what is a leveraged loan 
a leveraged loan is one that is extended to companies or individuals that already have considerable amounts of debt or a poor credit history lenders consider leveraged loans to carry a higher risk of default and as a result a leveraged loan is more costly to the borrower leveraged loans for companies or individuals with debt tend to have higher interest rates than typical loans these rates reflect the higher level of risk involved in issuing the loans understanding leveraged loansa leveraged loan is structured arranged and administered by at least one commercial or investment bank these institutions are called arrangers and subsequently may sell the loan in a process known as syndication to other banks or investors to lower the risk to lending institutions 1there are no set rules or criteria for defining a leveraged loan some market participants base it on a spread for instance many of the loans pay a floating rate often based on the secured overnight financing rate sofr which replaced the london interbank offered rate libor in june 2023 or another benchmark plus a stated basis or arm margin in general the adjustment of the credit spread adds basis points to the interest rate on a loan to make up for the fact that sofr has traded below libor 2if the arm margin is above a certain level it is considered a leveraged loan others base the classification on the borrower s credit rating with loans rated below investment grade which is categorized as ba3 bb or lower by the rating agencies moody s and s p typically banks are allowed to change the terms when syndicating the loan which is called price flex the arm margin can be raised if demand for the loan is insufficient at the original interest level in what is referred to as upward flex conversely the spread over sofr can be lowered which is called reverse flex if demand for the loan is high 