Highly Leveraged Transaction (HLT)
Candlefocus EditorWhen looking to acquire another company or refinance a company’s existing debt, companies with high debt-to-equity ratios may turn to HLTs to gain access to capital. This is often done when a company is unable to secure traditional financing. HLTs tend to be more expensive than traditional financing arrangements due to the heightened risk the lender is taking on and the higher interest rates associated with this type of loan structure.
To provide terms of repayment, HLTs can provide companies with several financing options. For example, a HLT could provide debt security in the form of a term loan with a repayment schedule; or an equity security whereby investors may buy into a portion of the company’s ownership in exchange for a portion of the company’s future earnings.
HLTs can also be used by companies to recapitalize damaged debt and restructure their overall liabilities. This can assist a company in managing their debt repayment schedule and allow a company to stay profitable while avoiding default. In addition, a HLT can also allow a company to acquire another firm by utilizing a debt security or equity security, rather than using its own funds.
Though extremely helpful for companies with large debt loads, there are certain risks for HLTs that both borrowers and lenders should be aware of. For instance, the terms of the loan repayment can be difficult for the borrower to fulfill, given their current debt-to-equity ratio. There is also the risk of default, whereby the borrower may be unable to pay back their loans in full.
Overall, highly leveraged transactions are financing arrangements that enable companies with large debt loads to gain access to additional capital and structured payment terms. Though potentially more expensive than traditional debt vehicles, HLTs are beneficial in transitioning distressed companies back to profitability and enabling companies to pursue acquisitions. Both borrowers and lenders should understand the risks involved, as well as the potential rewards, before entering into any HLT arrangement.