OverviewLeveraged Loans are secured loans taken out by sub-investment grade companies who require buy-out or acquisition finance (e.g. management buy-outs, merger and acquisitions, public to privates).
The key features of leveraged loans are:
A key distinguishing feature of leveraged loans from other asset classes, such as high yield bonds, is that they are fully secured – on the underlying assets and shares of the issuing company. This security can be enforced in the event that the borrowing company does not perform as agreed, and as a result, has meant that loans have historically delivered higher recoveries than high yield bonds in the event of a default.
European leveraged loans have traditionally delivered very stable returns, trading at or close to 100 (the price at which they are usually issued and repaid). In the second half of 2007, however, loans suffered significant price falls as the credit crunch led to widespread forced selling among banks and investment vehicles that had taken on too much leverage.
The process accelerated in the final quarter of 2008 following the bankruptcy of Lehman Brothers in September and the wholesale collapse of the Icelandic banking system in October 2008.
The loan market has rallied strongly in 2009 with pricing at roughly the levels that prevailed at the start of the liquidity crisis in mid 2007.
Second Lien and Mezzanine loans are assets ranking next in the capital structure behind Leveraged Loans.
They have the same security package as for senior Leveraged Loans and are also floating rate assets (with an indicative spread of LIBOR+700-1000bps).
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