Leveraged Loan

What is a Leveraged Loan?

A leveraged loan is a loan that is extended to businesses that (1) already hold short or long-term debt on their books or (2) with a poor credit rating/history. Leveraged loans are significantly riskier than traditional loans, and, as such, lenders typically demand a higher interest rate to reflect the greater risk.

Criteria for Classification

There are no universal criteria for a leveraged loan. However, S&P Global defines them as a loan that is:

1. Rated BB+ or lower (non-investment grade), or
2. Not rated below investment grade but carry a relatively high spread over a benchmark rate and are secured by a first or second lien.

The classification requires judgment. For example, a loan rated BB+ with a moderate spread may be treated as leveraged, while a non-rated loan with a similar spread might not qualify. In practice, both credit rating and pricing characteristics are considered when identifying a loan as leveraged.

Usage for Leveraged Loans

As outlined by S&P Global, issuers use proceeds from leveraged loans for four main purposes:

1. To support mergers and acquisitions (M&A) deals

Leveraged loans are commonly used to support a specific type of M&A deal — a leveraged buyout (LBO). In an LBO, a portion of the funds raised consists of leveraged loans.

2. Recapitalize a company’s balance sheet

Leveraged loans can be used to change a company’s balance sheet when repurchasing a portion of the company’s stock.

3. Refinance debt

This type of loan can also be used to refinance the existing debt of the company.

4. General corporate purposes

Such loans may be used to support the company’s day-to-day operations or to provide asset financing (for example, purchase of new property, plant, and equipment).

Example

A company is looking to use a leveraged loan to support the acquisition of a new long-term asset. The company will take out a $1,000,000 leveraged loan at an interest rate of SOFR + 300 basis points. If the loan is rated non-investment grade, is the loan considered leveraged or not?

Using the criteria set by S&P Global, the loan above would be considered a leveraged loan because the loan is non-investment grade (non-investment grade rating is BB+ or lower).

Loans in the Marketplace

Leveraged loans are typically priced over a benchmark rate such as SOFR plus a spread, which means the interest rate adjusts in line with prevailing market conditions. A higher rate results in a greater return for investors, while a lower rate reduces the return.

The leveraged loan market has grown significantly, reaching an estimated $1.5 trillion in assets as of mid-2025 — the fastest annual expansion since late 2022. The rise in demand reflects a broader investor appetite for higher-yielding, floating-rate instruments as interest rate volatility continues and credit spreads remain attractive.

When benchmark interest rates increase, the return on a leveraged loan generally rises, driving demand from investors. Conversely, when rates fall, returns decline and investor appetite may soften.

Additional Resources

To keep learning and advancing your career, the following CFI resources will be helpful:

• Debt Covenants
• Leverage Ratios
• Structured Finance
• Syndicated Loan
• See all commercial lending resources