Chapter 28 - The Leveraged Finance Special

G2G Chapter 28 - The Leveraged Finance Special ← to navigate Sector Specials Chapter 28

The Leveraged Finance Special

Leveraged Buyouts, High Yield, Leveraged Loans & Credit Analysis Overview

Chapter Roadmap

Part 1: Foundations - What is LevFin, LBO mechanics, entry/exit, debt structuring Part 2: Instruments - Term loans, second lien, high yield bonds, covenant analysis Part 3: Credit Metrics & Returns - Leverage ratios, interest coverage, IRR/MOIC waterfall Part 4: Market Dynamics - CLOs, unitranche, direct lending, rating frameworks Part 5: Practicals - Interview traps, red flags, fee economics Definition

What Is Leveraged Finance?

Leveraged Finance (LevFin) is the provision of debt to private equity sponsors or corporates to fund acquisitions, dividends, and capital structures. It sits at the intersection of M&A and capital markets. LBO Definition Acquisition financed primarily with debt, where sponsors contribute equity but leverage drives returns. Typical Leverage Profile 4–6x net leverage at entry, 2–3x at exit. Entry multiples: 8–12x EBITDA for traditional sectors. LevFin Team Role Arranges senior debt (TLA, TLB), subordinated debt (second lien, mezz), coordinates with sponsors on structure, manages bank syndication. Core Mechanics

The LBO Model Foundation

An LBO is modeled via a simple Sources & Uses table and a returns waterfall. Sources & Uses (Simple) Sources: Equity (30–50%) + Debt (50–70%) = Purchase Price Uses: Purchase price + Transaction fees + Working capital Entry Mechanics Sponsor identifies target, sources debt, closes with negotiated debt-to-equity ratio, typically 60% debt / 40% equity for mid-market, 70–80% debt for large Returns Waterfall Debt is paid down over hold (deleveraging). EBITDA may grow. Exit multiple and leverage multiple combine to create equity returns (IRR/MOIC). Entry Strategy

LBO Entry Mechanics

Entry Multiples By sector: Tech 10–12x, Industrials 9–11x, B2B Services 8–10x, Retail 6–8x. Premium assets command higher multiples. Equity Cheque Mid-market: 30–40% of EV. Upper-mid/large: 20–30%. Co-investment from management: 5–15% of equity. Management Rollover Sponsor typically requires founder/CEO to roll significant proceeds into new equity for alignment. Vesting cliffs (4 years) are standard. Entry Example Target: £200M EBITDA, 10x entry = £2B EV. 30% equity = £600M sponsor contribution + £1.4B debt. Management rolls £100M of pre-transaction wealth. Capital Stack