Overview of the Leveraged Finance Business

As the name suggests, leveraged finance business is financing risk-laden entities, businesses, or individuals.

It refers to the accumulation of debt capital for the purpose of:

  • LBOs: Leveraged buyouts or LBOs are for acquiring another business by using debt capital to meet the cost requirements. Financial sponsors may use the acquired business and the company’s assets as collateral.
  • M&A: The role of leveraged finance investment banking in mergers and acquisitions is for acquiring entities to pay for the purchase.
  • Recapitalization: It involves a restructuring of the debt landscape or borrowing to repay the dividends.
    Old Debt Refinancing: A way of replacing debt with a new one with different terms and conditions.

The current state of the leveraged finance business

The outstanding debt during the Covid-19 period stood at nearly USD 2 trillion, which was relatively better than the 2008 crisis. Furthermore, Covid-19 impacted multiple industries bringing businesses to examine the liquidity availability.

Even though the covenant calculations are most steered on a deal-to-deal basis, the impact on some industries has been visible. For instance, the disruption in some sectors has been due to an affected supply chain. On the other hand, a few industries have received a direct loss in revenue.

Companies would have former financial arrangements to stay afloat in the time of a crisis like covid-19. But it is best to check how the Covid-19 impacts the agreements or covenants. Hence, private equity sponsors have to check if the borrower’s or entity’s flexibility for reacting to the pandemic’s adverse effects will pave the road for leveraged finance investment banking.

Role of investment banks in Leveraged finance business

In layman’s terms, an investment bank’s role is to connect the lender and the borrower seeking to issue a loan via leverage finance products. Leveraged finance investment banking helps tackle three areas: the arrangement or deal origination, execution, and syndication.

The deal origination part stems from assessing the market for target companies based on debt capacity metrics. The investment bank pitches the opportunity to potential investors or clients and triggers the process for execution. Once the execution is finalized, syndication can complete the transaction.

Benefits of syndication

Syndication works as a tool for spreading the debt, enabling the borrower to negotiate the terms and conditions with the lead arranger or investment bank. The lead arranger conveys the opportunity to multiple investors and allows the borrower to access various investors. The practice helps minimize the risk, especially in leveraged finance investment banking, where the threat is higher.

Final say – Leveraged finance business trends

After a complete shutdown in March last year the financial markets landscape saw an unprecedented transformation in operations, capital, debt instruments, and more. It was driven mainly by the Coronavirus pandemic, including geopolitical events like US elections.

Let’s take a look at few trends that may envelop the leveraged finance business:

  • Shrinking of TLB (Term Loan Borrowing)
  • A stable nature of leverage business and high-yield bonds
  • Customized funding instruments like equity-linked loans
  • Alternatives for capital raising via direct lending solutions

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