Information and education only. Every page, figure and
calculator on this site exists to explain how financial instruments work. Nothing here is
investment, tax or legal advice, a recommendation, or a valuation you can rely on.Full disclaimer
Desk
Leveraged Finance
Debt raised against a company's own cash flows in order to buy it — the financing behind private equity, and what decides whether a buyout happens at all.
The desk at a glance
Leveraged finance raises debt against a company's own cash flows, in order to buy that company. The borrower is usually a business somebody is acquiring; the lender is usually a fund rather than a bank; and the amount is set not by what the business needs but by what its cash flows will support.
That last point is the whole desk. A buyout is priced backwards from the financing: what a financial buyer can pay is what it can borrow, plus the equity it will commit for the return it targets. When lenders retreat by one turn of leverage, bids fall across the market even though not one business has changed. This is why the same asset is worth different amounts in different quarters, and why the answer has nothing to do with the asset.
The desk also carries a risk no other origination desk carries in the same shape: it commits the bank's own money before it has raised anybody else's. A commitment letter binds the bank to fund on agreed terms even if the market moves in between. What happens when it does move is the subject of half the documentation.
Who does what
The sponsor — the private equity fund. It is the client, it decides the structure, and its return target sets the maximum price. See the fund itself on the other half of the site, and the buyout here.
The underwriting banks commit to fund and then sell the debt on. The gap between what they committed to and what the market will buy is their exposure.
The syndication desk sells the loan to funds and other banks. If it does not clear, the terms move within the flex the commitment allows — and beyond that the bank keeps the paper. See the Term Loan B.
Direct lenders — funds that will commit the whole amount themselves, removing syndication risk entirely. Sponsors pay for that certainty, and in an auction certainty sometimes beats the last few basis points. See unitranche.
The rating agencies rate the structure for the funds and the collateralised loan obligations that are the organised buyer of this paper.
The lenders' lawyers write the credit agreement — and what that document permits, years later, is what decides who has power in a restructuring.
What decides whether this desk is busy
Six mechanisms, each with the direction it pushes in and the thing to watch. None of them is a forecast, and none is a number that goes out of date.
What
Which way it pushes
What to watch
How much debt the market will lend against cash flow
Sets the buyer's maximum price directly
A buyout is priced backwards from the financing: what a sponsor can pay is what it can borrow plus the equity it will commit for the return it targets. When lenders retreat by a turn of leverage, bids fall even though nothing about the business changed.
The gap between what banks underwrite and what investors buy
The underwriting bank carries the difference
A bank commits to fund a buyout before the debt is sold on. If the market moves in between, the bank sells at a loss or holds the paper. That risk is what flex language exists to manage, and it is why commitments are priced with room in them.
Covenant terms, not only price
What the borrower may do later is negotiated at the start
Two loans at the same spread are not the same loan. What counts as earnings, how much more debt may be added, and what may be moved out of the lenders' reach decide what happens if things go wrong — and they are agreed while things are going well.
The exit that has to exist before the entry
No credible exit, no deal
A financial buyer must be able to describe how it sells later — to a trade buyer, to another sponsor, or to the public market. When listings shut and trade buyers are absent, entry prices fall because the exit is worth less.
Holding periods that have run long
Pushes towards selling, refinancing or paying a dividend
Funds have finite lives and investors expect capital back. An asset held past its expected period generates pressure for a transaction of some kind, which is where dividend recapitalisations and continuation vehicles come from.
The private credit alternative
Certainty of financing against price
A single lender that will commit the whole amount removes syndication risk and the possibility of a deal collapsing between signing and funding. Sponsors pay for that certainty, and in an auction certainty is sometimes worth more than the last few basis points.
The calendar this business keeps
Every desk has a rhythm its regulars plan around and a newcomer discovers by being surprised by it.
When
What happens
Why it matters
The auction's second round
Bidders receive the financing structure the seller expects
By this point a bid is a financing plan. A bidder whose lenders have not committed is bidding on hope, and sellers can tell.
Signing, with the commitment attached
The debt is committed in writing before it is raised
Commitment letters bind banks to fund even if the market turns, within agreed limits. This is why a buyout can be announced months before its bonds exist.
Syndication, weeks after signing
The committed debt is sold to funds and other banks
A deal that does not clear at the expected terms is repriced within the flex the commitment allows. Everything beyond that is the underwriter's problem, and it shows up in that bank's results.
The first covenant test after closing
The forecast meets reality on a defined date
Whether a covenant is tested quarterly, tested only when the revolver is drawn, or not tested at all is one of the most consequential things in the document and one of the least discussed.
The refinancing, well before maturity
Leveraged debt is refinanced repeatedly, rarely repaid
A capital structure is not paid down to zero; it is rolled. Each roll is an opportunity to change terms, and a market that will not roll it is what converts leverage into restructuring.
How this desk reaches the rest of the site
The deals and the instruments are one subject. These are the corridors — each one a mechanism, not a resemblance.
Collateralised loan obligations are the largest organised buyer of the loans this desk sells.
