In the high stakes arena of mergers and acquisitions, access to bridge loans from a trusted lender may mean the difference between closing the deal and losing the opportunity to acquire a company, subsidiary or division. The likelihood that a potential purchaser will be able to follow through with the transaction promptly if the bid is accepted is a key area of concern for target companies.
Bridge loan terms can be extremely complex, and it is advantageous to have an attorney experienced in the bridge loan process working to protect your interests.
Bridge Loan Basics
Bridge loans are intended to fill a gap until long-term financing can be obtained. However, there is significant risk associated with the short-term funding. As such, a bridge loan that is not paid off when it reaches maturity will automatically convert to long-term financing, typically at terms that are not favorable to the borrower.
Bridge loans themselves are relatively low-profit products for lenders, and tend to carry high risk. However, investment banks with an interest in other aspects of the transaction, such as the opportunity to arrange long-term financing, will often take that risk. In some cases, bridge loan commitments come from investment banks playing a role in the acquisition, as a means of ensuring that the transaction moves forward.
Bridge Loan Costs
There are a number of fees associated with bridge loans, some of which are payable even if the loan is never funded. These include:
- A commitment fee, payable regardless of whether or not the loan is ever originated
- A deal-away fee, which is payable in the event that the borrower uses alternate financing
- A funding fee, which is payable if and when the loan is funded
In addition, the borrower may be responsible for an administrative agent’s fee if the loan is syndicated, a periodic fee during the life of the loan, and a refinancing fee if the loan is refinanced ahead of schedule.
Negotiate the Best Terms for Your Bridge Loan
Since prospective buyers often pursue bridge loans as a fallback, some may feel that the terms of the bridge loan are not critical. Often, the prospective borrower and the prospective lender both enter into the agreement in hopes that the loan will never close. However, the terms of a bridge loan commitment are very important.
Bridge Loan Terms and Bid Acceptance
While the acquiring company or investor may be hoping and expecting that the bridge loan will not be necessary, the commitment provides certainty to the target company. As such, that company will have an interest in the terms of the bridge loan commitment and how well it will serve its purpose if it is required.
Bridge Loan Funding
In some cases, whether by design or because alternative options fall through, the bridge loan will be funded in order to allow the acquisition to move forward. In that circumstance, of course, the terms of the bridge loan become very relevant to the borrower and perhaps to the successful operation of the acquired company.
Bridge Loan Securities Demands
A securities demand provision allows the lender to demand that the borrower issue long-term debt securities in order to refinance the bridge loan. The specifics of this provision are often a key issue for negotiation, as the lender’s control over the offering of these securities to the market carries risk for the borrower. Another important point to be negotiated is the remedy or remedies available to the lender if the securities demand does not raise enough money to refinance the loan.
An Experienced Attorney Can Help Secure the Best Bridge Loans for You
While you may be unaccustomed to consulting an attorney before taking out a business loan, the complexities associated with a bridge loan and the impact of the terms of the bridge loan commitment on the likelihood that your acquisition bid will be accepted mean that you cannot afford to choose a bridge loan provider and enter into an agreement without a thorough analysis.
When you work with an attorney in our firm, we will guide and assist you every step of the way, including the following services:
- Help you identify the best bridge loan opportunity for your situation
- Negotiate on your behalf to obtain the best terms possible
- Thoroughly review and explain your loan agreement
- Advise you regarding your options for alternative financing
Do not leave this all-important aspect of your planned acquisition to chance. Contact KPPB LAW today for more information.
