DEFINITION of ‘Highly Leveraged Transaction – HLT’
A highly leveraged transaction is a bank loan to a highly leveraged company which has namely a large amount of debt.
BREAKING DOWN ‘Highly Leveraged Transaction – HLT’
Highly leveraged transactions are thought of as being similar to junk bonds, as they both face significant default risk, but HLTs are more secure, because they have stronger debt covenants due to their structure.
HLT guidelines are set out by the U.S. Office of the Comptroller of Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation. The OCC broadly considers a highly leveraged loan to be a transaction where the borrower’s post-financing leverage, when measured by debt-to-assets, debt-to-equity, cash flow-to-total debt or other such standards unique to particular industries, significantly exceeds industry norms for leverage.
For a loan to be defined as an HLT, it generally contains one or more of the following conditions:
- Proceeds used for buyouts, acquisition, and recapitalization.
- The transaction results in a substantial increase in borrower’s leverage ratio. Industry benchmarks include a twofold increase in the borrower’s liabilities, resulting in a balance sheet leverage ratio (total liabilities/total assets) higher than 50%, or an increase in the balance sheet leverage ratio more than 75%. Other benchmarks include increasing the borrower’s operating leverage ratios [total debt/ EBITDA or senior debt/EBITDA] above defined levels such as above 4.0X EBITDA or 3.0X EBITDA, respectively.
- Transactions designated as an HLT by the syndication agent.
- Borrower rated as a non-investment-grade company with a high debt to net worth ratio.
- Loan pricing indicates a non-investment-grade company. This generally consists of some spread over LIBOR that fluctuates as a function of market conditions.