Leveraged Loan

Leveraged loans are senior secured bank loans made to companies with high debt levels, typically with debt/EBITDA ratios exceeding 4x or credit ratings below investment grade. These floating-rate loans, usually priced at SOFR + 200-500 basis points, finance leveraged buyouts, acquisitions, and refinancings. For example, a private equity firm acquiring a $2 billion company might use $500 million equity and $1.5 billion in leveraged loans. Loans are syndicated among banks and institutional investors, with arrangers earning fees for structuring and distribution. Most leveraged loans are ‘covenant-lite,’ lacking traditional maintenance covenants, though they include incurrence covenants limiting additional debt. The $1.4 trillion leveraged loan market primarily trades in secondary markets with 1-2 day settlement. CLOs purchase majority of new issuance. Leveraged loans offer floating-rate protection against rising rates but carry significant credit risk. Default rates average 3% but spiked to 10% during recessions. Recovery rates average 60-70% due to senior secured status. Critics worry about deteriorating underwriting standards and systemic risks from the leveraged loan boom.