Leveraged acquisition finance

The provision of bank loans and the issue of high yield bonds to fund acquisitions 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 refers to the ratio of debt capital (bank loans and bonds) to equity capital (money invested in the shares of the target company). In a leveraged financing, this ratio is unusually high. As a result, the level of debt service (payment of interest and repayment of principal) absorbs a very large part of the cash flow produced by the business. Consequently, the risk of the company not being able to service the debt is higher and thus the position of the lenders is riskier than in a conventional acquisition. The interest rate on the debt will be high.