Corporate Financial Distress, Restructuring, and Bankruptcy, 4th Edition
by Edward I. Altman, Edith Hotchkiss, Wei Wang
CHAPTER 2An Introduction to Leveraged Finance
The leveraged loan markets and high‐yield bond markets play a critical role in helping finance speculative‐grade borrowers. These debt contracts have a variety of special features that make them unique in the financial markets. They are key to the restructuring of distressed firms because leveraged structures are more likely to become distressed than nonleveraged structures. Investment banks, hedge funds, and private equity funds (PEs) pay close attention to this special segment of the financial markets.
Both the leveraged loan markets and high‐yield bond markets in the United States have experienced fast growth since the end of the 2008–2009 financial crisis. Both markets experienced a record amount of new issuance in 2013 – over $600 billion of leveraged loans and over $330 billion of high‐yield bonds issued in total (based on data from Standard & Poor's Leveraged Commentary & Data (S&P LCD) and SIFMA). Total issuance in both markets declined shortly after 2013, when concerns about deteriorated underwriting standards led the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency to issue new leveraged lending guidelines.1 By 2017, however, issuance had returned to the peak level reached earlier ($651 billion in leveraged loan issuance and $284 in high‐yield bond issuance).
In this chapter, we provide a brief introduction to these two major instruments for speculative‐grade ...