the fundamentals of bridge loans

bridge loans are a key way to finance huge acquisitions, but their phrases are very specialised. in “the fundamentals of bridge loans”, the white & case group explains the important thing terms of bridge loans and discusses some demanding situations confronted inside the contemporary marketplace.

bridge loans serve as an important way that a ability acquirer demonstrates its potential to fund an acquisition. certainty of finances is needed both for regulatory reasons for financing the purchase of indexed groups in europe (i.e., underneath the united kingdom takeover code cash attention should be to be had to proceed with a bid), in addition to practical issues, consisting of offering warranty that both non-public fairness shoppers and company consumers can increase the important funds to guide their bids at some stage in an public sale procedure.

traditional bridge loans are transient loans with an preliminary maturity of 12 months or less, installed place to bridge a capacity hole among the declaration of an acquisition until a employer can steady everlasting financing. but, bridge loans carry enormous hazard. the borrower could prefer to avoid certain high-priced fees and pricing the permanent financing on the interest charge cap (discussed below) and lenders would favor to be engaged as the initial consumers on the everlasting financing (commonly high yield bond) in preference to assume the sort of massive stability sheet liability. the rationale among all events on the commitment stage is consequently now not to fund a bridge mortgage, however to attract down the bridge mortgage most effective to dispose of funding hazard from the m&a transaction. to this quit, the price and interest rate structure of the bridge dedication is set up to incentivize the borrower to release a high yield bond offering or different permanent financing transaction beforehand of the acquisition ultimate in place of investment the bridge, or if investment is necessary, to refinance the bridge as fast as feasible following the final of the acquisition.

in recent years and at some point of times of sturdy marketplace conditions, it has been quite straightforward for debtors to then finalize the everlasting financing transaction both earlier than drawing the bridge or straight away after and quick refinance bridge loans. but, current modifications and ongoing volatility in credit markets have not on time the everlasting financing and put a damper at the potential to refinance the bridge facilities throughout the initial one year term. in such marketplace situations, banks want to don’t forget whether or not to attend and stay in the bridge loan, or doubtlessly charge the excessive yield bond above the cap (discussed underneath) and/or charge with significant authentic problem bargain, which could mean the banks might ultimately lose predicted fees or greater from the transaction.

 

essential capabilities of a bridge loan
parties
the important thing parties to an average bridge mortgage are the acquirer (generally a newly hooked up enterprise) in an m&a transaction (the borrower), the banks appearing as arrangers and the executive agent.

duration / maturity
in a typical transaction, the bridge mortgage’s adulthood of 365 days will mechanically be prolonged into long-time period financing have to the borrower fail to refinance the bridge loan on the stop of its preliminary time period. the bridge mortgage will convert into a tradeable mortgage device, normally with a set interest price set at the “cap” fee (see below).

as in addition mentioned beneath, as soon as a bridge loan “phrases out” into an prolonged term mortgage, creditors have the proper to trade such loans for “change notes”. bridge loan documentation is drafted on the idea that at the time of conversion, lenders will need to change their prolonged term loans into “change notes”. such change notes are cleared via clearing systems and are freely tradeable, instead of prolonged term loans, that are less liquid and concern to certain transfer regulations.

documentation
normally, bridge mortgage commitments are documented via a commitment letter, bridge time period sheet, bridge fee letter and high yield bond engagement letter.

