I want to start this blog by giving a brief introduction on Leveraged Finance (or “LevFin”) since I have seen many students and early career professionals struggling in understanding what it really is and what you should focus on.

I don’t want this to be an academic paper but rather a practical guide for those of you considering a career in Investment Banking, Direct Lending, Restructuring or Private Equity. The goal is to start simple and expand on both (i) the market and (ii) technical aspects.

LevFin is a core product in today’s Investment Banking world and one of the most dynamic areas to understand. It sits between M&A, Capital Markets and Credit Analysis. For me personally it proved to be the sweet spot of project work in combination with the exposure to capital markets. The product is the engine behind Leveraged buyouts as well as corporate financings to enable large M&A transactions, dividend recapitalizations or growth investments.

This primer walks through the fundamentals to give you a better understanding on what to expect working in this field. The goal is not to provide a technical lesson, we will focus on this at a later stage, however it will help you to have a better understanding on this product.

Agenda

1.        What exactly is Leveraged Finance?

2.        Why is Leveraged Finance an appealing career in today’s world?

3.        LBOs and why they work

4.        Who is involved in a Leveraged Finance deal?

5.        Overview of different products

6.        How leveraged finance deals are structured

7.        Lifecycle of a deal from the banks point of view

8.        How lenders would look at a deal

9.        The Investor universe

Leveraged Finance refers to providing debt to companies that have above-average leverage (typically measured as debt relative to EBITDA) and/or a sub-investment-Grade credit profile. Unlike traditional corporate lending—where a bank extends a bilateral loan from its own balance sheet—LevFin typically involves arranging syndicated debt that is distributed to a broad base of institutional investors. In this sense, the debt is effectively placed in the capital markets, similar to how shares are sold in an IPO.

The most common syndicated products are Term Loan Bs, High-Yield Bonds, and Revolving Credit Facilities, though the exact structure can vary. Investors in these instruments include large asset managers, CLOs, pension funds, banks, hedge funds, and direct-lending funds.

LevFin financings are used for a range of transactions, including:

(i) leveraged buyouts,
(ii) dividend recapitalizations,
(iii) acquisition financings,
(iv) refinancing existing debt, and
(v) opportunistic or strategic capital raises.

Why it matters: LevFin enables companies, particularly private-equity-owned businesses, to raise capital relatively quickly, flexibly, and at scale. I am saying relatively due to the strong growth of direct lending which is typically the more flexible and faster solution. But we will compare those products in detail in the future

There are several reasons to join a LevFin group instead of a coverage or M&A execution team if you are interested in a career in investment banking. Ultimately, it comes down to personal preference, but having a strong understanding of financing will always be valued by clients.

For me, the appeal has been the combination of project-based work and exposure to the capital markets. As a product group, LevFin gives you insight into many different industries and exposes you to a wide range of operating models. You play a crucial role in the private equity ecosystem and, importantly, you tend to pitch far less and gain more experience working on live deals.

You will collaborate with many external stakeholders—including PE clients, investors, legal counsel, and M&A advisors—as well as internal teams such as risk, legal, middle office, and back office. While working with clients and deal teams is exciting, especially early in your career, the internal processes can sometimes feel challenging or even frustrating, as large-scale financing always comes with regulatory requirements and strict internal procedures.

A final reason to consider a career in lending is how the market itself is evolving. While PE exits remain popular, more and more students are considering careers as debt investors. Leveraged Finance provides the ideal foundation to build a strong credit skill set and to launch a long-term career in this space.

If we are thinking about Leveraged Finance, we will face two main scenarios. First being a corporate which is (highly) leveraged, leading to the company being categorized as sub–Investment Grade. The second, probably being the more interesting one, is known as a Leveraged Buyout. A Private Equity Fund is buying a company but financing it to a large extent through debt. To simplify the idea behind it you can think about yourself buying an apartment. You won’t purchase an apartment with 100% of your money but you will finance it with a loan. Once you have purchased it you can rent it out and someone living in it will pay rent, which then should service the interest payments and amortization of your loan. In a best-case scenario one day your loan will be paid back and the apartment will be yours. PE Sponsors will do the same with companies and on a shorter timeframe.

So why do LBOs work?

The leverage effect means that using debt boosts the return on your equity as long as the company’s return is higher than the cost of that debt. Debt is cheaper than equity, so if the company earns more on its assets than it pays in interest, the leftover profit flows to the smaller equity slice and increases the equity return.

