A leveraged buyout (or LBO, or highly leveraged transaction (HLT), or "bootstrap" transaction) occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved. If the company subsequently defaults on its debts, the LBO transaction will frequently be challenged by creditors or a bankruptcy trustee under a theory of fraudulent transfer
Companies of all sizes and industries have been the target of leveraged buyout transactions, although because of the importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a leveraged buyout, some features of potential target firms make for more attractive leverage buyout candidates, including:

  • Low existing debt loads;
  • A multi-year history of stable and recurring cash flows;
  • Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower cost secured debt;
  • The potential for new management to make operational or other improvements to the firm to boost cash flows, such as workforce reductions or eliminations;
  • Market conditions and perceptions that depress the valuation or stock price.

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