commitment letter – the commitment letter is the important thing operative record where the banks commit to make the bridge mortgage to be had to the acquirer to fund an acquisition. this consists of the general quantum of the financing, roles/titles of banks, as well as positive other key commitment phrases, together with any conditionality (typically restricted to gadgets in the manipulate of the borrower) to the availability of the funds. the dedication may additionally consist of extra factors of the senior part of the capital structure (for example, time period loans of 1 or more sorts) and in all likelihood a revolving credit facility dedication. attached to the dedication letter are time period sheets detailing the phrases of the loan facilities that will be made available, consisting of the bridge time period sheet.
bridge term sheet – the bridge term sheet is normally attached as a time table to the dedication letter and gives a precis of material terms of the bridge facility agreement. this time period sheet additionally consists of well-knownshows detailing the trade notes and covenant baskets that could govern the exchange notes and are also used as the idea of the anticipated high yield bond to refinance the bridge loan (or trade notes).
bridge charge letter – the bridge price letter describes the expenses and commissions that will be paid to each of the banks in trade for their bridge dedication, funding the bridge and rolling the bridge into a protracted-time period debt obligation. the fees are normally set as a percentage of the gross proceeds or predominant quantity. the price letter additionally lays out the cap and the securities call for (all as mentioned in element below). the price letter will even include charges of any additional factors of the senior capital structure, including revolving credit score facility fees.
high yield engagement letter – the excessive yield engagement letter is a letter from the acquirer to the lending banks in which it engages the banks to behave as preliminary consumers in any future bond imparting to take out the bridge mortgage. this letter gives the important thing engagement terms for the high yield bond providing to refinance to bridge loan, which includes the costs to be paid to the preliminary customers. in change for presenting the bridge and signing the bridge dedication letter, the banks expect to be engaged on the bridge takeout financing by way of way of signing the engagement letter.
charges, interest charges and rebates
prices, interest fees and diverse rebates are generally established to incentivize the borrower to refinance the bridge at the earliest feasible possibility. the prices in an ordinary bridge mortgage can also include the subsequent, all of which can be payable best if the acquisition closes – referred to as “no deal, no rate”:

dedication charge – a fee for the bridge lenders’ dedication, payable no matter whether or not the bridge mortgage is funded (provided the acquisition closes);
investment rate – payable most effective if the bridge mortgage is funded. usually, the bridge rate letter gives for a “rebate” of the investment charge, ranging from 25% to 100% of the preliminary price paid, depending on how lengthy the bridge mortgage is refinanced earlier than its preliminary adulthood. the less time among the investment and the refinancing of the bridge mortgage, the more the discount;
deal-away charge – in the occasion every other supply of funding is utilized on the acquisition closing date, the creditors are both absolutely or in part (relying if the bridge become funded) compensated as if they had led the everlasting financing. this rate is normally set out in the excessive yield engagement letter and ensures that the banks presenting the commitment will act because the mandated lead arrangers and/or initial clients inside the permanent financing transaction, or in any other case are compensated as a result;
alternative transaction price – this is payable if the borrower terminates the excessive yield engagement letter and completes the m&a transaction within an agreed duration thereafter (commonly inside 6-three hundred and sixty five days), with comparable financing provided with the aid of different banks. the original banks could be compensated a percentage of the charges they could have acquired, had they dedicated to the bridge loan;
conversion or rollover price – if the bridge mortgage isn’t refinanced at its preliminary adulthood date and is transformed into lengthy-time period financing, a conversion fee is imposed at the borrower. the banks will get hold of a price, which need to cover the prices the banks would have acquired had the bridge loan been refinanced through a excessive yield bond led by way of the banks committing to the bridge mortgage financing. this can, in a few transactions, be concern to a rebate mechanism much like the rebate of the funding fee, lowering with how long after the conversion date the prolonged time period loans are refinanced;
bond underwriting or loan arrangement charge – the banks get hold of a charge for underwriting the bond imparting or arranging a syndicated loan to refinance the bridge loan;
administrative agent charge – if syndicated banks are dedicated to the bridge loan, the agent will acquire a rate as soon as the bridge mortgage is funded and annually thereafter if the bridge loan stays splendid; and
interest price – the key hobby rate might be set out inside the dedication documents, with an interest charge that generally “steps up” on a quarterly foundation over the direction of the bridge mortgage.
securities demand
the securities call for provisions in the bridge fee letter deliver the banks the proper to demand that the borrower trouble a excessive yield bond to refinance the unpaid bridge loan. once the borrower and the banks satisfy the conditions of such call for, the banks in concept advantage full manipulate of the timing and shape of the long-time period financing.

the securities call for provision is typically exercisable by the banks upon the expiry of a holiday period following the remaining of the acquisition (or potentially prior to the final date). as soon as to be had to exercise this provision, the banks can “pressure” the borrower to go to marketplace with permanent high yield bonds on the cap hobby fee and at the terms set out within the bridge charge letter. if the borrower does no longer comply with the securities call for, then a “securities demand failure” could have took place under the bridge loan, which results in the mortgage immediately “terming out” into an extended time period mortgage (if you want to bring an interest charge at the cap charge) which may be exchanged into alternate notes and the conversion rate might be due. a securities demand failure will however now not represent an event of default below the bridge facility agreement.