Let’s look at this with a simple example:

You buy a company for €100m, hold it for 5 years and you are able to sell it for 200m. In Scenario A you will finance it with 100% equity, in Scenario B you use 40% equity and 60% debt. Assumption on the debt are 5% interest and no amortization.

Scenario 1 is a simple calculation, your value goes up from €100m to €200m, this means your equity has doubled in 5 years, a return on invested capital of 2x.

Scenario 2 is a bit more complex, you started with a €40m equity investment and €60m in debt. At the end of the 5 years you paid the interest, a total of €15m, and you need to repay the €60m to investors. This means after your expenses for the debt you have €125m left as equity. Looking at the original investment of €40m this translates into a return on invested capital of over 3x.

While both scenarios look attractive when you only compare the multiple on money, this metric ignores the fact that the investment took five years. Earning a 2× or 3× return is very different if it takes 1 year, 5 years, or 10 years. That’s why investors focus on the Internal Rate of Return (IRR). Because leverage increases the equity multiple in Scenario 2, the same five-year holding period results in a higher IRR, which is ultimately what most private equity funds are targeting.

Why is LevFin essential to LBOs?

Without leveraged finance markets, PE firms could not deploy large funds and execute buyouts efficiently. LBOs rely on debt markets being open, competitive, and liquid to provide (relatively) cheap capital.

LevFin transactions involve a number of stakeholders and we will use this to get a quick overview.

1. Company / Borrower

It is usually the operating company / target which has been bought by a PE Fund. While there are a number of legal entities for different purposes lets keep it simple at this stage. The borrower is an entity where the debt is sitting. If it is a corporate the company will make key decisions about its financing structure, if it is a PE company it will be the Sponsor deciding this on behalf of the borrower.

2. Private Equity Sponsor

As mentioned, there is no need for a Sponsor in Leveraged Finance deals if a corporate is being financed but in case of an LBO the Sponsor will be your key client. PE Sponsors acquire companies, hold them for a number of years and sell them again. You will see that those are your clients looking for the most aggressive terms which includes (i) largest possible amount of debt, (ii) lowest possible costs and (iii) greatest flexibility under its financing documentation.

3. Coverage Bankers

Coverage Bankers are usually the key contact for the client(s) (PE / Company). Those are the bankers who own the relationship with the client. They know the sector well and have a large internal network in the bank to provide the right product expertise. This could incl. M&A, Leveraged Finance, Equity Capital Markets, Hedging Teams and other corporate solutions.

4. Leveraged Finance

There are at least three different teams within leveraged finance but it varies by bank. You will typically find Origination, Syndicate and Portfolio Management.

Origination teams will focus on landing a deal together with its coverage bankers, preparing it and bringing it to market. Key responsibility includes finding a structure that works for the client, and which can be sold to the market. To make an assessment those teams will evaluate the credit both from qualitative as well as quantitative standpoints and compare it to other companies in the market. At a later stage they are involved in the deal execution and selling the deal to debt investors. We will focus on the detailed workstreams and tasks of a deal later in this primer and in a detailed session in the future.

Syndicate is working closely with origination and supporting deal teams by providing their view on pricing, documentation flexibility and liquidity in the market. This is the team which is in touch with investors during executions and they use their knowledge of current market conditions, comparable deals but also investor concerns that they pick up in their day to day.

Portfolio Management monitors the bank’s existing leveraged loan positions after they’re closed, assessing credit quality, financial performance, and risks over time. They ensure the borrower complies with loan terms, flag issues early, and protect the bank’s capital by managing exposures and acting if performance deteriorates. They might be involved in restructurings if loans are not performing but there are dedicated workout groups as well supporting in such cases.

5. Rating Agencies

There are many rating agencies worldwide with a different focus and purpose, but the credit market is dominated by three major players. S&P Global, Moody’s, and Fitch Ratings, which together account for the vast majority of all ratings used in debt financings and which will be the agencies you will work with as a Leveraged Finance professional.

Rating agencies evaluate how likely a borrower is to repay its debt. They assign a credit rating that investors use to form a view and come up with a price level.

S&P Global: Known for its forward-looking ratings and widely used outlook/watch system; very influential in public markets.

Moody’s: Combines quantitative models with sector-specific qualitative analysis; particularly strong in structured finance.

Fitch Ratings: Smaller but still globally accepted; often seen as a middle ground between S&P and Moody’s methodologies, offering detailed sector commentary.

On the banking side you will work with a specialised ratings advisory team, who are often former analysts coming from one of the 3 agencies. They will support in the communication with agencies, handle commercial aspects around the process of obtaining a credit rating and advise issuers, especially when it is their debut.

