Highly Leveraged Transaction (HLT)
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 promoted during the 1980s as a method for financing buyouts, acquisitions, or recapitalizations.
Seeing Highly Leveraged Transactions (HLTs)
Highly leveraged transactions are risky in that they add to a company's debt load and frequently result in an ugly debt-to-equity ratio, however the interest income generated from these transactions is sufficiently critical to make them appealing to investors and financial institutions.
Highly leveraged transactions are considered being like junk bonds — and junk bonds likely could be issued as part of the deal structure. Both junk bonds and highly leveraged transactions face critical default risk, yet HLTs are safer in light of the fact that they have more grounded debt agreements due to their structure. Leveraged buyouts (LBOs) are an illustration of a highly leveraged transaction.
Highly leveraged transactions frequently incorporate some sort of debt restructuring paying little heed to what the expectation is for the financing. This is basically on the grounds that the existing debt levels of the company must be dealt with for any chance of future achievement. The outcome is typically a convoluted debt structure with several types of subordinated debt. In the restructured entity, the lenders behind the highly leveraged transaction frequently 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 U.S. Office of the Comptroller of Currency (OCC), the Federal Reserve Board, and the Federal Deposit Insurance Corporation. The OCC comprehensively thinks about a highly leveraged transaction as one where the borrower's post-financing leverage, when estimated by debt-to-assets, debt-to-equity, and cash stream to-total debt fundamentally surpasses industry standards for leverage. Contingent upon the particulars of the industry being referred to, customized industry metrics can be fill in for these more extensive measures.
For a loan to be defined as a HLT, it generally needs to fit a blend of the accompanying conditions:
- Proceeds utilized for buyouts, acquisition, and recapitalization.
- The transaction brings about a substantial increase in the borrower's leverage ratio. Industry benchmarks remember a twofold increase for the borrower's liabilities, bringing about a balance sheet leverage ratio (total liabilities/total assets) higher than half, or an increase yet to be determined sheet leverage ratio of over 75%. Different benchmarks incorporate expanding the borrower's operating leverage ratios (debt-to-EBITDA or senior debt/EBITDA) above defined levels.
- Transactions are designated as a HLT by the syndication agent.
- The borrower is rated as a non-speculation grade company with a high debt to equity ratio.
- Loan pricing shows a non-speculation grade company. This generally comprises of some spread over the London Interbank Offered Rate (LIBOR) that varies as a function of market conditions.
The guidance on highly leveraged transactions is certainly not a legal regulation. There is an implied high-water mark of 6 times debt-to-EBITDA for the restructured entity, however this amount has been surpassed ordinarily. With highly leveraged transactions, as with nearly everything, the limit is what the market will buy.
Highlights
- Highly leveraged transactions are financing arrangements extended to companies that are now profoundly in debt.
- Highly leveraged transactions pay the agents a lot higher rates of interest to repay them for the extra risks presented by the large debt load.
- Highly leveraged transactions are embraced for the purpose of recapitalizing, buying out a company, or even obtaining another company.
