Leveraged Buyout (LBO)

An LBO is when a company uses considerable amounts of debt (leverage) to buy another company.  The acquired company’s assets are sometimes used as collateral for the loans.  The ratio is usually around 90% debt to 10% equity during an LBO.  Because of the small amount of capital, the bonds created to fund this are usually very low quality or junk bonds.  An LBO helps a company purchase another company without having to put up large amounts of capital.