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Leveraged Finance

Definition - What does Leveraged Finance mean?

Leveraged finance is funding that is used to acquire debt to invest in an asset that will generate profits in the future.

Divestopedia explains Leveraged Finance

Leveraged finance is used by companies to acquire an asset, repurchase shares, make an acquisition or buy-out another company. This debt is used to grow the company or raise capital to invest in another asset. The form of debt can be a leveraged loan, which tends to carry high interest as it is a riskier investment. The other form of debt can be high yield bonds, which are rated below investment grade.

This type of financing is preferred by most organizations as little funding of their own is required to be put up. However, if the asset investment does not perform as anticipated, the loss is much greater and the debt increases due to the interest expense which increases the risk of default. The greater the amount of debt, the higher the financial leverage and the higher the risk.

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