What is leveraged acquisition finance?

Leveraged finance is funding provided to a borrower that has a non-investment (speculative) grade rating, generally in the form of structured finance arranged in several facilities (tranches) under common documentation, each with its own terms and conditions.  The leverage of the transactions refers to the relatively high relationship of the funded debt to the equity capital invested in the borrower.  The structure of leveraged finance varies from deal to deal and country to country.

Syndicated leveraged finance in the London and Euromarkets market is based on the LMA “Senior Multicurrency Term and Revolving Facilities Agreement for Leveraged Acquisition Finance Transactions (Senior/Mezzanine)”.  The “Leveraged Document” is the LMA template facility agreement serving as the core element of the senior debt structure in a leveraged acquisition finance transaction for non-investment grade borrowers.

Although designed for use in leveraged buyouts (LBOs), the Leveraged Document can be adapted and used for other leveraged financing structures outside the LBO market.  Syndicated leveraged finance is also commonly used for corporate recapitalization and project financing.

Leveraged financing based on the LMA template agreement anticipates senior loan facilities in tranches of increasing maturity, a revolving facility and ancillary facilities, mezzanine debt, a structural intra-group loan in the form of an “equity investment” and a vendor loan.  LMA template leveraged documents assume no other funded debt in an acquisition finance.

The “Obligors” in an LMA “compliant” acquisition finance transaction are the “Parent”, the “Company” (“NewCo”) and the “Target” and its “Subsidiaries” (“Target Group”) as the “Original Borrowers” and, together with the Parent, the “Original Guarantors”.  The “Finance Parties” in the LMA template Leverage Document are the “Mandated Lead Arranger(s)”, the “Agent”, the “Issuing Bank” and the “Security Agent”.