Junk Bonds in LBOs

There's potential risk behind the transaction because your uses of funds aren't necessarily based around your core competencies. Say you went to market to issue some debt for working capital, for the most part you're going to get reasonable rates because the debt is backed by the business function your company thrives on to exist and the financing is short term. No company "thrives" of an acquisition, it is inorganic in a sense thus investors require a much higher yield for this type of debt. You also have to realize that you're issuing long term debt for acquisitions, and investors always require higher yields because of the uncertainty caused by inflation, interest rate risk, and market risk. You also have to understand that you'd have to issue a corporate debenture for this type of transaction. Debentures are unsecured, and companies default on them all the time hence the reason why they're high yield securities. Hope this gives you some insight.