A leveraged loan also referred to as gearing in the United Kingdom and Australia, is a type that is offered to individuals or companies with poor credit history or in debt of a considerable amount. Thus, this loan carries a higher risk of default because it has a higher interest rate than a typical loan. Borrowers will always run into default if they were unable to make payments for an extended period. However, a loan with a high-interest rate reflects a higher level of risk in issuing the loans.
WHAT YOU SHOULD KNOW
- Do you know that a leveraged loan is available for individuals. And companies that already have a. Poor credit history or a considerable amount of debt?
- Do you know that leveraged loans carry. Higher risk and can result in default? Thus, there are costs to borrowers.
- Unlike typical loans, leveraged loans have. Higher interest rates, reflecting the increase of risk involved in issuing the loans.
- You can borrower loans (Leveraged loans are available) with poor credit history but remember. You will get it at a high-interest rate.
A leveraged loan is structured, arranged, and. Administered by a commercial or investment bank. In the plan, the lenders are. Called arrangers, and they do this (sell loans) through a process called. Syndication to investors or other banks. Nevertheless, this lowers the risk to lending institutions.
Now that it is sold to banks
they can change the terms of the loans when issuing to borrowers. This process is referred to as price flex. When the interest margin increases as a result of the demand for the loans is insufficient, it is referred to as an upward flex.
Typically, companies use a leveraged loan to finance mergers and acquisitions, to recapitalize the balance sheet, or to refinance debt, and lots more. In finance merger and acquisition, it is the process where the company purchases a public entity to make it private. A leveraged loan can be used to finance the project. Also, the leveraged loan can be used to recapitalize the balance sheet by changing the composition of its capital structure. In the place to refinance debt, you can buy stock or pay dividends as well.