Definition of 'Leveraged Buyback'
There are several reasons why a company might be acquired in an LBO. One reason is that the private equity firm believes that the company can be more efficiently run and that the value of the company can be increased. Another reason is that the private equity firm may want to take the company private, which can give it more flexibility in how it operates.
LBO transactions are often complex and can involve a number of different parties. The private equity firm will typically work with a financial advisor, a law firm, and a debt financing provider. The debt financing provider will provide the debt that is used to finance the acquisition.
The debt used to finance an LBO is typically high-yield debt, which is also known as junk bonds. High-yield debt is riskier than investment-grade debt, and it typically carries a higher interest rate. The high interest rate on the debt used to finance an LBO can make it difficult for the acquired company to make its debt payments.
There are a number of risks associated with LBOs. One risk is that the acquired company may not be able to make its debt payments. If the company defaults on its debt, the private equity firm may have to take over the company and sell it off in pieces. Another risk is that the private equity firm may not be able to increase the value of the company. If the value of the company does not increase, the private equity firm may not be able to sell it for a profit.
LBO transactions have become increasingly popular in recent years. In 2018, there were over $500 billion worth of LBOs completed. However, the popularity of LBOs has declined in recent years due to the high cost of debt and the increased risk of default.
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