Top Bankers Behind the Exploding Leveraged Finance Market, From

• Raising below-investment-grade debt for deals has morphed into a $3 trillion business.
• The boom has attracted upstarts, like KKR, to compete for business alonside stalwarts like Goldman Sachs.
• Insider presents 8 top leveraged finance bankers, from the disrupters to the entrenched.

Leveraged finance, an area of banking typically used by private-equity firms to raise debt for acquisitions or recapitalizations, is in the midst of a “golden age,” according to Jeff Cohen, the head of leveraged and acquisition finance at Credit Suisse.

Cashed-up private-equity firms from KKR to Blackstone are making a spate of acquisitions amid attractive conditions for borrowers — thanks to rock-bottom interest rates. Investors starved of meaningful yield in the fixed-income markets, meanwhile, are more willing to buy riskier, leveraged loans and high-yield bonds in their search for returns.

In light of this backdrop, high-yield bond and leveraged loan markets have reached a collective $3 trillion, according to S&P Global Market Intelligence.

That’s triple what bankers estimate the two asset classes were worth in the early 2000s, before the housing crisis. And the market’s growth is only poised to swell further as dealmaking continues to ramp up.

This year through September 27, $1 trillion worth of transactions have taken place in the leveraged-loan market, up from $840 billion for the whole of 2020, and $993 billion a year earlier, according to Refinitiv. High-yield bond volumes are currently $377 billion this year, on pace to match last year’s $406 billion, and well ahead of the $263 billion raised in 2019.

What they’re charging

Fees vary depending on the type of transaction, but sources said banks are on track to pocket a minimum of $7.5 billion in leveraged-finance transaction costs this year.

That’s roughly inline with the $8.5 billion in fees banks pulled in last as demand for low-cost debt rose, according to Dealogic. In 2019, banks raked in $5.3 billion in leveraged-finance fees.

The standard fee rate for a dollar-denominated LBO is usually 2.25% for a loan and about 3% to 3.5% for a bridge loan and subsequent bond sale to investors, bankers said. Riskier loans that sit lower on a company’s capital structure, known as second-lien loans, earn banks between 2.5% to 2.75% in fees. Investors in second-lien loans are repaid after first-lien debt holders, and are at higher risk of not being repaid if a company defaults on its debt.

Sometimes, fees can be squeezed by 0.25% to 0.5% if direct lenders offer a borrower a competitive rate. And large transactions worth billions of dollars can be done for less if several banks are involved.

Fees dip for repeat business, like when a borrower wants to refinance existing debt with their relationship banks. Loans like this typically produce 0.75% to 1.5% in fees, sources…