A leveraged loan is a loan to a company that carries meaningful debt relative to its earnings — conventionally, a borrower rated below investment grade (below BBB-/Baa3) or paying a spread above a market threshold. The label matters because these loans form their own institutional market, with distinct documentation, investors, and trading conventions.
The classic structure has two layers. A revolving credit facility (the "revolver") provides working capital that can be drawn and repaid; it is usually held by banks. A term loan is fully drawn at close and amortizes little or not at all until maturity. "Term loan A" tranches amortize and are held by banks; "term loan B" (TLB) tranches have minimal amortization — often 1% per year with a bullet at maturity — and are sold to institutional investors.
Pricing is floating rate: a spread over a reference rate, which in the U.S. is now SOFR (the Secured Overnight Financing Rate, which replaced LIBOR). A loan quoted at "S+350" pays SOFR plus 3.50%. Many loans include a floor on the reference rate. Because coupons reset with short-term rates, leveraged loan returns are driven more by credit risk and rate levels than by duration.
Most leveraged loans are senior secured: they sit at the top of the capital structure and are backed by liens on substantially all of the borrower's assets. Recovery in default has historically been higher for first-lien loans than for unsecured bonds, though recoveries vary widely by cycle, sector, and — increasingly — by how aggressively documents permit collateral to move.
The syndication process starts with one or more arranging banks that underwrite or "best-efforts" market the loan. The arrangers prepare a confidential information memorandum, set price talk, and build a book of institutional investors — collateralized loan obligations (CLOs, the largest buyer base), loan mutual funds and ETFs, insurers, and credit funds. Terms can "flex" during syndication: pricing and documentation tighten or loosen depending on demand.
After close, loans trade in an over-the-counter secondary market at prices quoted as a percentage of par. Settlement is slower than bonds, and transfers are recorded by an administrative agent. Trade groups such as the LSTA standardize documentation and settlement mechanics in the U.S. market.
Two document features dominate credit analysis. First, covenants: most large TLBs are "covenant-lite," meaning they lack financial maintenance tests and rely on incurrence covenants (see our covenant guide). Second, flexibility baskets: modern credit agreements permit additional debt, investments, and restricted payments through negotiated baskets, and disputes over these provisions — collateral transfers, priming exchanges, "liability management" transactions — have become a defining feature of stressed situations.
Key vocabulary: "OID" (original issue discount) is the discount to par at which a loan is issued; "call protection" (often "101 soft call") compensates lenders if the loan is refinanced quickly; "EBITDA add-backs" are adjustments that raise the earnings figure used in leverage calculations, effectively loosening every ratio built on it; "amend-and-extend" pushes out maturities with existing lenders; and the "maturity wall" is the concentration of loans coming due in a given period.