6. Legal Counsel

You will find a number of lawyers on a deal. We will think about the two key groups here, the issuer counsel and bank / lender counsel. Every counsel with a different inventive, and understanding these dynamics is one of the core skills in LevFin.

Isser Counsel represents the company and PE sponsor raising the financing. They focus on getting flexible terms, minimizing restrictions, and ensuring the covenants and documentation give the borrower enough room to operate while still closing the deal efficiently.

Bank / Lender Counsel protects the interests of the bank or investor group providing the capital. They negotiate stronger covenants, reporting, collateral protections, and enforcement rights to ensure lenders are properly safeguarded if the borrower’s performance weakens.

7. Investors

Investors are key to Leveraged Finance since banks are not keen on keeping the financing on their book. While a bank earns money by structuring a deal Investors are the ones who buy the Bonds and Loans and make a profit from their interest income. We will cover the different Investor Groups in detail in chapter 9 of this guide.

Revolving Credit Facility (short: RCF):

A Revolving Credit Facility is a credit line that the company has which it can draw on and repay as often as it needs to. It is usually undrawn at closing and can be used to finance net working capital swings, smaller M&A transaction or any other business needs. This capital is provided by a number of relationship banks, who commit to this line with the idea of doing more business with this client going forward. It is not a lucrative product for banks on a standalone basis usually and more of an “entry ticket” for investment banking and commercial banking business. Most frequent tenor is 6.5 years since banks like to have a shorter maturity compared to institutional investors (i.e. no temporal subordination). RCFs are typically secured and rank either above other outstanding debt or pari passu (which means side-by-side" or „on equal footing"). The total size of those undrawn lines varies greatly and depend on the borrowers’ need and banks appetite. You will often see it being 0.5-1.0x of EBITDA but there are no rules.

Term Loan B (short: TLB)

A TLB is a senior secured loan, typically with a maturity of 7 years. While it could be amortizing the market standard is a bullet repayment (this means 100% repaid at maturity, it is only paying interest over the time of the loan). It can be drawn once and repaid at any time, once repaid you cannot draw it again even if repaid before the contractual maturity. A TLB typically requires at least two public ratings to draw attention of larger asset managers. Size of the loan could start as low as €250m but a size of at least €/$400-500m is recommended to ensure liquidity. On the larger end you can raise up to €/$2.0-2.5bn. Pricing is based on a margin, this means you have a base rate (EURIBOR or SONIA) and on top issuers pay the agreed margin. Pricing is a tricky part and there will be a write up to form a view on this.

Pros:

+  Usually you find a „leverage grid" in the legal documentation and issuers will benefit from lower margins once they are able to de-leverage

+  Flexibility to pre-pay

+  Flexibility around ratings for smaller deals

Cons:

-  Only offer senior secured options

-  Less favourable to challenged / cyclical credits

-  Requires the RCF to be pari-passu

-  New money deals often require due diligence

Bridge

A bridge is a loan provided by banks and is used to „bridge" the time from where borrowers require money to the time, they can raise this in the syndicated market, which is typically happening via a bond. The way it works is that pricing is attractive but there are multiple step-ups in pricing over time. Intention is to make it more expensive which gives borrowers the motivation to complete its financing in the bond market and to free up the balance sheet of the bank again. Compared to an investment grade bridge banks are having more power in the leveraged world which allows them to force an issuer in the market to de-risk its position

High Yield Bond (HYB)

A High Yield Bond is a public instrument and typically describes any bond rated below the BB+ threshold. The bond can be senior secured (SSN) or unsecured (SUN). Typical tenor of a bond is between 5-8 years, and redemption depends on a call schedule (a premium paid for early redemption in the first years and typically reducing over time). Similar to Term Loans there is a minimum size of €/$200-250m, but it is recommended to reach the €/$400-500m area to ensure sufficient liquidity (Investors feel more comfortable having a larger instrument and investor universe which leaves options to sell its share). A bond requires an Offering Memorandum, this is a document that outlines the issuer’s business, financials, risk factors, capital structure, use of proceeds, terms of the notes (including covenants), and legal / tax considerations to allow investors to assess the credit and the offering

Pros:

+  Most open to cyclical and challenged credits

+  Flexibility around tenors

+  Can easily co-exist with other debt in a structure

Cons:

-  Pricing sensitive and more dependent on market conditions, stronger reaction to macro events

-  Lower flexibility for pre-payment due to call schedule

- Issuance and Offering Memorandum are highly visible, high share of information being disclosed

