LBO MODELLING EXAM FROM WALL STREET PREP.

Introduction to leveraged finance Leveraged finance refers to the financing of highly levered, speculative-grade companies. Within the investment bank, the Leveraged Finance (“LevFin”) group works with corporations and private equity firms to raise debt capital by syndicating loans and underwriting bond offerings to be used in LBOs, M&A, debt refinancing and recapitalizations. The funds raised are used primarily for: 1. Leveraged buyouts (LBOs): Financial sponsors need to raise debt to fund a leveraged buyout. 2. Mergers & Acquisitions: Acquirers often borrow to pay acquisitions. When a lot of debt is needed, it falls under the leveraged finance umbrella. 3. Recapitalizations: Companies borrow to pay dividends (“dividend recap”) or to buy back shares. 4. Refinancing old debt: There is an old investment banking adage that says “the best thing about bonds is that they mature.” Once a company’s debt matures, the company will need to borrow again to pay for the old debt. Leveraged finance in the broader context of debt financing In the world of debt financing, there are two kinds of debt: 1. Investment-grade debt (BBB/Baa credit rating or above): Debt issued by companies with a strong credit profile. investment-grade debt is considered quite safe and default risk is very low. 2. Speculative-grade debt (BB/Ba or below): Debt issued by highly leveraged companies and thus a riskier credit profile. Speculative-grade debt is the world of leveraged finance. One thing both investment-grade and speculative-grade firms have in common is that they can access two distinct debt structures