Leveraged finance is a technique in finance that involves borrowing funds to buy things, estimating that future profits will be many times more than the cost of borrowing). It is the use of an above-normal amount of debt, as opposed to equity or cash, to finance the purchase of investment assets. Leveraged finance is commonly used as a way to boost an entitys equity base. Here are some key points about leveraged finance:
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Definition: Leveraged finance is a credit package that funds the acquisition or recapitalization of an entity or part of an entity.
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Use of debt: Leverage refers to the use of debt (borrowed funds) to amplify returns from an investment or project. Investors use leverage to multiply their buying power in the market.
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Leveraged buyouts: Within an investment bank, a division in charge of leveraged finance is responsible for services related to a client’s leveraged buyouts. These services typically include structuring, managing, and advising on debt financing for acquisitions.
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Types of debt: The leveraged finance division would present different types of debt the client firm might raise, such as bank debt, high-yield debt, syndicated loans, etc. .
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Characteristics of leveraged loans: Leveraged loans (also called “bank debt” or “senior debt”) represent senior tranche(s) in a company’s capital structure, with bonds usually making up the junior tranches. Leveraged loans are term loans that are often packaged with a revolving credit facility and are syndicated by an investment bank to commercial banks or institutional investors.
Leveraged finance is a form of debt offered by institutional investors and banks, and the borrowers are speculative-grade companies—private equity firms.