key securities call for negotiating issues from the creditors’ perspective consist of:

most importantly, the “cap” interest charge. that is a key time period blanketed in the bridge rate letter that determines the very best hobby fee the borrower will pay within the everlasting financing and provides a practical difficulty to the banks’ workout of the securities call for. if the cap is just too low for the present marketplace situations, then workout the securities call for could bring about the banks desiring to successfully cowl the distance among the cap and the market price on account of negative market situations if they want to vicinity securities above the cap;
negotiate a floor to any potential original difficulty bargain (oid). such discount is normally set at a ninety eight% ground such that the difficulty charge will now not be decrease than ninety eight% from the par amount of the bonds;
establish an inexpensive advertising length for the high yield bond to encourage the borrower and banks to launch a high yield bond on an efficient timeline; and
provide the banks with the right to reject the borrowers’ request for a holiday period earlier than the securities call for is initiated, or negotiate to shorten the vacation period as lots as possible.
one choice that the banks can negotiate at the outset inside the context of a securities call for is for positive “flex” within the bridge charge letter, which permits banks to “flex”, or amend, sure phrases of the securities provided below a securities demand to facilitate the issuance of everlasting financing. flex provisions should include, but aren’t limited to, forcing hobby charge increases, restructuring low-cost senior secured loans to better priced mezzanine loans or bonds, shortening or extending maturities of the loan tranches or tightening covenants. however, this sort of flexibility is much less normally visible recently in the european leveraged finance market.

prolonged term loans and exchange notes
as cited above, if the preliminary bridge loan terms out either by accomplishing its 12 months adulthood or upon a failed securities call for, the bridge mortgage mechanically (concern to very restricted exceptions along with non fee of charges) is refinanced into prolonged time period loans, that have a adulthood date equivalent to that proposed for the permanent financing (i.e., the tenor of the high yield bond take out financing). at positive ordinary intervals and concern to minimal issuance amounts, the lenders underneath the prolonged time period loans can alternate their extended term loans for an equal amount of trade notes, which are privately held securities which have normal functions of long time financing, inclusive of call safety and loose transferability, and accrue hobby on the cap. the creditors additionally receive the conversion or rollover price to catch up on the longer publicity to the credit score.

advertising and marketing
in the eu leveraged finance market, bridge loans are commonly no longer syndicated to different establishments and there is a strict difficulty on transferability of such bridge loans, that are comfortable for extended time period loans and fall away for alternate notes. consequently, the investment banks funding the loans will hold the commitments till the high yield bond offering is done (either prior to the remaining of the m&a transaction, in which case the bond is issued into escrow, or after the ultimate of the m&a transaction, in which case the underwriting banks can have funded the bridge loan and could be repaid with the proceeds of the bond).

instruction for the excessive yield imparting will consequently kick off as soon as feasible following the signing of the sale and purchase settlement for the m&a transaction, to permit the bond supplying to launch as quickly as feasible. excessive yield bonds are issued pursuant to rule 144a / law s underneath the us securities act, so three years of audited financials, relevant intervening time financials, pro forma monetary facts (if applicable), a fulsome providing memorandum and diligence of the target agency may be necessary to launch the high yield bond presenting. pre-commitment, the underwriting banks may have taken into consideration the timing to market and availability of financials and ought to have factored extra timing constraints into their decision to underwrite by way of considering the provider’s readiness to market.

what happens if the bridge continues to be in place?
bridge loans can, and are, funded. but, the purpose is that they’re exceptional for as short a time as feasible.

if, because of market situations, it isn’t feasible to avoid drawing down on the bridge loan or, if the bridge loan is funded, a short refinancing, underwriters will want to weigh whether to attend and live in the mortgage, or doubtlessly price the bond above the cap, which would imply the banks may also in the end lose predicted costs (or more) from the transaction. if the banks are not able to area the high yield bonds at a suitable price, a hung bridge mortgage takes place. at this level, the bridge loan has rolled over into an prolonged term loan and/or alternate notes with an hobby rate set on the cap. in the modern-day market situations, either of these alternatives are opportunities.