SCL 5 Transaction Structuring Flashcards
Bridge Loans
a short-term loan used to cover a financial gap while anticipating a specific event
Structuring a Bridge Loan
- Structure the loan with a simple note that matures within a year or less,
- make sure that the maturity date coincides with the anticipated repayment event.
- You also want to collect interest on a monthly basis
- include language that requires the loan to be paid off in full upon maturity.
Bridge Loan Risks
- an asset being sold or overestimating market interest in the asset.
- overestimate the market or shareholder interest in equity sales
- allowing interest to accumulate, effectively allowing the principal to grow
- A bank may fail to verify that the borrower is committed to refinancing the loan in the event that they must turn the bridge loan into a term loan.
- A borrower may also fail to anticipate cost overruns on a project being financed with bridge funding.
- overestimating the cash flow’s ability to service a bridge loan-turned-term loan
- The bank may not identify the contingencies of a refinance commitment or may not recognize that the borrower can’t meet those contingencies.
Two Options for Non-Payment of Bridge Loans
1) allow time for an alternate repayment event source to be identified and transacted, such as locating an alternate buyer for an asset or a new equity source.
2) recognize that the event has failed permanently and pursue the backup course of action the bank agreed upon when it decided to offer the loan, which often includes terming out the loan or looking to third-party support to repay the loan.
Joint and several
Joint and several refers to any obligation that may be enforced against all obligors jointly or against any one of them separately
Lending to Holding Co. vs. Operating Entity
- There is an advantage in lending directly to the assets and the source of the cash flow (Operating)
- If it’s not possible, then you need to ensure that in lending to a holding company, you have the guaranties from viable operating companies that are supported by consideration and, ideally, the pledge of assets to support such guaranties.
- When you’re lending to holding companies that are secured only by the pledge of stock in subsidiaries, the loan can only be justified in circumstances of assured financial strength or where the level of creditors at the operating subsidiary level is so small that it won’t undermine the credit.
Options Lending to Holding Co
- lend to Holding Co and its subsidiaries on a joint and several basis secured by all of the assets
- lend to Holding Co with secured guaranties from its subsidiaries
- lend to the principal operating subsidiaries with a guaranty from HSG
- A weaker position we could take would be to lend to HSG with a secured interest in the subsidiaries’ stock.
- form a new holding company and structure the transaction as an asset purchase with a loan to the new company
Guidelines for interpreting the appropriate purpose and amount of the bridge loan
- verify that the pending event has a realistic likelihood of occurring
- Limit the loan to an amount the borrower could repay in a reasonable amount of time should the repayment event fail
- if the borrower could not repay the bridge loan, anticipate a term loan as a backup repayment source.
- Determine if you would even make such a term loan to the company, and identify the maximum loan amount as if it were being structured as a term loan from the outset.
Collateral Considerations - Bridge Loan
- If the repayment event is the sale of a noncurrent asset, you need to secure the bridge loan with the asset being sold.
- If the repayment event is a refinance, secure the bridge loan with the assets being initially financed
- If an infusion of equity is identified as the repayment event, there may be assets financed with bridge loan proceeds. These assets should be used to secure the loan.
- if bridge loan proceeds are not funding assets that are suitable for collateral, identify any alternate assets that may be available as collateral.
