Bridge finance is a type of mezzanine funding that can take the form of either debt or equity.
A bridge loan (debt form of bridge finance) is a short-term financing (typically spanning 6-12 months) to facilitate an acquisition until permanent debt financing can be obtained. Bridge loans are more expensive because of the additional risk (leverage) of the loan. Bridge loan commitments are generally drawn down when long-term debts are not available and are used as funding of last resort. Investment banks typically offer bridge loans to private equity firms when they are sure bridge loans will not be required because they expect to be able to successfully place a bond offering in the capital markets or syndicate a term loan facility. PE funds are required to give an equity commitment letter to the target firm prior to signing the purchase agreement with the target company, especially in LBO deals. However, if the PE firm is unable to cover the entire equity commitment at the time of signing the agreement, or is waiting for a LP to make co-investment, the firm may ask the investment bank to provide an equity bridge to cover the gap. The PE firm is required to pay utilization fees if the equity bridge is used and additional fees are charged if the lender's equity is not purchased back within a stipulated time. Lenders acquire bridge since they are expected to be short-term commitments and are expected to be sold to permanent equity sources quickly.
Challenges
Companies often fall short of raising LBO debt and need to raise a good portion of money as bridge finance
Bridge finance typically needs to be raised quickly at a higher rate than senior debts
Bridge loans should be converted to mezzanine debt (convertible debts or debts with warrants or PIK toggles) at an early date to reduce cash outlays
Solutions
Bridge financing can be a complex exercise for which V4G offers innovative solutions
Payback period can be extended to allow borrower's cash flow to improve
We ensure equity dilution is minimal to prevent loss of control
Benefits
Professional advice and quick solution to funding problems, funding is arranged within days
Comparatively inexpensive source of capital without immediate dilution of equity
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