Ultimate Guide To Debt And Leverage Finance

Value of M&A deals has been on an uptrend for the last 25 years. Global M&A deals worth 2.8 trillion USD have been executed in 2020 alone. Since these deals often require a substantial amount of capital, debt and leveraged finance is often employed to finance such deals.

leveraged finance investment banking

Leveraged finance investment banking often includes taking upon a large amount of debt to fund various acquisitions. One of the primary means for such a purchase is leveraged buyouts either by the company’s management or another enterprise using substantial debts. Leveraged finance investment banking remains one of the most used methods to raise finance to fund an acquisition. However, debt and leverage are a double-edged sword, and any company indulging in the same must be aware of a few essential pointers.

What should a company consider before raising leverage?

A company taking upon leverage to fund any acquisition should be careful and aware of such investment’s cash flow possibility. Generally, companies take upon debt wherein repayment is met from the cash flows of the new acquisition. The company must ascertain whether a sufficient amount of cash flow will be generated to meet the debt obligations. Any default in such debt will make it difficult for the company to refinance or obtain additional debt due to high debt levels on their books already.

Apart from meeting the debt repayments regularly, the company must also be careful about meeting the covenants upon their debt on a regular and timely basis. Often various conditions are attached to debt, including the restriction on taking upon additional debt, maintaining specific rations, liquidity, etc. A company must maintain and meet such covenants. Any default on them may lead to a penalty or rise in the rate of interest payable. Leveraged finance investment banking often has a higher yield, and a further rise in the interest rate may hurt the company.

What are the reasons for raising leveraged finance?

Leveraged finance or debt is generally below investment grade debt and carries a higher amount of yield. Apart from M&A, leveraged finance might also be needed by asset-heavy companies that require substantial capital investment in the initial stages of their business. Companies may also prefer leveraged finance for refinancing their existing debt or consolidating multiple debts.

Conclusion

Leveraged finance investment banking is a risky move for a company due to the high amount of yields that the company might have to pay. It often requires a higher and regular amount of cash flow for the company. Investment banking companies can offer help to the companies in need of such loans by either consolidating financial institutions willing to provide such loans or to promote the loans to retail consumers to raise the required finance.

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