Which statement about term loans in LBO financing is true?

Which statement about term loans in LBO financing is true?

• A. They are unsecured and have a floating rate
• B. They are secured and have a fixed rate
• C. They are secured and have a floating rate
• D. They are not used in LBOs

Answer: (C)

In an LBO, term loans are designed to be secured and to carry a floating rate. They’re secured because lenders want strong collateral given the high leverage involved, typically taking a first lien on the target’s assets to prioritize repayment. The floating rate aspect aligns interest costs with current market conditions, usually pegged to a benchmark like SOFR or Euribor plus a spread that reflects the deal’s risk. This combination—secured and floating—provides lenders with protection and flexibility in a highly leveraged scenario. While there are unsecured or fixed-rate loans in other contexts, the standard LBO structure emphasizes secured, floating-rate term loans.

In an LBO, term loans are designed to be secured and to carry a floating rate. They’re secured because lenders want strong collateral given the high leverage involved, typically taking a first lien on the target’s assets to prioritize repayment. The floating rate aspect aligns interest costs with current market conditions, usually pegged to a benchmark like SOFR or Euribor plus a spread that reflects the deal’s risk. This combination—secured and floating—provides lenders with protection and flexibility in a highly leveraged scenario. While there are unsecured or fixed-rate loans in other contexts, the standard LBO structure emphasizes secured, floating-rate term loans.