What can be a consequence of high levels of debt in leveraged financing?

High levels of debt in leveraged financing primarily increase the risk of financial distress for a company, which can ultimately lead to bankruptcy under adverse conditions. When a firm is heavily indebted, it has higher fixed obligations in terms of interest payments and principal repayments. If the company faces difficulties such as a downturn in revenue, economic shocks, or increased operating costs, its ability to meet these obligations may be compromised.

In such scenarios, the burden of servicing debt can prevent the company from maintaining necessary operational capital, pursuing growth opportunities, or investing in critical areas of the business. This elevated risk profile can also lead to heightened scrutiny from lenders and investors, and in extreme cases, prompt a default on loans, potentially resulting in bankruptcy.

The other options present scenarios that are generally not associated with high levels of debt in leveraged financing. For instance, while one might think that excessive debt might help in securing additional financing due to a high leverage ratio, this is often not the case; lenders may become wary of a company that already carries a significant debt load. Likewise, high debt levels typically do not lead to increased profit margins or higher stakeholder trust, as the financial strain often detracts from operational flexibility and increases risk perception among stakeholders.