Explain how private market deals are funded with high-yield bonds, leveraged loans and convertible debt, and why each is chosen
The idea
Leveraged loans are senior secured (so cheaper than bonds), floating-rate and prepayable. They are syndicated to banks and CLOs, amortise (term loan A) or are largely bullet (term loan B), and carry maintenance covenants unless covenant-lite. High-yield bonds are usually fixed-rate bullets with longer maturities, incurrence covenants and call protection. They suit larger deals that need more debt than the loan market will provide. Convertibles pay a lower coupon in exchange for an equity conversion option, which saves cash interest for growth companies at the cost of dilution. Choose among them on cost, prepayment flexibility, covenant tightness and the size of the deal. The trap: floating-rate loans leave interest coverage exposed when policy rates rise.
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