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The leveraged buy out is a strategy of buying a company using borrowed money, in other words using debts and bonds. Usually, a holding borrows money and uses also its own assets (equity) for the buying; however, the debt remains much greater than the equity. LBOs can be very profitable projects in case of success. By improving the situation of the acquired company, which will eventually provide respectable cash flows, the holding pays the loan interests and reimburses the debt, and makes net profit with the rest
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It is very important to note that the success of a LBO is closely related to the management of the acquired company. As a matter of fact, if the managers fail to improve the performance of the new business, the results can be disastrous with an inability to pay the interests on loan.
Finally, since LBOs are usually risky, the bonds involved are labeled junk bonds: high returns are expected but with a high default risk.