What it is
Leveraged loans are a type of debt provided to companies that are considered to have a higher risk of default due to their existing debt levels or lower credit ratings. These loans are typically used to finance mergers and acquisitions, leveraged buyouts, or large capital expenditures. They are often floating-rate, meaning their interest payments adjust periodically based on a benchmark rate like SOFR, and are usually syndicated by a group of banks and institutional investors.
The market for leveraged loans can be an indicator of investor appetite for risk, as demand for these loans tends to rise during periods of strong economic growth and low interest rates. However, during economic downturns or periods of rising interest rates, the risk of defaults increases, which can create stress for lenders and investors. News often highlights concerns about the credit quality of borrowers or the weakening of loan covenants, potentially signaling broader credit market vulnerabilities.
Why it matters
Leveraged loans offer higher yields but come with higher risk, reflecting conditions in corporate debt markets. Their performance signals economic health.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice