"The Pulse" -- #24

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Due to popular demand, we added a bunch of Sophomore Summer Programs offered at banks like BofA, Rothschild, and UBS. Find them on the database!

_{Full disclosure: We do NOT recommend spending much time on Sophomore Summer Programs offered at large institutions. All that is needed for a sophomore summer internship is experience remotely related to finance at any firm of any size}

Recruiting Timeline:

Banking:

Where We’re At:  

• SA 2025: Save the date! January 1st will be the date larger banks are planning on opening applications. That considered, 95% of the process will wrap up around June. RBC is still the only shop that has opened its app.

• SA 2024: Random applications will continue to open. However, at this point it may be time to switch gears and find an internship in a different industry before gearing up for FT 2025 recruiting which will kick off around June.

• FT 2024: Most firms are wrapping up their processes (75% over). Get your shit together and send out all applications. Make sure you’re prepared to nail your interviews.

Gameplan:

• SA 2025: January 1st is less than 2 months away. It is time to start preparing for interviews (both behavioral and technical questions). We recommend prepping for behaviorals before technicals. Our advice is to have 5 relevant stories ready to go to answer any behavioral question. Reference our Premium Database for a suite of all the resources necessary to prepare for an interview.

• SA 2024: Take a job anywhere you can. If you hate the shop/location just re-recruit for FT 2025 which will start over the summer.

• FT 2024: You better know your shit (behaviorally and technically). If not, check out our Premium Database which houses all of the resources necessary to land the job.

Interview Questions of the Week:

-Behavioral: What makes you different from other candidates?

-Technical: If company A with a 20x P/E multiple acquires company B with a 15x P/E multiple, is this an accretive or dilutive transaction?

Feel free to write us your responses and we can provide feedback on the quality of your answers!

Want access to an updated database of 200+ banks/consulting/buyside firms? Venmo @HoosHelpers $50 and shoot us an e-mail @[email protected]. Additional details of the database can be found below. Gain an edge over everyone else by not having to spend countless hours tracking applications and deadlines.

Consulting:

Where We’re At:  

• SA 2025: Only one application has been released (this is uncommonly early). It will be a few months before anymore SA 2025 apps are released.

• SA 2024: The more desirable/prestigious firms have wrapped up hiring for summer 2024. The only firms still hiring are smaller and more niche.

• FT 2024: Similarly to SA 2024, the more well-known firms have concluded hiring for 2024.

Gameplan:

• SA 2025: We’re early in this process so researching firms of interest and networking with professionals should be the priority. It’s not a bad idea to start case prep so that you know how to approach them properly when interviews come around.

• SA 2024: If you haven’t landed a role yet, I would suggest focusing on the smaller firms that are still hiring since their deadlines are later than the likes of MBB, big 4, and other notable firms. Make sure you have a strong answer to “why this firm?”. By this time in the process you should be experienced with cases.

• FT 2024: Shift your focus to smaller firms who are still in the process of recruiting. With these firms, networking goes a long way.

Interview Questions of the Week:

-Tell me about a time when you were creative in solving a problem. How did you approach the problem and what was the outcome?

Feel free to write us your responses and we can provide feedback on the quality of your answers!

Buyside:

Where We’re At:  

• SA 2025: GTCR and Insight Partners are the only apps open. Expect more volume in-line with banking from powerhouse shops such as Apollo, Blackstone, and KKR.

• SA 2024: There has actually been a surprising rebound in activity for SA 2024. Sixth Street recently posted an app for a direct lending internship in NYC.

Gameplan:

• SA 2025: Once again, apps will open in a short few months. You need to be preparing for behavioral and technical questions today. By now, you should know what area of investing you’re looking to enter (buyout, growth, vc, credit, etc).

• SA 2024: With a few new apps opening you need to be firing off apps today. Right now. Put this newsletter down and fire off those apps. Your resume should be polished and you should be hungry to land the job with rehearsed behavioral and technical answers.