-  Significant time (and cost) investment for a debut

-  Issuance can only take place within certain time periods after audited / reviewed financials are published

Unitranche / Direct Lending Solution

While not part of the syndicated market its important to not forget about the competing product offered by private credit funds. A Unitranche is a privately negotiated loan that blends senior and subordinated debt into a single tranche with one interest rate, one set of documents, and one lender group. Tenors often range from 5–7 years, with repayment being similar to a loan at the end of the tenor. Because the structure consolidates different layers of risk into one instrument, pricing is higher than traditional senior bank debt but often still competitive. Documentation and covenants are bespoke and can provide meaningful flexibility for acquisitions, capex, and add-ons, while still giving lenders strong control through financial maintenance covenants. The product is most common in mid-market LBO transactions and less popular with corporate issuers.

Pros:

+       High execution speed and deal certainty due to a small, coordinated lender group

+       Customizable terms and covenants tailored to the transaction

+       Simple capital structure and reduced complexity

+      Confidential, private-market process with no / limited public disclosure

Cons:

-       More expensive compared to Term Loan or High Yield Bond

-      Lenders may negotiate tighter covenants or reporting obligations

-      Possibly higher refinancing risk due to limited lenders

-      Often less competitive in large cap segment due to high costs and concentration risk in debt fund’s portfolio

Pay-in-kind (PIK)

PIK is not a standalone instrument but rather an instrument feature, however you will see a PIK in almost all LBOs. PIK means pay-in-kind, which is a non-cash interest payment. It is seen as more risky and hence more expensive. The interest portion is covered by issuing more debt which leads to a higher principal amount. Due to payments in more debt, it is compounding making it even riskier. For Sponsors its often seen as an instrument which is more equity like due to its characteristics and return profile. Often this type of debt is sitting outside the restricted group, which means its claims are coming after that of the cash paying senior debt.

It is a useful instrument as well in HoldCo scenarios where you don’t have guaranteed dividend payments to service the debt. Typically you have a toggle feature, which allows you to pay in cash if available, and if not you pay in kind. It is also a feature for challenged credits or restructuring scenarios where you want to preserve near-term liquidity.

Pros:

+  Preserving liquidity easing pressure on cash flows

+  Allowing sponsors to lower capital needs by structuring PIK as equity like instrument

+  Can serve as a tax shield depending on local taxation rules and overall structure

Cons:

-  Compounding making it an expensive instrument

-  Higher costs compared to cash pay instruments

-  Increases refinancing risk

-  Possibly not liked by other lending groups when it is reducing the sponsors equity stake in the company

A leveraged finance (LevFin) structure must balance the different  needs of four key stakeholders:

1. Sponsors typically push for maximum leverage and operational flexibility to enhance returns

2. Lenders, by contrast, focus on downside protection and want to ensure that the borrower can service its debt under stressed scenarios

3. The company itself needs a capital structure that preserves sufficient liquidity and operating capacity to run the business

4. “The market” dictates what is achievable in terms of pricing, leverage levels, and structural terms based on current investor demand. To be fair, the market is a mix of all participants but besides the lenders and issuers opinion it is dictated by macro news flow, overall attractiveness of the credit market compared to other asset classes, the rate environment, cash levels investors hold and many more factors

To come up with a financing view for a potential client we look at several factors including:

Leverage: A central part of any LevFin deal is determining the appropriate leverage, i.e. how much debt the company can support. To find this out you would typically look at (i) comparable transactions in the industry / close peers, (ii) the cash flow profile and (iii) equity cushion.

I.  Comparable Transactions (Leverage Comps): usually reflect the risk appetite for investors in a certain industry. You will see that debt investors put less leverage on a cyclical automotive or chemicals asset and feel more comfortable with a stable non-cyclical asset operating in a stable segment like healthcare. Once you have a view on the industry you can try to look at the closest peer and benchmark them.

II. Cash Flow Profile: probably being the most obvious. If you put high amounts of expensive debt, there should be enough free cash flow to service the debt. When structuring a deal as a banker you would typically come up with a less aggressive business plan compared to what management or a sponsor gives you. When modelling a new structure, the company should be able to service this debt. In Europe you would look at the ECB repayment test, in the US at the FED test. Both are somewhat similar and as a rough guidance you can assume that the company should repay 50% of its debt over a period of 7 years. While the ECB focuses on net senior debt in the US this ratio is calculated on gross debt.

