Definition of Leveraged buyout (LBO)

Leveraged buyout (LBO)

A transaction used for taking a public corporation private financed through the use
of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or
junk bonds. Investors can participate in an lbo through either the purchase of the debt (i.e., purchase of the
bonds or participation in the bank loan) or the purchase of equity through an lbo fund that specializes in
such investments.

leveraged buyout (LBO)

Acquisition of the firm by a private group using substantial borrowed funds.

Buyout

Purchase of a controlling interest (or percent of shares) of a company's stock. A leveraged buy-out is
done with borrowed money.

Highly leveraged transaction (HLT)

Bank loan to a highly leveraged firm.

Leveraged beta

The beta of a leveraged required return; that is, the beta as adjusted for the degree of
leverage in the firm's capital structure.

Leveraged equity

Stock in a firm that relies on financial leverage. Holders of leveraged equity face the
benefits and costs of using debt.

Leveraged lease

A lease arrangement under which the lessor borrows a large proportion of the funds needed
to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the
borrowing.

Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.

Leveraged required return

The required return on an investment when the investment is financed partially by debt.

Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.

Management buyout (MBO)

leveraged buyout whereby the acquiring group is led by the firm's management.

Unleveraged beta

The beta of an unleveraged required return (i.e. no debt) on an investment when the
investment is financed entirely by equity.

Unleveraged required return

The required return on an investment when the investment is financed entirely
by equity (i.e. no debt).

Leveraged buyout

The purchase of one business entity by another, largely using borrowed
funds. The borrowings are typically paid off through the future cash flow of
the purchased entity.

management buyout (MBO)

Acquisition of the firm by its own management in a leveraged buyout.

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