Leveraged loan (also referred to in German as loan; the English word loan is assigned a masculine and a neuter gender in German, and more rarely a grace loan)

A secured loan to companies with a rating below investment grade (non-investment grade: practically below BBB rating). – In line with the higher risk, such loans must also bear a higher interest rate; typically, the interest rate is at least 150 basis points (1.5 percent) above LIBOR. To this end, restrictions are imposed on the company; the worse the debtor, the stricter the covenants. If these are not met, the bank can call in the loan immediately. – Banks then often pool the corresponding loans and refinance them on the market as syndicated high-yield corporate loans by issuing asset-backed securities. In most cases, however, the securitized securities created in this way are not tranched further but issued in a single junior tranche. – At the end of 2007, the leveraged loan portfolios held by German banks consisted on average of around one hundred different tranches. The average retained loan volume per transaction (final take) was around EUR 30 million. – See downgrade trigger clause, first-loss clause, lemons problem, securitization.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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