Understanding Debt Tranches in an LBO

A leveraged buyout, or LBO, uses multiple layers of debt to help fund an acquisition. To build an LBO model or discuss deal financing in interviews, you need to understand each tranche’s purpose, repayment profile, cost, and priority.

Author: Alex Johnson Updated 5 min read

Why LBOs Use Multiple Debt Tranches

An LBO capital structure has to balance financing cost, flexibility, and risk. Senior lenders accept lower returns because they are repaid first and often have claims on collateral. Junior lenders bear more risk, so they demand higher interest rates and stronger return protections.

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