United States: A View of the Bridge: M&A Bridge Loans Explained

Bridge loan financing for mergers and acquisitions involves high stakes for borrowers and lenders. Understanding the timing, structure, terms and range of outcomes under a bridge loan commitment is key to a successful financing negotiation and to analyzing the overall transaction economics.

For corporations and private equity sponsors pursuing large acquisitions, securing a bridge loan commitment may be the final component to a winning acquisition bid. While in many cases the borrower and the committing bridge lenders view the bridge commitment as a backstop and share the goal of never actually having the bridge loan funded, the terms can be of critical importance to the overall economics of the acquisition and to the timing, structure and terms of a long-term financing. The complexity of bridge loan terms, and the broad range of potential outcomes that may follow a bridge loan commitment, make it imperative for an acquirer to promptly engage in careful negotiations with the bridge loan providers and to factor the bridge financing costs and terms into its economic analysis and projections for the acquisition.

The Financing Gap and a Bridge Loan to Cross It

In the current merger and acquisition environment, acquisition targets in middle market and large cap transactions will rarely accept a financing contingency in an acquisition agreement. Acquisition targets will closely analyze a bidder's financing sources to assess the likelihood that a bid, once accepted, will result in a consummated acquisition. This presents obvious difficulties for a potential acquirer that does not have an existing credit facility or cash sufficient to finance the subject acquisition. The challenges are particularly acute for transactions in which a bidder expects ultimately to finance the acquisition in whole or in part through new debt financing in the capital markets, through a high-yield debt offering or a broadly syndicated loan facility, where a number of factors, including confidentiality requirements, bid uncertainty, capital market conditions and transaction timing, may prohibit securing such financing in advance of announcing an acquisition.

Bridge loan financing offers a solution to fill the gap between the time a purchase agreement is signed and the time at which long-term financing can be obtained, and is sometimes the only practical option for an aspiring acquirer to secure a winning bid. Although the bridge loan, if it is actually funded, is necessary for purposes of financing the payment of the purchase price on the closing date, it is the bridge loan commitment, which is invariably provided by an investment bank (or its affiliates) regarded as highly creditworthy, that provides the critically needed assurance to the acquirer that financing will be available for the acquisition on the closing date regardless of whether a capital markets transaction can be completed by that time, and to the target that the transaction will not fail to close as a result of a lack of financing.

A unique aspect of bridge loan financing is that the investment banks (or their affiliates) providing the bridge loan commitment typically do not wish to participate in the long-term financing as debt holders, and seek to reduce or eliminate the significant risk associated with a funded bridge loan. Instead, investment banks commit to bridge financing so that they may be engaged to arrange the long-term financing and, in many cases, to facilitate the underlying acquisition for which they may also be involved, each of which offers significant fee income to the investment bank.

Structure of Bridge Loans

Bridge loans are typically short-term facilities used to bridge a financing gap until the borrower is able to obtain long-term financing from the capital markets or another takeout. Similar to other loans, interest rates for bridge loans vary depending upon the credit rating of the borrower or its debt. However, bridge loan interest rates tend to be higher than rates applicable to other forms of financing, and such rates typically increase periodically over the initial term of the loan. For example, a bridge loan with an initial term of one year likely will have an upward interest rate change on a quarterly basis. Interest rates will normally be subject to a cap, though the bridge lenders may also require a floor. Bridge lenders may also allow for non-cash or payment-in-kind interest payments, which also may be subject to a cap.

Maturity

If the borrower does not pay off a bridge loan at the end of its initial term, the bridge loan will automatically convert into a long-term financing either in the form of a bond or a term loan with a longer maturity (e.g., five to 10 years) and a higher interest rate (typically the interest rate at the end of the initial term plus an additional premium). To facilitate conversion of the bridge loan into bonds, the bridge lenders may require the borrower to file a shelf registration with respect to these exchange securities prior to the end of the initial term. In addition, the bridge lenders may also require the borrower to pay liquidated damages equal to a percentage of the principal amount of the exchange securities if the exchange securities are not freely tradeable at the end of the initial term.

Fee Structure

To compensate bridge lenders for the short-term nature of a bridge loan, commitments often include myriad fees, some of which have the potential to overlap. Fees may include the following:

