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Summary (30 words): Leveraged finance continues growing in popularity with its ability to bring speculative-grade companies out of financial turmoil. It achieves this by raising debt capital through loan syndication and bond offerings.

Leveraged finance investment banking (LevFin) refers to financing speculative-grade companies that are highly levered, therefore having riskier credit profiles. The LevFin group within an investment bank helps corporations and private equity firms raise debt capital through loan syndication. They also underwrite bond offerings, allowing the following uses for the raised funds:

  • Leveraged Buyouts (LBOs): Financial sponsors raise debt to fund a leveraged buyout.
  • Recapitalisations: Borrowing to buy back shares or for dividend recaps (paying dividends).
  • Capital Expenditures: Raising debt to meet a large expense like opening a new factory or developing a new asset.
  • Mergers and Acquisitions (M&A): When acquisitions require a large debt, LevFin steps in.
  • Refinancing Old Debts: Companies often borrow to pay for the old debt, incurring a new debt in the process.

Therefore, leveraged finance investment banking offers financial solutions to corporations looking to expand business despite high credit risk.

LevFin AKA Speculative-Grade Debt

Speculative-grade companies are corporations with credit ratings below BBB and Baa. These companies require higher debt to cope with their finances. More leverage increases the risk of defaulting on the loan and bankruptcy.

Therefore, LevFin providers apply high interest rates with stringent security mechanisms for speculative-grade borrowers. The following are some details about leveraged loans and speculative-grade bonds provided by institutional investors in leveraged finance investment banking.

Leveraged Loans (Bank or Senior Debt)

Leveraged loans are term loans representing senior tranches in the company’s capital structure. Senior tranches have a higher default risk, therefore, requiring collateral when raising debt. This security raises the total debt without drastically increasing interest rates.

The different kinds of leverage loans include:

  • Covenant-lite loans
  • Second lien leveraged loans
  • Asset-based loans (ABL)
  • Cash flow revolvers

Leveraged loans include principal amortisation (pay-downs), security statuses (1st or 2nd lien), floating rates, the term, covenants, private investments, and prepayment facilities.

Speculative-Grade Bonds

The other wing of leveraged finance investment banking involves high-yield bonds. These bonds are rated below BBB and enable borrowers to increase leverage to unprecedented levels. Leveraged loans cannot support these levels, allowing high-yield bonds or “junk” to represent the junior tiers in the capital structure.

Speculative-grade bonds include semi-annual interest payments, terms, principal amortisation (bullet payments), unsecured options, and public debt. They may be senior or subordinated to other bonds within the capital structure depending on intercreditor agreements. However, a senior bond is still junior to secured debt.

Mezzanine Debt

The last type is mezzanine debt, which involves the financing between senior secured debt and equity. 2nd lien debt, senior and subordinated bonds come into this category. Today, it is used more to describe securities with both debt and equity features. It includes convertible debt, bonds with warrants, convertible preferred stock, and preferred stock with warrants.

Through these methods, leveraged finance investment banking can significantly aid a company needing debt. They come in to help companies meet large expenses with various effective models and debt options. These abilities to enable growth have helped speculative-grade companies meet their goals efficiently with the right funding.