III. Equity Cushion: is the equity in a company. For a new deal lenders would typically require at least 40% equity (you see less and structures incl. PIK as quasi equity investments), this is not just the layer that absorbs losses before the debt is affected but also showing lenders that the Sponsor is financially aligned. It signals that the sponsor is incentivised to support the business, avoid value-destructive decisions, and protect the credit through performance volatility

This is helping us form a first view on the leverage the company will have. As you can see it’s a bit of a moving piece, you can have an idea on the leverage but your cash flows and repayment capacity are depending on the instruments pricing.

Pricing: being an early indication and might change based on the markets demand and appetite for risk. To come up with a view you do “H-Comps”. You try to look at the issuers outstanding instruments, closest peers, companies with a similar rating and recent issuances. You pull the data out of Bloomberg to see where they are trading and what their yield to maturity is. Based on this you can start forming a view. For debuts your peers are key and it makes sense to not just compare the pricing but also do some vertical comps or side-by-side, to dive deeper into the operations and financials. If your new issuer is a stronger credit with better financials, you should be able to achieve a better pricing and vice versa. In reality this involves discussions with your syndicate desk and seniors and it’s not always simple to find the right price.

Instruments: With a leverage target in mind, you can now think about your clients’ needs and come up with more details on the instruments. You have some pros and cons listed above in the overview of instruments. If your client is financing a LBO he probably wants the largest flexibility, and it makes sense to recommend a Term Loan B. If it is a larger transaction you need to think about the liquidity in the market and if it makes sense to raise EUR/USD Term Loans as well as bonds to tap a different group of investors. On the other hand if you are structuring a deal for a corporate, he might be in favour of an all bonds transaction due to the certainty of its cost. Finally, you can think about your instruments and if all of them are senior or if you might consider some more risky (and more expensive) junior debt to increase the overall leverage.

Interest Types: Despite the Instrument there is a second important consideration. We discussed between fixed and floating interest rates based on the instrument we have chosen. A second consideration would be if the debt should be cash pay, which is most common for senior debt, or if you might consider a PIK.

Maturity and Amortization: Maturity determines the length of time the borrower must repay the principal, directly affecting refinancing risk and long-term cash flow planning. Amortization profiles shape the annual debt service burden and influence how quickly leverage is reduced over the life of the facility. A typical sponsor deal will see a bullet repayment, usually after 7 years. While 7 years is a long time you will see issuers going to market more frequently to (i) use favourable market windows and (ii) to address their maturities 2-3 years ahead of its date to avoid any refinancing risks in a bad or closed market. Corporates think differently about its maturity wall, especially if large amounts of debt are outstanding you might want to spread them across multiple years to not tackle your full debt stack in one go.

Call Protection: The call schedule defines when and at what cost the issuer can redeem the debt prior to maturity, impacting financial flexibility and interest expense optimization. For Term Loans you will find a 6-month soft call at 101, allowing for high flexibility. Bonds are less flexible and more expensive to repay early, hence it is important for both issuers and investors to consider this. You will see bonds being described as “7NC3”, with the first number describing the years until maturity, NC meaning non call and the number behind the number of years until it is callable.

Covenants: Covenants govern borrower behaviour and come in three forms Incurrence based-, maintenance-, and negative covenants.

Incurrence-Based Covenants: restrict the borrower from taking certain actions—such as raising additional debt or paying dividends—unless specific financial tests are met at the time of the action. They provide flexibility in stable periods but protection for lenders at moments of potential risk.

Maintenance Covenants: require the borrower to continuously meet predetermined financial ratios, such as leverage or interest coverage, tested on a agreed schedule. They offer early warning signs of deteriorating credit quality and give lenders tighter ongoing control.

Negative Covenants: explicitly prohibit certain actions, such as asset disposals, restricted payments, or changes in business activities. Their purpose is to preserve the lender’s credit position by limiting behaviours that could weaken the borrower’s ability to repay debt.

Security Package: This goes beyond your first financing views and might become more relevant once you really think about the execution. A security package describes all assets which secure a loan and which lenders can rely on when things go bad. This could be PPE, intellectual property, share pledges in the company or any other assets which might be of value. In reality as part of an LBO you would typically receive the share pledge but larger security packages are unlikely and depending on the industry of the borrower. It also defines whether subsidiaries guarantee the debt, which might improves lender recovery prospects in a downside scenario.

Documentation Flexibility: Finally, deal documentation defines the level of flexibility available to the sponsor. Sponsors typically try to negotiate a really flexible document which is not liked by lenders, hence when underwriting a deal, it is key to keep in mind what lenders will be focused on and might not accept. You will see that this is highly dependent on the market, in some markets it is difficult to raise capital and the negotiation power is with lenders, in markets with high liquidity and limited options to deploy cash this shifts towards issuers.

