What is leveraged finance?
Most companies use debt to finance their operations. Funding a company with above normal levels of debt is called leveraged finance. As the more-than-normal-debt is usually higher risk and more costly than standard borrowing, it's usually raised for a specific or temporary aim like acquiring another company or repurchasing shares.
Where have you heard about leveraged finance?
The risks associated with leveraged finance were made abundantly clear during the economic downturn and subsequent financial crisis of 2008 when it was revealed that banks that had been involved in risky lending practices had also become highly leveraged themselves and would collapse under the weight of their debt without bailouts from governments.
What you need to know about leveraged finance.
Most of the larger investment banks have a division dedicated to leveraged finance. They market debt offerings to help companies raise the capital to fund acquisitions, recapitalisation and asset purchases, that could yield potentially high returns.
Leveraged finance can be raised through leveraged loans, with higher interest rates to reflect the higher risk, high-yield bonds and mezzanine debt financing.
Using leveraged finance means that the company is able to invest or operate without increasing its equity. On the other hand, the risks and potential for loss can be very high.
Find out more about leveraged finance.
Find out how leveraged finance is used by companies to acquire other businesses through leveraged buyouts.