What is the main form of debt financing used in LBOs?

What is the main form of debt financing used in LBOs?

• A. Bonds: High-yield
• B. Leveraged loans: revolver & term loans
• C. Mezzanine finance
• D. Equity injections

Answer: (B)

In LBOs, the financing is driven by debt, with the backbone formed by leveraged loans. This typically comes as a combination of a revolving credit facility (the revolver) and term loans. The revolver provides flexible, short‑term liquidity to cover working capital needs and keep options open for any interim cash needs, while term loans supply the bulk of long‑term financing to fund the purchase and ongoing capital needs. These loans are usually senior and secured, with covenants that help manage risk and keep debt service aligned with the company’s cash flow, which is essential given the high leverage typical of an LBO. High‑yield bonds can be used in some deals, but they’re generally more expensive and less flexible than senior leveraged loans, so they don’t usually form the main debt layer. Mezzanine finance sits behind senior debt and serves to fill remaining gaps at a higher cost, not as the primary funding. Equity injections, by contrast, are equity, not debt, and while they are necessary to complete the capital stack, they don’t constitute the main form of debt financing.

In LBOs, the financing is driven by debt, with the backbone formed by leveraged loans. This typically comes as a combination of a revolving credit facility (the revolver) and term loans. The revolver provides flexible, short‑term liquidity to cover working capital needs and keep options open for any interim cash needs, while term loans supply the bulk of long‑term financing to fund the purchase and ongoing capital needs. These loans are usually senior and secured, with covenants that help manage risk and keep debt service aligned with the company’s cash flow, which is essential given the high leverage typical of an LBO.

High‑yield bonds can be used in some deals, but they’re generally more expensive and less flexible than senior leveraged loans, so they don’t usually form the main debt layer. Mezzanine finance sits behind senior debt and serves to fill remaining gaps at a higher cost, not as the primary funding. Equity injections, by contrast, are equity, not debt, and while they are necessary to complete the capital stack, they don’t constitute the main form of debt financing.