Interview Questions of the Week:

-Behavioral: What are the qualities of a good investment? What questions need to be answered before deploying capital?

-Technical: Why is a ‘take-private’ an attractive opportunity? What are the pros and cons of this type of transaction?

Feel free to write us your responses and we can provide feedback on the quality of your answers!

Premium Database:

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This is a small investment for a huge payout when you secure your dream offer!

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Market Update:

The hottest topic in finance: Private Credit

First, I want to drop some quick market news:

• 4.9% annualized GDP growth in Q3 (greater than expected)

• China deflation in October, again! CPI of -0.2% 

• Potential government shutdown November 17th (also checkout our previous thoughts on this topic: "The Pulse" -- #18

Now, let’s talk private credit. Traditionally known as the little brother of private equity with regards to prestige and excitement. However, private credit has been dominating financial news headlines since rates were hiked back in March 2022. Take a look at this article from the financial times: The Rise of Private Credit

Higher rates = greater yield on debt products with yield comparable to equity returns today. Today, these loans are clipping SOFR(“S”) + 500-800bps (an unlevered return of 10-13%).

So, what is private credit? Who are the players in the space? And how does it work?

Private credit is a blend of traditional bank lending and private equity. It resembles bank lending due to the fact that private credit is literally a debt instrument (primarily leveraged loans) from an asset manager instead of a bank. It resembles private equity because private credit funds raise capital from the same limited partners (LPs) such as insurance companies, endowments, pension funds, and high net-worth individuals. Private credit funds will then invest (lend) this capital to other companies while generating a similar return profile as PE (usually 1.5% of AUM and 15% outperformance vs. 2% of AUM and 20% of outperformance seen in PE).

PC became popular after 2008 as banks were slammed by tight regulation such as the Dodd-Frank Act and Basel requiring banks to hold more capital in reserves on their balance sheets and forego risky lending. In effect, the broadly syndicated leveraged loan market (BSL market) became harder for banks to facilitate and participate in. The floodgates for PC opened up shortly after as a huge hole was created for corporate financing.

So, who makes up the PC space? Take a look below:

Lots of familiar names seen in PE. In fact, many large asset managers have opened PC arms because the asset class has become so attractive. With a PE arm and a PC arm, these asset managers sometimes finance their PE deals with capital from the PC arm! Sounds like incest!

With the rise in PC, most PE deals are being financed by PC. However, financing is usually provided by an entirely different asset manager in order to mitigate risk. This is almost like a romantic relationship between a step-brother and step-sister lmao. Lotta sex talk bc of NNN in today’s edition of The Pulse.

Now, how does PC work?

PC investors look to provide financing for sponsor-backed transactions (usually LBOs in PE deals) or they look to provide financing to smaller, middle-market companies which are typically not very creditworthy; ie not eligible for financing in the BSL market.

Advantages of PC (from the borrower’s perspective): Quicker execution + more specialized lending to the needs of the borrower. No syndication means that financing can be provided quicker than a traditional bank loan. Lesser regulatory oversight means private credit investors can lend to riskier borrowers and create any type of product to suit the needs of the borrower.

Disadvantages of PC (also from the borrower’s perspective): More expensive because PC funds demand an illiquidity premium for providing non-tradable financing. Greater interest rate risk since PC financing is mostly executed with loans and loans carry floating interest rates. Many PC deals executed in 2020 and 2021 only carried rates of ~3-5% on pricing of S + 200-400bps. Due to rising rates, these same deals are now throwing off a cost of debt around 10-13% with new deals commanding S + 500-800bps. That is about a 400% increase in interest expense for these borrowers.

Where is PC headed?

All good things come to an end. With the explosion of private credit, there are certainly plenty of shitty deals underwritten with way too high LTVs or with far too little liens on quality assets. Shitty deals executed in 2020 and 2021 will end in HUGE losses as companies are unable to service the explosive increase in interest expense. Companies have seen their credit ratings downgraded in 17 out of the last 18 months with ~75% of all leveraged borrowers having credit ratings of B or below compared to only 35% of borrowers in 2000. Also, ~40% of all leveraged debt is expected to mature in 2025.

