What is a Highly Leveraged Transaction (HLT)?
A highly leveraged transaction (HLT) is a bank loan to debt-laden companies. They gained popularity in the 1980s for financing buyouts, acquisitions, and recapitalizations.
High-Leverage Transactions
While highly leveraged deals may increase a company’s debt and debt-to-equity ratio, they earn considerable interest revenue, appealing to investors and financial institutions.
Highly leveraged deals resemble junk bonds, which may be issued as part of the deal structure. Structured HLTs feature tighter debt covenants than trash bonds and highly leveraged deals, making them safer against default. Leveraged buyouts (LBOs) are highly leveraged transactions.
Highly leveraged deals generally involve debt restructuring independent of financing goals. For future growth, the corporation must address its debt—a complex debt structure with many subordinate debts frequently results. The lenders behind the highly leveraged deal generally get stock in the reorganized business.
Highly Leveraged Transaction Advice
The OCC, Federal Reserve Board, and FDIC guide highly leveraged transactions. The OCC defines a highly leveraged transaction as one where the borrower’s post-financing leverage (debt-to-assets, debt-to-equity, and cash flow-to-total debt) considerably exceeds industry norms. Depending on the sector, customized industry metrics can replace these more considerable indicators.
A loan is usually an HLT if it meets one or more of the following criteria:
- For buyouts, acquisitions, and recapitalization.
- The deal significantly raises the borrower’s leverage ratio. As the borrower’s obligations double, the balance sheet leverage ratio (total liabilities/total assets) rises over 50%, or 75%, according to industry benchmarks. Benchmarks may include raising the borrower’s debt-to-EBITDA or senior debt-to-EBITDA ratios over set thresholds.
- The syndication agent designates transactions as HLTs.
- Borrower is a non-investment-grade corporation with a high debt-to-equity ratio.
- The company loan price suggests a non-investment grade—the spread above the London Interbank Offered Rate (LIBOR) changes based on market circumstances.
The recommendation on highly leveraged deals isn’t lawful. The restructured firm has exceeded the implied high-water level of six times debt-to-EBITDA many times. As with other things, the market decides what to buy in highly leveraged deals.
Conclusion
- Highly leveraged deals finance heavily indebted firms.
- Highly leveraged deals recapitalize, buy out, or acquire companies.
- Highly leveraged deals pay higher interest rates to compensate financiers for the risks of excessive debt.
