leveraged finance

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Title - leveraged finance

LEVERAGED FINANCE

The assets of a business must be financed somehow , and when a business is growing , the additional assets must be financed by additional capital

Leverage refers to the way in which an organization is financed by a combination of equity capital and debt . A highly geared or levered company is one that is financed with more of debt relative to equity The level of leverage has a considerable effect on the earnings attributable to the ordinary shareholders . A highly levered company must

generate enough profits to cover its interest charges before anything is available for equity . On the other hand , if borrowed funds are invested in projects which provide returns in excess of the cost of debt then the ordinary shareholders will benefit (this is called favorable effect of leverage

Leveraged Finance Defined

Leveraged finance is funding a company or business unit with more debt than would be considered normal for that company or industry More-than-normal debt implies that the funding is riskier , and therefore more costly , than normal borrowing . As a result , levered finance is commonly employed to achieve a specific , often temporary , objective : to make an acquisition , to effect a buy-out , to repurchase shares or fund a one-time dividend , or to invest in a self-sustaining cash-generating asset

Although different banks mean different things when they talk leveraged finance , it generally includes two main products - leveraged loans and high-yield bonds . Leveraged loans , which are often defined as credits priced 125 basis points or more over the London inter-bank offered rate are essentially loans with a high rate of interest to reflect a higher risk posed by the borrower . High-yield or junk bonds are those that are rated below "investment grade " i .e . less than triple-B

A key instrument is much leveraged finance , particularly in leveraged buy-outs , is mezzanine or "in between " debt . Mezzanine debt has long been used by mid-cap companies in Europe and the US as a funding alternative to high yield bonds or bank debt . The product ranks between senior bank debt and equity in a company 's capital structure , and mezzanine investors take higher risks than bond buyers but are rewarded with equity-like returns averaging between 15 and 20 per cent

Companies that are too small to tap the bond market have been the traditional users of mezzanine debt , but it is increasingly being used as part of the financing package for larger leveraged acquisition deals Although mezzanine has been more expensive for companies to use than junk bonds , the low coupons coupled with high returns often makes some sort of mezzanine or hybrid debt an essential buffer between senior lenders and the equity investors

Leveraged Acquisition Finance

Leveraged Acquisition Finance is the provision of bank loans and the issue of high yield bonds to fund acquisitions of companies or parts of companies by an existing internal management team (a management buy-out , an external management team (a management buy-in ) or a third party (an acquisition

The leverage of a transaction...