Leveraged loans are credit facilities extended to borrowers with speculative-grade credit ratings or significant pre-existing debt — typically at leverage ratios of 4x+ EBITDA. The leveraged loan market encompasses revolving credit facilities, amortizing term loans (Term Loan A), and institutional term loans (Term Loan B), with the institutional term loan market growing to become the dominant product for leveraged finance transactions.
Term Loan B (TLB) is the defining product of the institutional leveraged loan market. TLBs feature minimal amortization (typically 1% per year), a bullet maturity at 5–7 years, and floating-rate pricing (SOFR + spread). They are designed for institutional investors — CLOs, loan mutual funds, and hedge funds — rather than bank balance sheets, and are distributed through a syndication process similar to bonds. Because they are designed for buy-and-hold institutional investors rather than revolving bank lenders, TLBs carry covenant-lite structures that lack maintenance financial covenants.
The leveraged loan market is the primary funding source for private equity LBOs. When a PE sponsor acquires a company, the TLB provides the bulk of the acquisition financing — large enough to constitute the majority of debt in the capital structure, syndicated to institutional investors over a few weeks, and at pricing that reflects current market appetite for leveraged credit. The TLB market's health directly affects the pace and economics of PE deal activity.
Pricing for leveraged loans reflects a combination of credit quality, leverage, market conditions, and syndication dynamics. Pricing grids — where the spread steps up or down based on the borrower's leverage ratio — are used in some leveraged loans, though covenant-lite TLBs often have fixed pricing regardless of leverage. Flex provisions allow underwriting banks to adjust pricing by 25–50 bps up or down from the initial price talk in response to investor demand during syndication.
The secondary market for leveraged loans is a significant and liquid market. Trades settle through the LSTA (Loan Syndications and Trading Association) standard forms, with par trades settling T+7 and distressed trades using modified forms. Daily price quotes are published by data providers, providing transparency to market participants and enabling CLO managers to mark their portfolios to market regularly.