As a LevFin banker you will experience a certain sequence but you might be surprised how much time you spend on executions compared to marketing.

1. Pitching

There are two main types, a bank approaching a client presenting its views or a potential client asking for views through a RfP (Request for Proposal). Both are structured similar and you will see materials which are only a handful of slides and others which are fairly extensive (those might lead to a long night or weekend filled with work). For clients it is important to invite a number of banks to get different views (ideally banks are aligned confirming where the market is) and ensure there is enough appetite from the banks entering the deal and underwriting it.

·      Market conditions: an overview on the market, this incl. an overview of the macro environment followed by a section on the products (HYB and Term Loans) to show volumes, returns and recent deals. While there are standard slides available you might want to tailor it, focusing on new money deals for a debut or showing achieved outcomes on repricings when an existing client wants to do the same.

·      Company / Market Overview: like in any other banking pitch. This can be a one pager or full section, depending if you know the client or might want to win a mandate and show how you would explain the business to investors.

·      Key Credit Highlights and Risks and Mitigants: are highly important since this is key for investors to understand. It should show the highlights for credit investors, meaning it’s a bit more focused on downside protection. Risks and Mitigants is your view on an asset, attention points you (and investors) would like to raise and mitigating factors you can come up with. Both KCH and R&M are important section since it shows your understanding of the asset.

·      Capital Structure: showing the proposed structure, leverage, pricing and probably a few comments on your thoughts behind this. You typically mention where the rating might come out or whatever is worth to flag in the right context. This is the slide your client is probably most interested in.

·      Comps: as outlined above there are different set of comps incl. H-Comps, Leveraged Comps and Vertical Comps. H-Comps are a table showing different tranches, their rating, size, pricing, OID and how they are trading. You show those for similar industries, similar ratings and recent issuance which have entered the market. Leveraged Comps look at the capital structure of comparable companies and the leverage which has been accepted by the market. You would look at senior, junior and equity like leverage. Vertical Comps are a detailed comparison to the closest peers, comparing the companies in details.

·      Investor appetite: to show the client your understanding of the investor universe, who to target and how you see the final order book coming together.

Other sections and pages would incl. an intro to the team, credentials and what qualifies you as a bank, detailed rating analysis or fee proposals.

2. Internal Credit Process

Every bank has a different credit process, but every bank needs an approval to commit capital. First step is some type of “screening”, the initial, high-level assessment of a company to determine whether it is a viable candidate for debt financing and at what approximate leverage, risk, and return profile. It focuses on evaluating the company’s business model, market position, cash flow stability, growth prospects, and key risks before committing resources to full underwriting and structuring.

Once successful and you are working with a client you need to go to a credit committee. A credit committee requires a detailed paper outlining the key aspects to make a decision. The committee serves as the bank’s key risk control mechanism, ensuring that transactions meet credit standards and the banks appetite for risk before any capital is committed.

To come up with this view it requires a detailed analysis of the business and industry, review and sensitisation of the financial model, and assessment of leverage, cash flow generation, liquidity and debt service capacity under base and downside scenarios. The LevFin team evaluates the proposed capital structure, covenant package, security and documentation terms, as well as execution risk related to syndication and market conditions and presents them to risk.

Your team also incorporates findings from due diligence and third-party reports, including quality of earnings, commercial and legal diligence, and assesses sponsor track record and alignment. The credit materials are reviewed with credit risk, legal and compliance teams, and presented to the relevant credit committee for approval of underwriting commitments, hold levels and key terms. In a best-case scenario you get approved instantly, typically risk will highlight a few key attention points and you might need to get back to them. Once approved hopefully your bank gets a mandate and you kick off the workstreams.

While the internal process is of course a matter of the deal and structure you will learn a lot about politics. It’s not always the best or worst credit getting an approval / rejection but it matters a lot on who you are working with, how the banks relationship might be to a certain sponsor or corporate and if there is more investment banking business attached to a client.

3. Due Diligence

The due diligence phase is usually happening as part of your internal approval process and should be finalized by the time your committee makes a decision.

During this time, you  work closely with the sponsor and company management to assess the investment case in detail. This includes reviewing and stress-testing the financial model, sensitising the plan and inserting your financing assumptions. Besides the sponsor case you will need to come up with more cases, a bank case, which is a more conservative case as well as the downside case, which looks at a real stressed scenario.

In parallel, banks conduct an in-depth industry and market analysis to validate the business plan, competitive positioning and overall quality of a potential issuer. Where applicable, assess potential synergies, including their timing, execution risk and impact on cash flows.

