5. Why Is Leveraged Finance Analysis Unique?

What’s in this chapter:

• Why volatility exists in the leveraged finance market

• How and why the analysis for this market uses components of fixed income, equity, and investment banking, among others

• Why leveraged finance credit analysis is different from investment grade and equities

Leveraged finance analysis encompasses key components from other types of securities analysis. It also emphasizes and incorporates features unique to its market. This combination of tools commonly used in equity, debt, and corporate finance makes the analytical work done in this market unique.

Companies with more debt leverage (or gearing in the UK) have less margin for error. Therefore, the security prices of these companies react more dramatically to relatively smaller changes in operating results or news headlines than prices of companies with less leverage (such as investment-grade companies). This more volatile reaction in price is more similar to stocks than to traditional investment-grade corporate or government-issued bonds.