What Is a Highly Leveraged Transaction (HLT)?

A highly leveraged transaction (HLT) is a bank loan to a company that has a large amount of debt. They were popularized in the 1980s as a way to finance buyouts, acquisitions, or recapitalizations.

Unde💙rstanding Highly Leveraged Transactions (HLTs)

Highly leveraged transactions are risky in that they add to a company's debt load and often result in an unattractive 澳洲幸运5开奖号码历史查询:debt-to-equity ratio,💫 but the interest income generated from these transactions is 🌸significant enough to make them attractive to investors and financial institutions.

Highly leveraged transactions are thought of as being similar to 澳洲幸运5开奖号码历史查询:junk bonds—and junk bonds may well be issued as part of the deal structure. Both junk bonds and highly leveraged transactions face significant default risk, but HLTs are more secure because they have stronger debt covenants due to their structure. 澳洲幸运5开奖号码历史查询:Leveraged buyouts (LBOs) are an example of a highly leveraged tr༺ansaction.

Highly leveraged transactions often include some type of debt restructuring regardl🤪ess of what the intention is for the financing. This is simply because the existing debt levels of the company must be dealt with fo♎r any chance of future success. The end result is usually a complicated debt structure with several types of subordinated debt. In the restructured entity, the lenders behind the highly leveraged transaction often end up with an equity stake in the new enterprise.

Guidance for Highly Leveraged Transactions

Guidance for highly leveraged transactions is set out by the 澳洲幸运5开奖🐎号码历史查询:U.S. Office of the Comptrollerꦍ of Currency (OCC), the Federal Reserve Board, and the Federal Deposit Insurance Corporation. The OCC broadly considers a highly leveraged transaction as one where the borrower’s post-financing leverage, when measured by 澳洲幸运5开奖号码历史查询:debt-to-assets, debt-to-equity, and cash flow-to-total debt significantly exceeds industry norms for leverage. Depending on the particulars of the industry in question, customized industry metrics can be su♉bstituted for these broader measures.

For a loan to b❀e defined as an HLT, it generally has to fit some combination of the following conditions:

• Proceeds used for buyouts, acquisition, and recapitalization.
• The transaction results in a substantial increase in the borrower’s leverage ratio. Industry benchmarks include a twofold increase in the borrower’s liabilities, resulting in a balance sheet leverage ratio (total liabilities/total assets) higher than 50%, or an increase in the balance sheet leverage ratio of more than 75%. Other benchmarks include increasing the borrower’s operating leverage ratios (澳洲幸运5开奖号码历史查询:debt-to-EBITDA or senior debt/EBITDA) above defined levels.
• Transactions are designated as an HLT by the 澳洲幸运5开奖号码历史查询:syndication agent.
• The borrower is rated as a non-investment-grade company with a high debt to equity ratio.
• Loan pricing indicates a non-investment-grade company. This generally consists of some spread over the 澳洲幸运5开奖号码历史查询:London Interbank Offered Rate (LIBOR) that fluctuates as a function of market conditions.

The guidance on highly leveraged transactions isn't a legal regulation. There is an implied high-water mark of 6 times 澳洲幸运5开奖号码历史查询:debt-to-EBITDA for the restructured entity, but this amount has been exceede♛d many times. With highly leveraged transactions, as with almost everything, the limit is what the market wi⛦ll buy.