The silver lining is that there is so much new capital in PC with managers sitting on billions in dry powder. Which means that shitty 2020 and 2021 deals will be refinanced because managers need to put capital to work.

Also, so many of these shitty deals were underwritten at a time when credit agreements were very covenant-lite, providing limited protection to lenders. The theme of 2025 will be amend and extend as lenders will work to tweak the credit agreements as companies face financial stress instead of calling default.

Nevertheless, there will certainly be a few funds that go bust as they are forced to realize major losses on aggressive lending.

Digging a little deeper:

Downgrades and companies tripping covenants may actually present a huge opportunity for credit investors. Specifically, CLOs and mutual funds who abide by strict tranche thresholds will be forced sellers as credit ratings of the underlying borrowers are downgraded. This creates an opportunity for hedge funds or private credit investors to scoop up debt at huge discounts.

Also, the huge maturity wall in 2025 and 2026 presents private credit investors with an opportunity to refinance fixed-rate bonds with floating-rate loans. Floating rates are a double-edged sword. With a floating rate instrument your cost of debt may not only rise in the future, but it can also FALL as rates are cut! Rates are expected to be cut starting in 2H2024 which presents a perfect opportunity for fixed-rate bonds to be swapped for floating-rate loans. Why the fuck would you lock in a 10-15% cost of debt in 2025 by financing with bonds?

If you’re confused about bonds vs. loans, don’t worry. Check below for our learning point of the week discussing the differences of these financial products.

During an interview, have a view on private credit and where opportunity and danger presents itself within the fastest growing asset class in finance.

• Governed by: an indenture. This is a legal document outlining all of the terms of the bond (pricing, seniority, protection, maturity, etc)

• Amendability: indentures are “static” with little room to amend the terms because of the large number of investors required to vote on proposed amendments

• Draw: when bonds are issued, a company receives a lump sum matching the total $ invested by lenders

• Pricing: typically fixed-rate. Borrowers pay a predetermined rate every period (month, quarter, semi-annual, or year). This rate is often greater than the rate charged on a comparable loan

• Maturity: typically longer than loans, but range from a few months to over 30 years

• Seniority: typically more junior to loans

  • fewer covenants within indentures

• Recoverability: recovery rates during an event of default or bankruptcy yielding ~40 cents on the dollar

• Investors: hedge funds, banks, insurance companies, other large institutions

• Liquidity: fairly liquid since bonds are issued in broadly syndicated deals

Leveraged Loans:

• Governed by: a credit agreement. This is similar to an indenture and outlines all of the terms (these are full of legal jargon and fucking suck to read through)

• Amendability: highly amendable. Fewer lenders = fewer votes required to amend the terms

• Draw: dependent on the type of loan. Revolvers (essentially corporate credit cards) can be drawn based on the borrower’s discretion. Term loans are provided as a lump sum

• Pricing: typically floating-rate. Priced on a base rate (SOFR) + a spread (500-800bps today) dependent on the creditworthiness of the borrower and competition amongst lenders

• Maturity: typically shorter than bonds. Anywhere from 3-7 years

• Seniority: typically more senior to bonds. Leveraged loans are often collateralized by the company’s assets to serve as protection in an event of default

  • stricter covenants than bonds with a much greater degree of monitoring by the lender

• Recoverability: average recovery rates yielding ~60 cents on the dollar

• Investors: hedge funds, banks, and private credit funds

• Liquidity: illiquid because loans are usually bilateral contracts between a lender or small group of lenders and the borrower

Bonds and loans are super important financial instruments with companies issuing either product dependent on their specific needs. They are primarily used to finance projects and allow the company to raise capital without diluting ownership.

Going Forward:

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“The Pulse” #24