The diligence process also involves reviewing a range of third-party and internal reports, including quality of earnings reports to assess the sustainability of earnings and identify non-recurring items or accounting adjustments, commercial due diligence reports to evaluate market dynamics and customer behaviour, and operational or technical reports to assess cost structure, scalability and operational risks. Legal, tax and ESG reports are reviewed to identify risks, potential liabilities and compliance considerations. Findings from these reports are incorporated into the credit analysis.

4. Rating Agency Process

From a banking perspective, the rating agency process is an integral part of structuring and executing a financing since rating outcomes will influence the investor base and liquidity. The bank acts as the primary coordinator between the issuer, sponsor and the rating agencies, ensuring that the transaction rationale, credit story and proposed capital structure are well articulated and presented. While you would see multiple bookrunners on one deal you would see one bank acting as the rating advisor. If split between banks you would see the banks splitting agencies with one bank being responsible for a certain agency.

As part of this process, the bank supports management in preparing rating materials, including the financial model, business plan and management presentation, and ensures that key assumptions are robust, internally consistent and aligned with market expectations. The sponsor model serves as a basis but agencies will come up with their own plan to analyses leverage, cash flow generation and debt service capacity under base and downside cases, and assesses liquidity, covenant headroom and refinancing risk, with a view to anticipating rating agency concerns.

The bank also coordinates the provision of supporting documentation, including audited financials, management accounts, quality of earnings reports, due diligence materials where available, and proposed debt terms. During management meetings and Q&A sessions with the rating agencies, the bank helps frame key messages, highlight risk mitigants and ensures that complex structural or technical points are clearly explained. Banks usually benchmark the issuer to other rated companies and try to argue in their favour to receive a strong rating outcome.

Rating agencies will focus on two building blocks consistent of (i) the business profile and (ii) financial profile.

Those rating blocks combined with its liquidity, governance framework and considerations among its ownership lead to a final rating. For Private Equity clients ratings are typically capped at a high single B level.

Feedback on rating outcomes is received after c. 3 weeks. Agencies will go to their own committee to ensure an independent decision. Once agreed, issuers and banks will have a quick call to share the outcome.  Soon after agencies share draft reports for review with the banks and timing is being discussed, to publish once the deal is going to market.

5. Documentation

In a leveraged finance deal, the documentation stage is when the business terms are put into formal legal contracts. Lawyers for the company and the lenders are responsible for writing these documents. Documents are different between loans and bonds. These documents explain how much money is being borrowed, how interest is paid, and when the debt must be repaid. To simplify negotiations, you start with a “grid”, a file which highlights the key terms, covenants and baskets in a table and only once agreed this is being included in a long form documentation (often running to hundreds of pages and intimidating at first glance for a junior).

A key part of the documents is the set of covenants, which are rules the company must follow while the debt is outstanding. Covenants might limit how much more debt the company can take on or how much cash it can pay out to owners. The documents also include many definitions, which explain exactly how important terms and financial numbers are calculated. These definitions matter because small wording differences can change what the company is allowed to do. Just think about EBITDA adjustments, if you are allowed to do more adjustments this lowers your leverage, potentially increasing the headroom under which you can issue new debt up to a certain leverage level. If your document is stricter on what can be adjusted you limit this, which is seen more favourable for banks and lenders. 

Another important concept which is being agreed is baskets, which are pre-agreed limits that allow the company to do certain things up to a set amount. For example, a basket may allow a certain level of extra borrowing or investments. This stage involves negotiation so that lenders feel protected while the company keeps enough flexibility to run its business.

While those are agreed in an underwriting you might see changes to your documentation during the syndication phase. Investors review the documents and provide feedback, and while you might have an underwritten deal as a sponsor you might want to show flexibility towards lenders to achieve a better outcome (pricing, OID).

6. Syndication / Marketing

From a banking perspective, the syndication of a Term Loan B and Bond is the key execution phase and typically one of the most interesting parts. Before going out to the market you will have finalized all materials, like lender presentations, models and draft term sheets. You will have a call with all parties to get their “go” to launch and once this is done you usually announce the deal on Bloomberg with some high-level information and terms.

