Leveraged buyout

A leveraged buyout is the purchase of a business that uses a large proportion of borrowed funds to pay for the acquisition. The intent behind this arrangement is to minimize the use of equity financing by the acquirer.

In a leveraged buyout, the assets of the acquiree are frequently used as collateral for the debt incurred, which results in a very high debt-equity ratio. This arrangement presents a high risk of default, especially if the cash flows of the acquiree are insufficient to make ongoing debt repayments.

When bonds are issued to finance a leveraged buyout, their high risk of nonpayment means that they may be assigned a junk bond rating, and so will have a high effective interest rate.