Leveraged Loan

Leveraged Loan

The market for leveraged loans made by non-financial corporations in Europe and the US is around five times larger than the markets for high-yield bonds. Due to their comparatively lower interest rates compared with unsecured loans, leveraged loans can be an attractive option for borrowers. However, they also come with more risk, as the lender can seize the asset if the borrower defaults. 

What is a leveraged loan? 

In certain cases, a company’s books of accounts may already show short- or long-term debts and bad credit history. Under these circumstances, they take out extra, very high-interest loans, typically more expensive than other types of loans. These loans are termed “leverage loans.” 

 Leveraged loans are arranged, organised, and managed by at least one investment or commercial bank. These organisations are referred to as arrangers. They may later sell the loan — a procedure known as syndication — to other investors or banks to minimise the risks to lending institutions. 

Understanding leveraged loans 

Specified standards or guidelines do not define a leveraged loan. Some market players use a spread as their foundation. As an illustration, many loans have a variable interest rate based primarily on the London Interbank Offered Rate (LIBOR) with a specified basis or ARM margin.  

Being an average of the rates that international banks charge one another for loans, LIBOR is regarded as a benchmark rate. A loan is regarded as leveraged if the ARM margin exceeds a specific threshold.   

Benefits of leveraged loans 

  • Financial leverage increases the impact of each dollar you invest. Leveraged finance may help you achieve considerably more than you could without adding leverage. 
  • Leveraged financing is best suited for limited periods if your organisation has a specific development aim, such as a management buyout, carrying out an acquisition, share repurchase, or a one-time dividend because of the added expense and hazards of piling on debt. 

Importance of leveraged loans 

Leveraged loans are an important source of financing for companies that may not be able to obtain traditional loans. They are typically used to finance the purchase of assets or to fund other business activities. Leveraged loans can be a useful tool for companies to grow and expand their businesses. 

 Additionally, when repurchasing a part of a company’s shares, leveraged loans help alter the company’s balance sheet. They frequently advocate a certain kind of merger and acquisition agreement called a leveraged buyout (LBO). In an LBO, leveraged loans comprise a certain amount of the funding. 

Example of a leveraged loan 

If a loan has a rating of BB- or below, Leveraged Commentary & Data (LCD), a supplier of leverage loan news and analytics, includes the loan in its universe of leveraged loans.  

 In contrast, an unrated or rated BBB- or above loan backed by a first or second lien is frequently categorised as a leverage loan when the spread is LIBOR plus 125 base points or greater. 

 Let’s say a business wants to take a leveraged loan to finance the purchase of a new long-term investment. The corporation will issue bonds worth US$1,000,000 at an interest rate of LIBOR + 50. Does a loan qualify as leveraged if it has a non-investment grade rating? 

 In the circumstance mentioned above, the loan would be regarded as a leveraged loan according to S&P Global’s standards because it is not investment grade (non-investment grade rating is BB+ or lower). 

Frequently Asked Questions

Leveraged loans are used to finance the purchase of an asset, such as a property or a company. The loan is secured by the asset, which means that if the borrower defaults, the lender can seize the asset to recoup its losses. 

 They are often used by investors looking to buy an asset with a high value but who may not have the full cash needed to purchase it outright. By securing the loan with the asset, the borrower can get the financing they need while maintaining ownership of the asset. 

Businesses use leveraged loans to make large investments or purchases. The loans are typically used to finance the purchase of assets such as real estate or equipment. Banks or other financial institutions typically make the loans. The loans are typically made to businesses with a high debt level. The loans are typically made to businesses with a high level of debt and are considered high risk. 

Leveraged loans are often formed with a rolling credit facility and many term loan tranches with gradually increasing payback durations. The term tiers may be collateralised by readily available company assets and shares, while a conventional borrowing foundation of working assets may secure the revolving loan part. 

There are two main types of leveraged loan syndication: the lead bank model and the agent bank model. In the lead bank model, one bank takes on the lead arranger and underwriter role, and the other provides funding. In the agent bank model, all of the banks involved share the responsibility of lead arranger and underwriter, and each bank provides a portion of the funding. 

 The lead bank model is more common in leveraged loan syndication, allowing the lead bank to control the deal and take on more risk. The agent bank model is more common in syndicated loans for smaller companies, allowing all banks involved to share the risk. 

Some of the advantages include the following: 

  • If handled properly, the loan amount gained through leverage loans can help the firm expand its capital and help it reach its potential. 
  • Leveraged loans are ideal when a company wants to make an acquisition, a management buyout, buy back shares, or pay a one-time dividend because doing so comes with added expenses and risks. 

Some of the disadvantages include the following: 

  • These loans have higher interest rates, therefore the cost of financing for the business is higher. 
  • Leveraged loan management requires significantly more time from the management since it is a much more complicated procedure. 
  • The business incurs leverage loans and other debts, including short- and long-term obligations. It raises the company’s debt level over the industry norm, increasing its long-term leverage risk. 

Related Terms

    Read the Latest Market Journal

    Financial Sectors Thriving: Top Traded Counters in April 2024

    Published on May 21, 2024 69 

    At a glance: The Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%...

    One Dollar at a Time: The Potential of Fractional Shares

    Published on May 20, 2024 68 

    Table of contents 1. Introduction 2. Dollar-Cost Averaging 3. Popularity of Dollar-Cost Averaging 4. Small...

    Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

    Published on May 20, 2024 69 

    Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly...

    Weekly Updates 20/5/24 – 24/5/24

    Published on May 20, 2024 20 

    This weekly update is designed to help you stay informed and relate economic and company...

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 105 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 104 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 59 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Hong Kong Value Stocks Q2 2024

    Published on May 14, 2024 133 

    After a long period of sluggishness, Hong Kong market has begun to pick up. The...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com