Why do private equity firms refinance?

Corporate refinancing is often done to improve a company’s financial position. Through refinancing, a company can receive more favorable interest rates, improve their credit quality, and secure more favorable financing options. It can also be done while a company is in distress with the help of debt restructuring.

Why would a PE firm prefer high yield debt instead?

Why would a PE firm prefer high-yield debt instead? If the PE firm intends to refinance the company at some point or they don’t believe their returns are too sensitive to interest payments, they might use high-yield debt.

Why would you refinance a debt?

The most common reasons to refinance debt are: terms of the new debt; To reduce the monthly repayment amount by entering into new debt with longer terms; To switch from a variable-rate debt to a fixed-rate debt or vice versa (commonly done in changing interest rate environments).

What does refinancing debt mean?

Debt refinancing involves replacing one or more existing loans with a new loan that offers more favourable terms. This may be a lower interest rate, for example, or an extended repayment period, but the business benefits by reducing its outgoings on a month-to-month basis.

Does private equity invest in debt?

Leveraged Buyouts (LBOs) LBOs are exactly how they sound. A company is bought out by a private equity (PE) firm, and the purchase is financed through debt, which is collateralized by the target’s operations and assets.

How does refinancing debt work?

Refinancing debt results in lower monthly payments, which in turn frees up cash that can be utilized for other needs. A company can refinance its debt by replacing its current debt with a lower interest rate debt. Issuing new equity to pay down the debt load is another method of refinancing.

Why would a company use high-yield debt?

What Are High-Yield Bonds? High-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds are more likely to default, so they must pay a higher yield than investment-grade bonds to compensate investors.