What is a leveraged buyout?
A leveraged buyout, or LBO, is the acquisition of a company funded mostly with debt. The buyer only contributes a small amount of money and borrows the rest. To get the loan, they can put up the assets of the company they want to buy as collateral.
Where have you heard about leveraged buyouts?
Public opinion is divided on LBOs. Many regard them as ruthless, and the 1980s saw several acquired companies being made bankrupt. Others see LBOs as a way of streamlining corporate structures. A well-known example of an LBO was Blackstone Group’s $26 billion (£21bn) buyout of Hilton Hotels in 2007.
What you need to know about leveraged buyouts.
This type of deal is often carried out by private equity firms that want to purchase a public company to turn it into a privately-held enterprise. It may be a friendly or hostile deal.
The function of leveraged buyouts is to allow companies to make large acquisitions without having to put up a lot of capital. In fact, the ratio can be as much as 90% debt to 10% equity.
If you have a corporate bond, and the company that issued the bond becomes the target of a leveraged buyout, your money could be at risk.