Investors are invited into a virtual data room where they find invites to a global investor call and all materials. The Global Investor Call (or short “GIC”) is happening shortly after the deal is announced, this is a pre-recorded video of the lender presentation followed by a short live Q&A. Later in the day or the following days investors are able to book slots with management for small group meetings, allowing them to get an impression of management and ask their questions. All outstanding Q&A will be handled by banks together with the sponsor and company. This means your sales and syndicate teams are receiving written questions, banks origination or coverage teams will prepare answers and ask for inputs at the end of the day where required. Once completed the answers will be shared with investors. For a debut deal you can expect hundreds of questions coming from investors which need to be answered in a short time frame of 1-2 weeks.

During the time in market banks will provide regular market updates, investor feedback and an order book. The order book is showing which investors plan to invest, which investors are working and who has declined and why. Towards the end of a syndication phase, you want to be in a position where your book has been covered. If demand is high and the credit is liked you might be able to raise more debt or lower your pricing. If you see that demand is weak you might have to change pricing or terms to be more lender friendly.

7. Allocation & Closing

Following pricing, the bank manages allocations across loan and bond investors, and prepares the closing. To do so you see one or more investors fronting the money, which means banks transfer the amount raised to the borrower while collecting transfers from investors in the background. Other banks enter a loss sharing agreement, to ensure that the risk is split between all bookrunners and not just the fronting bank. Being the fronting bank is an admin heavy process which means you will coordinate a lot with your middle and back-office to ensure that the money is being transferred. Collecting money from investors takes a bit longer and might be pending completion of KYCs (Know your customer checks).

8. Other workstreams

While this should give you an idea on some workstreams, you have to keep in mind that there are some other workstreams. Seeing huge amounts of money being transferred means there is a ton of regulations and admin work happening in the background. As a junior you will be frustrated, trying to clear the KYC of the borrowers and guarantors, you will try to collect signatures and sign-offs in your organisation, learn to use internal reporting tools and make sure the deal gets league table credits with key platforms like Bloomberg. I don’t want to go into detail here but it is safe to say that there are time consuming tasks, sometimes highly important, which are not fun at all. I will save you those for your first internship or first year on the desk .

This deserves a full write-up in the coming weeks but let’s cover the key points in some bullets. This is not only the way lenders would look at a deal but also what you, as a Banker, would need to assess to come up with the right underwriting terms and price guidance.

1. Business Risk

2. Financial Risk

3. Structural Risk

4. Documentation Risk

5. Sponsor Behaviour

To buy a loan or bond lenders will need comfort on (i) its downside protection and (ii) price of the instrument. Pricing being determined as part of the syndication and can be seen in the margin / coupon as well as in the OID (original issue discount). OID being more common among Loans which are offered below its par value to increase investors overall yield.

Downside protection being the key aspect of credit investing, simply due to the fact that you can’t recover a loss through another investment like equity investors might do, your maximum performance is capped through your margin / coupon.

Leveraged finance touches a diverse set of capital providers:

1. CLOs

CLOs are the largest and most stable buyer base of Term Loans. Those are special purpose vehicles which issue debt and uses the funds to buy loans. They do not invest in bonds but loans only and have strict investment criteria like ratings, tenor and limited concentration risks.

2. Asset Managers

Funds which invest pooled funds from clients, it is a high-quality investor in a leveraged finance deal which is holding the asset for a long time period.

3. Pension Funds

Financial institutions which manage policy holder’s savings and retirement funds. It’s a highly risk averse investor but a high-quality investor class which is holding assets long term.

4. Banks

Banks are not just investment banks but all other institutions which accept deposits and lend money. You will typically find a number of banks being lenders in the RCF. Some banks have asset management arms holding parts of the debt and larger investment banks are providing underwriting services. A successful syndication can also mean that the order book is only covering 85-90% of the total amount and banks are forced to keep the remaining parts on their book.

5. Hedge Funds

Hedge Funds can come as a fund of pooled capital with a number of different strategies and focuses. They invest in different instruments but can be seen as rather short-term holders. In Leveraged Finance deals they can become more relevant in challenged credit stories.

6. Trading desks

Banks trading desks might put an order in as well to support creating a secondary market, however this is not a long-term investor and no one you should depend on when marketing a deal.

7. Direct Lenders

Those are funds who typically try to be the only lender to a deal, hence being more of a competitor to a syndicated deal.  However, you might see them being part of a syndicated loan deal if the offering is interesting and their fund mandate allows for such investments. They are long-term holders but should not take a large share of your order book when offering a syndicated deal.

This ecosystem ensures that almost any company—large or small, stable or cyclical—can find capital at a price. 

If you actually read this far, I hope you have a better understanding of Leveraged Finance and what your day to day might include. We will focus on deep diving in many of the different topics in the future.

Should you have any ideas to improve the formats or other feedback feel free to reach out at: [email protected]

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