LBO structure question about subordinated / high-yield debt

First you must understand what the differences are between high-yield debt and "bank debt". High-yield debt tends to have a higher interest rate than bank debt (hence the name high yield). Further, high-yield debt interest rates are typically fixed whereas bank debt has a floating rate (which tends to change with the LIBOR rate). High-yield debt has incurrence covenants while bank debt has maintenance covenants. The main difference between the two is that incurrence covenants prevents you from “doing something” (such as buying a factory or selling a part of a business), whereas maintenance covenants requires you to maintain certain financial metrics (debt to EBITDA or interest coverage ratio minimum).

Now to the fun part, why would a private equity firm choose high-yield debt?

If the private equity firm intends to refinance the company at some point or they do not believe their returns are too sensitive to interest payments, they might use high-yield debt. They might also prefer high-yield debt if they do not see it necessary to plan a major acquisition or major asset sale.

Why would a private equity firm choose to use bank debt?

If the private equity firm is concerned about initial cash flows from the investment company they may be concerned about meeting interest payments and thus want the lower-cost option of bank debt. They may also not want to be restricted by incurrence covenants and thus can plan major acquisitions or capital expenditures.