There are numerous funding sources for corporate entities, from bank loans to IPO issuance. Most corporate entities were comfortable with equity financing a few decades back. However, the increased competitiveness in the market has forced corporations to try other financing sources. Companies now prefer a mix of equity and debt with leveraged finance support from investment banks.
Leveraged finance investment banking can help companies with higher levels of credit and default risks secure funds. However, investment banks must apply effective leveraged finance strategies to achieve success. Read on to understand some proven strategies for investment banks to succeed with leveraged finance.
Are you familiar with leveraged finance in the investment banking sector?
Leveraged finance is the process of offering capital to companies with a higher risk level. In some cases, companies already in debt use leveraged finance to make buyouts. A company with high debt levels can use leveraged funds to acquire another company. It is called LBO (Leveraged Buyout), where borrowed funds are used to acquire a company.
With an LBO, the investment bank will count on the cash flow generated after acquisition for debt repayment. An investment bank might place its money or collect it from different investors for an LBO. It is crucial to note that the risk of default is high as the company is already in debt.
Investment banks are crucial in raising leveraged funds for companies in financial distress. They help with underwriting, loan processing, deal negotiation, benchmarking, and other leveraged finance processes. Investment banks must also issue junk or high-yield bonds on behalf of companies. Junk bonds belong to companies that have high debt and poor creditworthiness.
Since such companies’ risk level is high, they issue junk bonds to raise funds. The interest rate on these bonds is more, thus compensating for the increased credit risk. Investment banks also use different methods, like syndicates, for collecting leveraged funds.
Investment banks can use leveraged funds to support acquisition, debt refinancing, and project financing. They also offer leveraged loans and issue high-yield bonds on behalf of companies. All these processes fall under the umbrella of leveraged financing. Usually, investment banks have a department dedicated to leveraged finance processes. Leveraged finance requires rigorous analysis as the credit risks are high. Investment banks are also liable for offering high yields to investors offering leveraged funds.
Strategies to succeed in leveraged finance investment banking
Investment banks must follow these three proven strategies to succeed in leveraged financing:
Partner with a reliable third party
Investment banks cannot toy with the leveraged funds, as they are answerable to investors. Also, they help companies secure leveraged funds at better deals. Since the stakes are high, leveraged finance investment banking is full of risks. Key decisions cannot be taken without proper research and data analysis. It is only right to partner with a third-party research firm that offers leveraged finance support. Such a firm will help you with benchmarking, football field analysis, deal screening, financial modelling, and many other processes.
Focus on risk management
Investment banks must focus on risk management before indulging in leveraged finance deals. Leveraged finance deals are full of risks involving companies with poor credit ratings. The cash flows generated after LBOs serve as collateral for leveraged funds. Similarly, the cash flows generated by a project or corporate deal will be used as collateral, considering the financing is debt-driven. If the leveraged buyout fails, investors might not get the desired results. Therefore, it is essential to manage all the risks in advance and indulge in leveraged fiancé deals where there is a certain level of surety.
Build market awareness
Investment banks need to know about the market as it might affect the deal. For example, a company might fail to generate cash flows after a leveraged buyout due to market conditions. It is better to indulge in leveraged finance investment banking when you know the market in and out.
In a nutshell
Leveraged finance investment banking is a challenging niche, and you need all the support. You can always partner with a third-party research firm to unlock the true potential of leveraged financing. With rich insights and rigorous research, you can indulge in profitable leveraged finance deals. Choose your partner for leveraged finance support right away.