Is it going to become an algorithm driven role?
Thanks a lot!
No, I don’t think so, because LevFin deals still depend on talking to clients, investors, etc., and negotiating deal terms. A client doesn’t want to talk to a chatbot in place of a human.
Very helpful!! Have a quick question. What would be a best shot for someone working in a credit rating agency covering insurance sectors. Since analyzing insurance companies balance sheets and operating performance is quite technical in itself, I wonder if I can leverage that experience into credit funds or DCM/LevFin in banking. I am in Hong Kong. Please share your short thoughts on a potential career path! Thanks as always
With that background, you would probably have a better shot at the FIG team of a bank or possibly in DCM since DCM tends to cover the financial institutions that issue debt constantly. It would be difficult to move directly into a credit fund without banking first, and I think LevFin might be tough unless you have experience rating high-yield issuances. The relative lack of LBO activity in the insurance sector will also make it more difficult since so many LevFin deals are LBO-related.
Which of your BIWS courses is most relevant for breaking into a LevFin group? Thx
If you have little time and need to prepare quickly, the Interview Guide (see the credit/LBO cases and the corresponding technical sections).
If you have more time, such as several weeks to prepare, the Excel & Fundamentals course (see Modules 5 and 15).
Hi Brian, thanks for the insight and the article is very helpful. Just a quick question: could you elaborate on what the term “markets-based role/team” actually means? How do you know if the Lev Fin team you are in is more markets based or not? Is it only based on how much modeling experience you get? Thank you very much.
Markets-based usually means that you do more work tracking the markets, creating update slides, etc. rather than working on transactions. But there’s very little consistency, and different people use different definitions, so your best bet is to ask someone in the group.
Thanks for this!
Would someone with Mid-Cap Lev Fin experience have a shot at direct lending?