What the client is actually paying for
Three separate things, and confusing them is the commonest error:
The margin — the ongoing spread over a floating benchmark rate. This is the cost of the money, paid for as long as the debt exists.
The original issue discount — the loan is sold below its face value, so the lender receives more than the margin implies. It is how a deal is repriced without reopening the margin, and it is where flex usually lands first.
The arrangement and underwriting fees — paid once, for putting the structure together and for standing behind it.
The economically important term is not any of the three. It is what the document permits: how earnings may be adjusted before leverage is measured, how much further debt may be incurred, whether assets may be moved beyond the lenders' reach, and what a majority of holders may impose on a minority. Two loans at the same margin are not the same loan, and the difference only shows up when things go wrong — by which time it cannot be renegotiated. The playbook reads one in the order that matters.
Financing decides 6 of the 9 — which is most of the desk. Approval and Diligence decide none of them here — which does not mean they are absent, only that they are never the thing a transaction on this desk turns on.
The documents, in the order they appear
The commitment letter and term sheet — signed at the same time as the acquisition agreement, binding the banks to fund. Includes the flex: how far terms may be moved to get the debt sold.
The fee letter — separate and usually confidential, because the fees would otherwise be readable off the public documents.
The credit agreement — the loan itself. Definitions first: what counts as earnings, what counts as debt, what counts as a permitted investment.
The intercreditor agreement — who is paid first, who may enforce, and what the junior lenders may not do. On a structure with more than one layer this is the document that decides outcomes; see mezzanine.
The security documents — what is pledged, in which jurisdictions, and whether the pledge survives the borrower's insolvency there.
The offering memorandum, if the debt goes to the bond market rather than the loan market — see the high-yield issue.
Run the numbers
Interactive: how much debt the earnings carryMedium
Two tests bind a financing — a leverage ceiling and an interest-cover floor — and only the tighter of the two is the answer. Which one binds tells you what the structure is really exposed to.
Capacity on the leverage test
—
Capacity on the cover test
—
Debt capacity
—
Annual interest
—
Cash after everything
—
Which test binds
—
Reading
—
One year, no amortisation, no working-capital swing. A real credit paper does all three, and they usually make the answer smaller. Information and education only. Not advice, not a valuation, and not a quote for anything.
Interactive: where a buyout return actually comes fromMedium
Three sources, separated: the earnings grew, the multiple moved, or the debt was repaid. Most arguments about whether buyouts create value are arguments about which line is largest.
Equity in
—
Equity out
—
Money multiple
—
Annualised return
—
From earnings growth
—
From the exit multiple
—
From paying debt down
—
Reading
—
No fees, no dividends taken out along the way, one entry and one exit. Each source is measured holding the other two at entry, so the three do not sum exactly to the gain. Information and education only. Not advice, not a valuation, and not a quote for anything.
Interactive: sources and uses, with equity as the plugMedium
The first page of every deal model. The two columns have to be equal, which means the equity cheque is not chosen — it is whatever is left.
Total uses
—
New debt
—
Cash equity to write
—
Balance
—
Equity share of the funding
—
Spent on the transaction itself
—
Reading
—
Rolled equity is a source here because it never leaves. Whether a lender counts it towards the sponsor's contribution is a credit-agreement question, not an arithmetic one. Information and education only. Not advice, not a valuation, and not a quote for anything.
Interactive: the deleveraging pathMedium
Deleveraging is not a plan, it is an output: cash left after interest, capex and tax, swept into the loan, year after year.
Leverage at the start
—
Leverage at the end
—
Debt remaining
—
Repaid out of cash
—
When it clears 3×
—
Reading
—
No working-capital movement, no disposals, no refinancing. Those are the three things that actually change a deleveraging path, and none of them is in here. Information and education only. Not advice, not a valuation, and not a quote for anything.
How a deal dies here
The debt does not clear and the flex is not enough. The banks fund anyway and hold paper at a loss, which is a deal that completed and a transaction that failed.
The sponsor cannot reach its return at the price the seller wants, once the financing is priced. It withdraws, and a trade buyer wins the auction.
Diligence changes the earnings figure the whole structure was sized against. Leverage is a multiple of a number that has just moved.
The exit stops being credible. No listing window and no trade buyer means no way out in five years, and the entry price falls to reflect it.
A covenant is tested too early. A structure that cannot survive its own first test after closing is one nobody will lend into.
Concepts to master
Leverage is a multiple of an adjusted number. Add-backs for exceptional costs and run-rate synergies each may be defensible; together they are the difference between a figure a lender accepts and one it does not.
Returns come from three places — paying down debt, growing earnings, and selling at a higher multiple than you bought. Only the first two are the buyer's doing. See the buyout model.
Certainty of funds is a product. In a competitive process, a bid that cannot fail on financing beats a marginally higher one that can.
Covenant-lite is not covenant-free. It means maintenance tests are absent or apply only to the revolver; the incurrence tests are still there, and they still bind.
This desk manufactures the raw material of the leveraged credit market — see credit and the loan itself, plus leverage as a mechanism.