Leveraged finance (LevFin) is an investment strategy that typically refers to borrowing by sub-investment grade borrowers and their private equity sponsor investors to finance an initial purchase (leveraged buyout or LBO), to add to existing investments (through add-on acquisitions), or for general corporate purposes or, sometimes, dividends. Typically, the borrowed money (i.e., debt) is raised using financial instruments like loans or bonds. Generally speaking, leveraged finance provides money (i.e., capital) to companies with riskier credit profiles (hence, these being sub-investment grade).
Companies and private equity investors using a leveraged finance investment strategy typically avail themselves of one or more of the following asset classes:
Broadly Syndicated Leveraged Loans: These are loans provided to companies with higher debt levels or riskier credit profiles. Leveraged loans typically have floating interest rates and are secured by collateral.
High Yield Bonds: High-yield bonds are debt securities issued by companies with lower credit ratings. They offer higher yields to compensate for the increased risk.
Private Credit: This is borrowed money raised from private firms (financial firms and non-financial firms) (i.e., not a bank loan).
Another common instrument in the leveraged finance market is the Collateralised Loan Obligation (CLOs). CLOs are structured financial products backed by a pool of loans, typically corporate loans with sub-investment grade credit ratings. The loans provide security for the CLO, making it a collateralised instrument. CLOs can be traded on secondary financial markets through exchanges or through private transactions.
ELFA’s Initiative Committees for these asset classes provide education, webinars and market leading resources, including reports, best practice guides and ESG Fact Sheets, which contribute to the knowledge, resilience, efficiency and transparency of the leveraged finance market.
The types of firms that participate in the leveraged finance market are usually sophisticated market players who understand the risk reward economics of leveraged finance. They include investment banks, asset managers, pension funds, private equity firms, hedge funds, and institutional investors.
Examples of leveraged finance transactions (investments) include:
Leveraged Buyouts (LBOs): This is the process where a firm, like a private equity sponsor, acquires a company using mostly borrowed money (borrowed funds) to carry out the transaction. In an LBO, the acquiring firm uses a significant amount of debt (leverage) to finance the acquisition. This may occur, for example, when a company is taken from public ownership to private ownership using a significant amount of debt.
Mergers and Acquisitions (M&As): This refers to the process of acquiring or merging with another company. Where the financing of the transaction involves a significant amount of debt (leverage). the M&A is considered a leveraged finance transaction.
Recapitalisations: This involves a company borrowing money to pay dividends to shareholders (dividend recap) or to buy back shares.
Refinancing debt: The involves a company borrowing money to pay back existing debt, which could include obtaining the borrowed money at a lower price (repricing). It could also involve borrowing money to restructure a company, often achieved through liability management practices.
General corporate purposes: This involves borrowing money to finance the purchase of inventory and/or to expand the business and its operations (capital expenditure).
The leveraged finance market plays a crucial role in the functioning of the economy. It does so by supporting business and company growth and by enabling investment. As companies grow and invest, they create job opportunities, which helps sustain employment growth.
Specific ways that the leveraged finance market contributes to economic growth include:
Company financing: Leveraged finance provide companies with money (capital) for expansion, acquisitions, and refinancing. This capital allows businesses to invest in new projects, recruit staff, and innovate in the business.
Market liquidity: The leveraged finance market enhances market liquidity by allowing investors to buy and sell leveraged finance (debt) securities. This liquidity benefits both issuers and investors.
Wealth creation and diversification of investment: Investing in the leveraged finance market can provide diversification of investment and potentially offers higher returns compared to, for example, investment-grade instruments.
We host regular educational webinars on topics of interest to our members and the wider leveraged finance community.
With the support of with our Partners, we ensure that our members are kept up to date with important market trends and regulatory developments. We also provide training opportunities for junior team members through our Academy.
Our collaboration with other trade associations and educational institutions means that our members can often take advantage of valuable discounts to externally hosted events.
ELFA is pleased to be partnering with Invisso for Private Credit Connect: London on 26th March 2025 in London.
ELFA is pleased to be supporting SuperReturn International on 2-6 June 2025 in Berlin.
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