Investment banking (v) - asking questions in an effective way

My mentor at work recently taught me a great lesson about asking question. Garbage-in-garbage-out: when questions are asked poorly, you don't get the information you want; if asked appropriately, however, valuable information can be extracted. 

Here are a few things I've learnt about asking "good" questions.

Be precise: be precise about the specific information you are asking for. 

Bad question: "please provide historical financials of the borrower" 
Good question: "please provide past 3 years consolidated financials for abc company". 

Demonstrate your knowledge: when asking questions, it is also important to demonstrate that you are not completely clueless about the situation. 

Bad question: "please describe the company's growth strategy"
Good question: "please describe the growth strategy of company's financial business (include divestment of trading firm), industry business, and consumer business (include potential joint venture with xyz company)

This way, you are also asking about the company's growth strategy - but you demonstrate that you are aware of the company's situation, you just want to know more precise details.

Ask for information iso presenting a view: asking questions is an opportunity to get valuable information, not to present a view or to state an opinion. 

Bad question: "the value of the company's land seems small; what other assets can be pledged to the bank as security?" 
Good question: "please provide the market value of abc company's land as of today. What is the expected value of abc company's land in development? Is there any data from past transaction to support such expected valuation?" 

This way, you avoid potential argument about whether the value of the land is big or small; instead, you are asking for precise / useful information about the market value and expected future value of the company's assets. 

Investment banking (iv) - debt capacity analysis

"Debt capacity" here refers to the maximum amount of debt that a company can support. 

Evaluating debt capacity is an important task done by investment bankers, because it helps to optimize a company's capital structure, giving the company an appropriate amount of debt funding to conduct / expand its business

Determining the debt capacity of a company is not a rocket science; it involves a lot of subjective thinking. However, there are several metrics that serve as guides for investment bankers.   

Leverage ratios 

Leverage ratio tells us a company's debt is how many times of its cashflow. There are two types of leverage ratios:

1. Gross leverage: (total debt / LTM EBITDA). Gross leverages evaluates the size of a company debt relative to its last-twevle-months EBITDA (note: it is a prevalent practice among bankers to use LTM EBITDA as a proxy for cashflow). 

For example, if a company has a gross leverage ratio of 4.0x; the implication for bankers is that it will take the company approximately 4 years time pay down its debt using cashflow generated by the company. 

2. Net leverage: (total debt - cash) / LTM EBITDA. Net leverage is slightly different from gross leverage by focusing on a company's net debt (ie. a company's total debt net of cash.)

Illustrative example: company ABC

• LTM EBITDA = USD 50mn
• Total debt = USD 75mn
• Cash = USD 25mn 

Gross leverage = 75 / 50 = 1.50x

Net leverage = (75 - 25) / 50 = 1.00x

Now, if I, an investment banker, comes in and says that we are comfortable with leveraging a company up to 3.00x gross leverage. That means we think the company can support total debt of USD 150mn (USD 50mn *3). Hence, we will lend an additional USD 75mn (USD 150mn - USD 75mn) to leverage the company.

That's how leverage ratios works in a nutshell.

For any questions / feedback, you are most welcome to post a comment. I hope this blog will be a platform for us to exchange ideas and learn from each other.  

Recruitment (i) - my story and an overview

Having gone through various banking recruiting process myself, I'd like to share some tips for the recruitment process (especially for junior professionals). 

In this very first post, I will discuss what a banking career is like for recent graduates, why I started my career in banking, and what you should do.   

Choosing your first job ......
Leaving the academic world means young graduates have to find a job. Needless to say, universities around the world offers a lot of opportunities (eg. recruitment talks, internships) to help students find their first jobs. 

I don't need to elaborate of these opportunities here; what I want to point out is that banking / finance is not the only option for business students. Other very good options include: 

• IT (sales / business development roles in eg. Google, Apple, Microsoft.),
• Economist (researchers / economists in eg. IMF, World Bank.)
• PhDs (in various subjects eg. econometrics, developmental economics.)
• Consulting (eg. Mckinsey, Bain, BCG.)

But if you decide to pursue opportunities in finance / banking after considering all these option, my blog is here to help. In a series of post, I will discuss the recruitment process, interviewing tips, different roles within banking / finance, etc.    

Why I have chose banking
For me, I have chosen banking because:

1. Good foundation for business career: businesses are inseparable from finance. Working in investment banking allows me to gain valuable knowledge of how companies finance their operations, acquisitions, and strategic expansion. 

2. Training: banks typically put a lot of resources to train up its junior bankers (eg. academic programs, sponsorships of CFA and other licensing exams). Don't forget, I receives all these trainings while getting paid! 

3. Network: another advantage of being a junior banker is that I get a lot of opportunities to cooperate & connect with other professionals (other bankers, lawyers, consultants, etc.).      

4. $: I don't get paid a huge sum for my work, but I do admit that pay is typically better in banking compared to a lot of other industries.  

What you should do
If you decide banking / finance is the right opportunity for you, then doing the following will help you in achieving your goals:

1. Have a good resume: making my resume took me way more time than I initially expected. But what I realize is that having a good resume saves me a lot of time by getting me lots of interviewing opportunities. My blog will discuss what a good resume is like.

2. Network: talk to teachers, friends, alumni; ask for opportunities and find out more about what a banking job is like.    

3. Brush up your finance knowledge: this include studying again the materials from your "introduction to corporate finance" class (at least knowing how to calculate free cash flow, what is CAPM model, etc, what are the different method of valuing a company, etc.)

4. Interview practice: your first interview may not land you a job right away, but practice makes perfect. 

I will elaborate on these points and other tips in the posts to follow. 

Questions

If you have any comments or questions, please drop me a comment (or email me at investingneverdie@gmail.com). Happy to discuss your particular situation and whether CFA might be a good option for you.