Chapter 6. Leveraged finance

Abstract: Over the last two decades, the leveraged loan market has grown to a size comparable to the market for high-yield corporate bonds, creating a market for “leveraged finance” that includes about $3 trillion in outstanding debt. For issuers and investors in these markets, high-yield bonds and leveraged loans offer similar but still distinct products to link firms with the providers of debt capital. Because issuers are risky and relatively large, the market is distinct from the investment-grade bond and traditional bank loan markets that serve either very safe borrowers or much smaller borrowers. This distinction has shaped the development of the primary markets, secondary markets, investors, and contracts that govern the relationship between debtors and creditors. We introduce the structure of these markets and review existing academic literature that touches on them. We also suggest areas that deserve additional research.