"The Pulse" -- #114 / Loan-Only Capital Structures

Recruiting Timeline:

Banking:

Where We’re At:

• SA 2027: No new updates here—won’t see anything here until September

• SA 2026: Marathon Capital, Stephens, Dickinson Williams & Company, and Quantum Financial Advisors all opened apps this week. 111 firms are recruiting for SA 2026

• FT 2026: DB. Moelis, William Blair, Stephens and more opened their apps. 26 firms are actively recruiting for FT 2026  

• If you need some interview support or just need a place to vent, check out our Coaching Program: Coaching for banking, consulting, and buyside recruiting | The Pulse. 95%+ of those coached for the summer 2025 recruiting season received offers!

New SA 2026 Applications:

• Marathon Capital: Chicago-based boutique (SA 2026)

• Stephens: Middle market IB (SA 2026)

• Dickinson Williams & Company: LMM IB (SA 2026)

• Quantum Financial Advisors: Tech IB (SA 2026)

New FT 2026 Applications:

• Stephens: Middle market IB (FT 2026)

• Dickinson Williams & Company: LMM IB (FT 2026)

• William Blair: Middle market banking (FT 2026)

• Deutsche Bank: Full-service, bulge bracket bank (FT 2026)

• Moelis: Elite boutique, hiring tech M&A in SF (FT 2026)

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Consulting:

Where We’re At:

• Two firms released applications this week. We are in the early days of the process (though MBB apps have been out for a while now).

SA 2026 released apps:

• Renaissance Strategic Advisors - Summer Consulting Analyst (SA 2026)

• Sage Analysis Group - Management Consultant Analyst (SA 2026)

FT 2026 released apps:

• Renaissance Strategic Advisors - Consulting Analyst (SA 2026)

Buyside:

Where We’re At:

• SA 2026: I-Squared Capital, PeakSpan, Verition Fund Management and more opened app this week. Currently, 120 buyside firms are recruiting for SA 2026 seats 

New SA 2026 released apps:

• I-Squared Capital: Infrastructure PE (SA 2026)

• PeakSpan Capital: Growth equity (SA 2026)

• Verition Fund Management: Multi-strat HF (SA 2026)

• Affinius: Tech RE investing (SA 2026)

• Healthpeak Properties: REPE (SA 2026)

• Indiana Public Retirement System: Investment intern (SA 2026)

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Market Update: 

Loan-Only Capital Structures

A recent development in the capital markets is the prominence of the loan-only capital structure.

Loans and bonds are fundamentally different. Loans are floating rate debt instruments and are priced at a spread to SOFR repayable over a fixed period. On the other hand, bonds are fixed rate debt instruments also repayable over a fixed period.

Further detail about loans vs. bonds can be found in the ‘Learning Point’ section below.

Why are loan-only capital structures an issue?

As floating-rate instruments, the interest rates charged on loans are directly tied to SOFR. As seen in the graph above, during 2022 rates were hiked by 500bps in ~8 months. CFOs, treasurers, etc cannot rightfully prepare a budget with an expected cost increase of that magnitude. For smaller companies, this can lead to financial stress.

Why not hedge? Hedging is expensive and requires ‘dead cash’—cash that is not being put to work to reinvest in the business.

The longstanding capital markets dilemma is that the largest, most credit worthy companies are the only ones who a). are capable of withstanding an increase in spread, b). can operationally restructure to reduce costs, c). have the size to effectively hedge rate swings, and d). have access to the bond markets to attain fixed rate debt.

Your typical middle-market widget manufacturer is more or less stuck eating the enhanced cost of capital. Some of these companies cannot bear the heightened costs and end up defaulting.

As smaller issuers without access to the bond markets, they rely on loan issuances to support their capital structures because they often don’t have access to other forms of corporate debt.

Small issuers, especially private ones, have a difficult time raising bond financing because the bond investors cannot justify the risk of the underwrite. Fixed rate instruments with inherent pricing risk based on rate movements or company performance can be very volatile. This volatility causes a need for liquidity to trade in and out of positions— a feature not present for private markets issuers. Therefore, it is difficult to underwrite affordable bond financing for smaller issuers in the public markets and nearly impossible to do so in the private markets.

Despite these headwinds, spreads are still historically low. Investors are content with the strong, high-single digit / low, double-digit public market returns and the influx of capital into the credit markets has led to very competitive bidding on new issuances. Also, the public markets has a stronger concentration of more mature, cash-flow generating enterprises today than it did 20 years ago (notions reflected here: “The Pulse” —#110).

With rates staying higher for longer, we are going to see greater dispersion between public and private market credit quality. Any public markets deterioration is likely to be moderate due to the organic strength of the issuers and the greater access to capital structure differentiation. However, in the private markets with younger companies and primarily loan-only capital structures, credit quality between the ‘winners’ and ‘losers’ is bound to widen with time.

Disclosure: Nothing written here is financial advice or should be used for investment decisions.

Bonds vs. Loans. What are the differences?

First, I’ll cover the similarities. Bonds and loans are both financial instruments used to finance projects by companies. A company can raise capital from an institution (bank, PC firm, or specialty finance company) with either a bond or loan instead of issuing more shares and diluting equity. Both bonds and loans carry an interest rate which serves as profit for the lender and an expense for the borrower.

Corporate Bonds (High-Yield Bonds):

• 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 (400-800bps 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: mostly 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” #114