<h2>Leveraged Loan</h2>
<p>A <strong>leveraged loan</strong> is a type of debt financing where the borrower uses the loan proceeds to repay or refinance existing debt, often to fund a leveraged buyout (LBO) or other corporate acquisitions. The term "leveraged" refers to the high level of debt relative to the company's assets or earnings.</p>

<h2>How It Works</h2>
<p>Leveraged loans are typically provided by a syndicate of banks or other institutional investors. Here's how they work:</p>
<ul>
  <li>The borrower, usually a private equity firm or a company seeking to fund an acquisition, approaches lenders with a proposal.</li>
  <li>The lenders evaluate the borrower's creditworthiness and the cash flows of the target company to determine the loan amount and terms.</li>
  <li>The loan is structured with a high loan-to-value (LTV) ratio, often above 60%, and may include covenants that restrict the borrower's actions until the loan is repaid.</li>
  <li>The borrower uses the loan proceeds to fund the acquisition or refinance existing debt, and repays the loan with interest over an agreed period, usually 5-10 years.</li>
</ul>

<h2>Why It Matters for Traders</h2>
<p>Leveraged loans can be attractive to traders due to their high yields, but they also come with significant risks:</p>
<ul>
  <li><strong>High Yields</strong>: Leveraged loans offer higher yields than investment-grade bonds due to their higher risk profile. This can make them an appealing option for yield-hungry investors.</li>
  <li><strong>Potential for Capital Appreciation</strong>: If the borrower's financial situation improves, the value of the loan may increase, providing an opportunity for capital appreciation.</li>
  <li><strong>Credit Risk</strong>: Leveraged loans are subject to higher credit risk, as the borrower may struggle to repay the debt if their financial situation deteriorates. This can lead to defaults and losses for investors.</li>
  <li><strong>Liquidity Risk</strong>: Leveraged loans are typically illiquid, making it difficult for investors to sell them if they need to raise cash. This can exacerbate losses if the borrower defaults.</li>
</ul>

<h2>Example</h2>
<p>Consider a private equity firm that wants to acquire a company valued at $1 billion. The firm arranges a $700 million leveraged loan with a syndicate of banks, using the proceeds to fund the acquisition. The loan has a 5-year term, an interest rate of 8%, and a LTV ratio of 70%.</p>
<p>If the acquired company generates sufficient cash flows to repay the loan, the private equity firm can realize a significant return on its investment. However, if the company's financial situation deteriorates, the firm may struggle to repay the loan, putting the lenders' capital at risk.</p>

<h2>Key Takeaways</h2>
<ul>
  <li>Leveraged loans are debt financing tools used to fund acquisitions or refinance existing debt.</li>
  <li>They offer high yields but come with significant credit and liquidity risks.</li>
  <li>Traders should carefully evaluate the creditworthiness of the borrower and the underlying cash flows before investing in leveraged loans.</li>
  <li>Leveraged loans can be traded on the <strong>MetaTrader 5</strong> platform through STB Provider, a regulated Forex and CFD broker offering STP/NDD execution and up to 1:300 leverage.</li>
</ul>