Libor floors leveraged loans wikipedia

 

libor floors leveraged loans wikipedia

NEW YORK, Sept 30 (Reuters) - A recent influx of retail investors into the US leveraged loan market, driven by the prospect of near-term interest rate hikes and rising Libor rates, is helping to push secondary prices higher as loans continue to offer good relative value compared to high-yield bonds.

Retail investors, individuals who invest via bank loan funds rather than institutional investors such as pension funds and endowments, have been targeting the US leveraged loan market since August as signs indicate that the Federal Reserve is intending to raise interest rates.

This has prompted nine weeks of inflows into the asset class, which continues to offer good yields as returns in other products grind lower in a volatile environment driven by political considerations and macroeconomic concerns.

Libor floors leveraged loans wikipedia

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NEW YORK, Sept 30 (Reuters) - A recent influx of retail investors into the US leveraged loan market, driven by the prospect of near-term interest rate hikes and rising Libor rates, is helping to push secondary prices higher as loans continue to offer good relative value compared to high-yield bonds.

Retail investors, individuals who invest via bank loan funds rather than institutional investors such as pension funds and endowments, have been targeting the US leveraged loan market since August as signs indicate that the Federal Reserve is intending to raise interest rates.

This has prompted nine weeks of inflows into the asset class, which continues to offer good yields as returns in other products grind lower in a volatile environment driven by political considerations and macroeconomic concerns.

As mentioned previously, financial risk is the risk to the stockholders that is caused by an increase in debt and preferred equities in a company's capital structure. As a company increases debt and preferred equities, interest payments increase, reducing EPS. As a result, risk to stockholder return is increased. A company should keep its optimal capital structure in mind when making financing decisions to ensure any increases in debt and preferred equity increase the value of the company.

Degree of Financial Leverage
This measures the percentage change in earnings per share over the percentage change in EBIT. This is known as "degree of financial leverage" (DFL). It is the measure of the sensitivity of EPS to changes in EBIT as a result of changes in debt.

Example: Degree of Financial Leverage
With Newco's current production, its sales are $7 million annually. The company's variable costs of sales are 40% of sales, and its fixed costs are $2.4 million. The company's annual interest expense amounts to $100,000 annually. If we increase Newco's EBIT by 20%, how much will the company's EPS increase?

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