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Debt private placements

Careers At A Glance - Debt Private Placements

By Fintros — November 2017

Fintros: You worked in Debt Private Placements. Can you explain to our readers a bit more about your role and what it consists of?

Anonymous Associate: Sure. Our department handles both origination and syndication. You can think of it as a hybrid role within banking. Origination is the task of structuring the deal, but before that can take place the first task concerns approaching the client and winning the business. Once the client has signed the engagement letter, the next step is structuring the legal documentation and the business features of the product. While this might appear redundant since we are selling the same debt product each time, each deal is structured differently by virtue of negative and positive covenants - to name one consideration - which are items that restrict the way the money is used. Additionally, it can be structured differently from a syndication perspective (who the deal can be sold to), and that is a matter of jurisdiction; taking into account where the money is held, and which legal entity is operating within these corporations. That is a brief description of the origination process.

Syndication, on the other hand, is actually getting out there and selling the transaction. Our transactions are sold strictly to what’s known as 4(a)(2) investors, so our product is known as 4(a)(2) private placements (debt), and that is a product as defined by the 1933 Securities Act.

Our investors are, by law, all qualified institutional investors (QIBs).

We do not sell to retail investors. Syndication is the process of getting on the phone with the QIB’s and talking through the credit with them, which is the profile of the company. Credit profiles are typically rated by one of the three major ratings agencies: Moody’s, S&P, and Fitch. The benefit of a 4(a)(2) private placement is that it is a private offering, so a lot of our issuers are allowed to be unrated and don’t require an official credit score. On the flip side, this does make our job a bit more difficult. This is because we have to position the credit for our investors and use other companies as benchmarks and discuss with them the strengths and risks of the investment and then help frame the mitigation of those risks when we speak with them.

Fintros: Within this binary operation, at what time are you under the most pressure from the investors?

Anonymous Associate: The toughest days on the job are those leading up to bid day, which is also the day that takes place before pricing. A deal takes about 2 months; you spend the first month and a half preparing the offering materials (origination), and building the prospectus, which is a marketing material you give to the investors to let them know more about the company, the risks, the strengths, the geographies; all the details you could get if you downloaded a prospectus from the SEC on a public company. It also outlines the competitive landscape.

Fintros: Can you briefly give our readers a glimpse at your tasks throughout the lifecycle of a deal?

Anonymous Associate: Of course, the first six weeks (on average) are spent preparing those materials and gathering any legal opinions necessary. The next two weeks are spent ‘in market’, or ‘live’. This is when we officially launch the transaction to a number of QIBs. They use a secure data site to receive all of the materials for their review, and at the end of those two weeks we take bids. We probably spend about ten days allowing them to review the materials and ask any questions they might have. Then we spend the last 4-5 days preparing a bid book. We give investors one day with a deadline where if they are interested they have to submit a bid by the EOD. A bid is simply ‘I want x number of bonds or dollars at this price’. We dictate the price, and the price is communicated in the form of a spread in basis points over government treasury bonds. So I’d say the craziest day in this specific group is bid day, or the day preceding it. We are consistently on the phones constantly answering any questions and credit concerns from the investors.

Following that, we are taking live orders, putting them in a spreadsheet, cleaning up that spreadsheet, and then delivering it to the client for their review. Once the client sees what the offer looks like and is satisfied with the amount that is being offered at a certain price (interest rate), we will move to pricing day.

However, it is important to note that client satisfaction is not a forgone conclusion. When we launch the deal we give a number (cover amount) that we are looking for – let’s say 100 million - and if we don’t reach that amount it is considered a failed deal. With that being said, 99 percent of the time the amount raised is larger than the cover we offer when we launch the package. This is called having oversubscription to your deal, which we typically have. If we receive 500 million in orders, but we’re only issuing 200 million of bonds, we obviously have to scale everyone’s bids back, and once we’ve done that we go through allocation. This is where the investors have to agree to what they have been allocated. Sometimes they are not interested with the amount, in which case we simply move their allocated bonds to another investor.

Fintros: What happens next?

Anonymous Associate: Once the company has signed off on the amount that has been raised, and the price at which it has been raised at, and the investors have been notified of and agreed to their allocations, it is time for pricing day. This is not a full day event, rather it is often a 5-10-minute call where we have someone from our public side syndication desk get on the phone and he does what is called spotting, where he spots the treasury rates. Using a Bloomberg terminal this individual will say where the current government treasury is, and based on our agreed upon spread over that treasury, he/she sets the coupon or the interest rate for the new bonds for the company. On the phone call will be the company and all of the investors who have participated in bidding, and who have received allocations on the transaction. Once the price is set the deal is considered virtually closed, there will then be a two-week process where the lawyers have to square away certain legal documents and have them signed by the appropriate investors and the company. After that business has been taken care of, the deal is officially closed, and the company receives the money that has been raised and they begin paying interest on those funds.

For all intents and purposes, the life of the investment banker in my position is only concerned with getting to the pricing date, even though there are a few weeks after that before the deal officially closes. To finally answer your question, the busiest time period is that leading up to bid, because in those days you are actively looking to close out certain investment leads, and that involves coordinating with both the investor and sometimes the company to provide the former with specific answers to their questions. There is only so much information that we hold as the investment banker, and we do our level best to reduce the amount of time that the company has to spend answering to investors directly; we have our own prospectus and we do our own due diligence of the company. So, leading up to bid, my colleagues and I are on the phone anywhere from 5-7 hours of the day with investors answering questions. Common queries surround the company’s competition, revenue by product, risk and plans to mitigate, outstanding litigation, customer concentration outlook, industry risks, news, and relevant legislation. As you can imagine these questions run the gambit, from Ebola’s impact on the food industry, to the impact of California’s recent legislation on clean energy on a coal company.

Fintros: Great. Could you run me through your daily expectations?

Anonymous Associate: The average day would be a mix of handling live deal deliverables. You are not necessarily always on a live deal, but your priorities as a Private Placement Associate would be to A) deal with any deliverables that need to be handled for any live deals; B) draft and complete any pitch materials for prospective business. Typically, your MD and Director will be travelling a fair amount to build the pipeline for the group, and you are expected to prepare and provide them with the materials that they use in their presentations. So you’ll spend a good chunk of your day when you are not on a live deal helping your bosses prepare for new deals. C) The rest of the work is internal maintenance stuff. Making sure internal marketing updates are refreshed, making sure we have updated statistics on our competitors and deals that are taking place in the market that are being executed by competing banks. That’s essentially it. Those are the three main buckets, prioritized in that order.

For an Associate in IB, Debt Private Placements, you’re arriving anywhere between 8-8:30, and it depends on what you have that day, but everyone is generally catching up on emails for the first hour or so. From 9:30 – 12 you are likely working on your most immediate deliverables, whether that is for something that is in the market or for a pitch for your boss. I’ll usually take 30 minutes for lunch and eat at my desk where I can scan the news sites for any relevant reports. After lunch you are handling work in the aforementioned priority order. Your end hour depends on the business of the group. You can leave anywhere from 7:30 – 3 in the morning depending on how busy you are. If you are inclined to do so you can spend the entire night in the office. It all depends on how capable you are of managing your time effectively.

Lastly, I should note that May/June, Oct/Nov, and Feb/March are often the busiest times of the year as CFO’s and Treasurers are looking to finish their financing needs at these times. Deal volume is cyclical, and so you know you are going to be grinding during these time periods.

Fintros: Let’s close with a quick tip for IB analysts and our younger candidates who are looking to work in IB.

Anonymous Associate: My greatest piece of advice would be to form a strong habit of being technically sound. Beyond that, in your early days in IB you will be given enough slack to learn the tech, lingo, and general processes, but you are not going to be able survive in this industry if you lack time management skills.

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