Leveraged loans are commercial loans extended to corporate borrowers that are already carrying a high degree of debt, often associated with private equity buyouts, mergers, or recapitalizations. These loans are typically arranged by a group of banks and then syndicated, or sold in pieces, to various institutional investors. A defining characteristic of leveraged loans is that they usually carry floating interest rates, meaning the interest payments adjust periodically based on a benchmark rate.
Because they sit at the top of a company's capital structure and are often secured by the company's assets, they generally have priority of repayment over standard corporate bonds in the event of bankruptcy. The floating-rate nature of these loans makes them particularly attractive in environments where interest rates are rising, as the income generated by the loans increases alongside the broader market rates.
Investors utilize leveraged loans to access senior secured corporate credit and to generate income that is somewhat insulated from interest rate duration risk. They are a core component of alternative credit strategies and collateralized loan obligations.
Because they sit at the top of a company's capital structure and are often secured by the company's assets, they generally have priority of repayment over standard corporate bonds in the event of bankruptcy. The floating-rate nature of these loans makes them particularly attractive in environments where interest rates are rising, as the income generated by the loans increases alongside the broader market rates.
Investors utilize leveraged loans to access senior secured corporate credit and to generate income that is somewhat insulated from interest rate duration risk. They are a core component of alternative credit strategies and collateralized loan obligations.