What is leveraged finance ? In today’s markets

What is leveraged finance? In today’s markets, it refers to funding strategies that use high-yield bonds or leveraged loans to back corporate acquisitions. With the 2024 high-yield index yielding about 7.2%, analysts forecast increased activity in M&A as equity valuations remain elevated. Traders are watching debt-to-EBITDA ratios closely as tightened credit spreads hint at moderate risk appetite. The transactions broadly followed the US ABS model. Similar to US ABS and in contrast to CMBS, there was no loan underlying the securitisation, and a long maturity date of June 2050 (traditional non-data centre European CMBS tending to have much shorter maturity dates of around 5 years). They involved insolvency-remote property owning companies at asset level, with cashflows passed up to their parent, the issuer, via intercompany debt, which is also similar to US ABS. This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice. For portfolio managers, what is leveraged finance is tied to spread dynamics. High-yield spreads narrowed 25bps in May as investor demand surged. This tightening suggests markets price in lower default risks over the next six months, aided by steady corporate earnings.