LBO or Leveraged Buyout is a significant amount of borrowed money either in bonds or loans to meet the cost of acquisition. In other words, the term refers to a situation where a company borrows money in terms of bonds or loans to pay the cost of acquisition. The collateral for the loans as well as the assets for company acquisition include in the acquisition assets. However, in many cases, we call leveraged buyout when the company completes acquisition from borrowed funds entirely.
Leveraged buyout has not entered popularity again since the 2008 financial crisis. But as the time goes on, it rises again. Usually, the leveraged buyout ratio covers 90% debt and 10% equity. The ratio in the LBO occurs because of the high debt/equity ratio. The bonds issued in the buyout are not investment grade. Plus, it sometimes refers to junk bonds.
However, LBO’s reputation is famous for being ruthless and predatory business tactics. This is because the target company does not usually sanction the acquisition. Practically, there is a bit of irony in succeeding the target company. This is because the assets and balance sheet could be in the form of collateral acquisition. But this is to note that, most of the leveraged buyout purpose is to create a large acquisition without committing too much capital.