  • A commitment fee is a fee for the bridge lenders' commitment, payable whether or not the bridge loan is funded.
  • A funding fee is a fee for funding the bridge loan, payable on the date that the bridge loan funds (typically on the closing date). If a bridge loan is refinanced before maturity, some bridge lenders may be willing to partially refund the funding fee depending upon the time between the funding and the repayment. These rebates range from 75 percent to 25 percent depending on the time period after which the refinancing of the bridge loan occurs. The shorter the period of refinancing after funding, typically the higher the discount. For example, the bridge lenders may be willing to refund 75 percent of the funding fee if it is refinanced within 30 days of funding, 50 percent if it is refinanced within 60 days of funding, or 25 percent if it is refinanced within 90 days of funding. Outside time frames for rebates vary and may be as long as 270 days.
  • A deal-away fee is a fee to the bridge lenders on the closing date in the event another source of financing is used. Typically the fee is intended to compensate the bridge lenders for the fees that they would have otherwise received had the bridge loan funded.
  • If the bridge loan is syndicated, the lead bank is usually appointed as the administrative agent and receives an additional administrative agent's fee when the bridge loan funds, then typically annually thereafter for as long as the bridge loan is outstanding.
  • A duration fee is a periodic fee on the outstanding balance of the bridge loan, sometimes increasing the longer the bridge loan remains outstanding.
  • If the bridge loan is not refinanced by the end of its initial term and converts into long-term financing as discussed previously, bridge lenders often will require an additional conversion/rollover fee to compensate them for continuing the bridge loan under the new financing structure. Fees are typically equal to an underwriting fee that would have been paid had the bridge loan been replaced in a bond offering. Similar to the funding fee, the conversion/rollover fee may also be subject to rebate depending on when the bridge loan is repaid after the end of the initial term of the bridge loan.
  • A refinancing fee is a fee payable when the bridge loan is refinanced prior to its initial term. Typically, the refinancing fee is equal to the conversion/rollover fee.
  • A bond underwriting fee is a fee for underwriting a bond offering to replace the bridge loan, typically documented separately from the bridge loan commitment.

Careful attention should be paid when negotiating bridge-loan-related fees to avoid potential overlap. For example, the refinancing fee could overlap with the bond underwriting fee in cases in which the bond offering is placed by the same investment bank that issued the bridge loan. Similarly, the refinancing fee may potentially overlap with the deal-away fee if the deal-away fee provision is worded broadly to extend beyond the initial funding of the bridge loan.

Securities Demand

Often the most contentious provision when negotiating a bridge loan commitment is the securities demand, which provides the bridge lenders with the right to require the borrower to issue long-term debt securities into the capital markets to refinance the bridge loan. Once the conditions for the securities demand are met, the investment bank, rather than the borrower, controls the timing to take the long-term financing to market. Common points of negotiation include the following:

  • Timing. A borrower may request to limit the bridge lenders' ability to make a securities demand until some period after the bridge loan funds (e.g., up to 180 days after funding) to allow for flexibility to fund the bridge in case the price of long-term debt is higher at closing. However, in recent years, borrowers have typically been unable to obtain such "holiday" periods from bridge lenders. More commonly, securities demands are exercisable at closing, although bridge lenders also may require that the securities demand be exercisable pre-closing with the securities issued into escrow.
  • Number, frequency and minimum size of demands. To limit the costs of multiple securities demands, borrowers may try to limit the number, frequency and minimum size of each demand.
  • Sale process requirements. Often, borrowers will seek to obtain an obligation from the bridge lenders that they will obtain the best price for the securities offering or at least make a bona fide attempt (e.g., at least one road show).

Securities Demand Failure

Borrowers and bridge lenders also typically negotiate the remedies in case the securities demand fails to raise funds sufficient to repay the bridge loan in full. In particular, bridge lenders will often request the ability to exercise any or all of the following remedies upon notice of a demand failure:

  • Increase in the bridge loan interest rate to the highest rate chargeable under the facility
  • Modification of bridge loan terms to include defeasance and call provisions customary in publicly traded high-yield debt so long as the failure continues
  • Default under the bridge loan so long as the failure continues
  • Payment of a conversion/rollover fee

Similarly, borrowers may seek to narrow the scope of the securities demand failure through a provision permitting the borrower to refuse a securities demand if it would result in potentially adverse tax consequences (e.g., cancellation of debt income or applicable high-yield discount obligations issues).

Terms of Long-Term Financing

Sponsors who have experience with negotiating fully underwritten commitment letters with one or more lead lenders and arrangers that intend to syndicate a significant part of an acquisition loan facility will be familiar with "market flex" provisions in fee letters that enable the committing lenders and arrangers to "flex" certain specified terms of the credit facility. Such "flex" provisions apply as well to bridge loan commitments, in which underwriters seek broad discretion to vary the terms of the long-term financing to facilitate the syndication of the long-term credit facility or the placement of the long-term debt securities. The scope of such flex rights can vary dramatically depending on conditions in the capital markets, sponsor relationship, leverage and issuer credit profile. Among the many terms that may be subject to flex are price, structure flex (senior debt, senior subordinated, second lien tranches), maturities, financial covenants and financial covenant calculations.

Conclusion

A corporation or private equity sponsor negotiating a commitment for a bridge loan will invariably seek the best economic terms for the bridge facility and for the anticipated long-term financings. However, as much or more focus is needed on limiting the downside risk by negotiating limits on the rights of underwriters to make securities demands and flex key economic and legal terms, and by understanding the impact of a downside case on financial projections for the acquisition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions