leveraged finance

Five trends shaping the future of leveraged finance in investment banking

Investment banks engage in a number of fund-raising activities. Corporate entities depend heavily on investment banks to secure working capital. Often, investment banks bring retail/angel investors on board or become investors/stakeholders themselves. They offer a wide range of services such as arranging leveraged finance.

Understanding leveraged finance

Investment or corporate banks also arrange loans/funds for companies in debt. Leveraged finance refers the concept of arranging funds for an entity and expecting a reward for doing so. With leveraged finance, an entity’s working capital is increased. Apart from companies in debt, those struggling to survive also seek leveraged finance.

Leveraged finance can be used for buyouts, debt settlement, M&A deals and recapitalisations. It increases a corporate’s debt but also focuses on boosting growth of the private equity firm or corporation. Investment banks take on high risk when providing leveraged finance, as the particular corporate entity may not get back on its feet even after raising the required working capital.

Trends related to leveraged finance

  • Leveraged finance for M&A deals

The frequency of M&A deals has increased since the pandemic. Companies that cannot handle market competition are being taken over or merging. Leveraged finance for M&A deals is expected to increase in the coming years.

  • ESG research for leveraged finance services

Investment banks invest in entities that can provide long-term profit. To find good investment opportunities, investment/corporate banks rely on ESG research support, prefering to arrange leveraged finance for firms free of environmental or governance risks.

  • Urgent need for capital

Some firms need funding urgently because of the pandemic and market crashes, and prefer bulk investments rather than instalments. Even struggling firms can get back on their feet with significant working capital.

  • Need for leveraged finance support

Investment banks may not be able to identify firms in need of leveraged finance and depend on leveraged finance support services from third parties.

  • Increasing need for macroeconomic analysis

Investment banks now consider macroeconomic factors such as national productivity and inflation to predict growth of corporate entities.