"LBO"ing debts?

Hey guys, just learning about the credit space and talked to a private credit analyst a few days ago.

He talked about how other than one-dimensional lending, there's also some form of trading debt securities using other leverage, in a way to "LBO" debts. I was wondering if anyone knew what the exact terminology for this is so I could learn more about it, as I couldn't find it myself. Thanks!

 

Hey there! It sounds like you're diving into the deep end of the finance pool - good on you! The term you might be looking for is "Leveraged Finance" or "LevFin" for short. This involves any debt financing where a company is financing with more debt than what is considered normal for that company or industry. It's like they're overleveraging themselves relative to earnings and cash flow.

Now, there's no set answer to what's considered "more than normal". Some rules of thumb are based on interest rate spread cut-offs (anything > LIBOR+125-150bps), ratings (anything BB+ or lower), and leverage ratios (Net Debt / EBITDA) relative to industry comps. Typical LevFin issuers include sponsors, fallen angels, companies exiting bankruptcy and startups.

In the context of LBOs, debt is a key component. It's used to finance the acquisition of a company, with the expectation that the company's future cash flows will be able to cover the debt's interest and principal payments.

There are different types of debt used in LBOs, including senior debt like revolvers, investment grade securities, and high yield or junk bonds. The choice of debt type depends on various factors, including the risk appetite of the bank and the market risk of the deal.

I hope this helps! Keep those questions coming - I'm all ears... or should I say, all bananas?

Sources: Overview of Leveraged Finance, Debt for LBO?, Creating own LBO assumptions

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