For many companies, financing an acquisition is a two-step process. The long-term strategy might call for raising cash using syndicated term loans and revolvers, bonds, equity, and asset sales. However, many companies use bridge loans to initially fund acquisitions, then repay those loans with other financings and/or assets sales. In fact, according to Reuters, the largest syndicated loan in the U.S. in 2008 was the $14.5 billion one-year bridge loan backing Verizon Wireless' acquisition of Alltel Corp.
What is a Bridge Loan?
A bridge loan is a term loan where the expected source of repayment is a specific event, typically a debt or equity financing and/or asset sale. These loans typically have a bullet maturity (i.e. no amortization) of 1 year or less. As an incentive to borrowers to refinance bridge loans quickly, they typically include interest rate increases and "duration fees" tied to how long the loan is outstanding. For example, the Altria bridge loan (described below) calls for the interest rate to increase by 0.25% and for an additional 0.75% fee if the loan is not repaid within 90 days (with additional step-ups and fees each 90 days thereafter). Bridge loans are typically underwritten by a small group of banks rather than being widely distributed in the syndicated loan market. These underwriting banks typically also manage the "takeout financing" (e.g. the bonds issued to repay the bridge loan).
Altria Uses a Bridge Loan
On September 8, 2008, Altria Group, Inc., the parent company for cigarette maker Philip Morris USA and other companies, announced an agreement to purchase UST Inc., a leading manufacturer of smokeless tobacco. The transaction, scheduled to close within 4 months, called for Altria to pay UST shareholders $10.4 billion cash and to assume $1.3 billion of UST debt. The company's plan was to finance the purchase with $11 billion of long-term, public bonds. However, at the time they announced the acquisition, they also announced a $7 billion dollar commitment (split between J.P. Morgan and Goldman Sachs) for a 364 day bridge loan which, when added to the company's existing unused credit facilities, could fund the entire purchase.
Here's the timeline:
- September 8 - Altria announces agreement to buy UST and $7 billion loan commitment.
- November 4 - Altria issues $6 billion in 5, 10 and 30 year bonds.
- December 18 - Altria issues $775 million in 18 month bonds.
- December 19 - Altria closes (but does not draw down) on $5 billion 364 day bridge loan (reduced from the original $7 billion commitment). The bank group expands from JPM and Goldman to include 6 other banks.
- January 6 - Altria closes on the purchase of UST and draws down $4.3 billion from the bridge loan.
- February 3 - Altria issues $4.225 billion in 5, 10 and 30 year bonds (bringing the total bond issuance to the planned $11 billion) and repays the bridge loan. The 8 banks that underwrote the bridge loan are all joint book-running managers on these bonds.
4 comments:
Pfizer is using a large bridge loan from BofA, JPM, Goldman and Citi to pay for its proposed acquisition of Wyeth. Exactly what you're talking about in this blog.
Thanks for this enlightening piece on bridge loans. How will the banks' ability to make such large commitments be affected by the current turmoil? I know it's been a competitive factor, a bank's willingness and ability to make a large bridge commitment, in winning leading syndications roles and other lucrative business.
When companies file bankruptcy what they are saying is that their assets are insufficient to cover their debt obligations. Companies will go through every financial strategy possible before filing for Chapter 11. What is confusing is that Chapter 11 is the vehicle companies use when they hope to reorganize and continue operations, to "emerge from bankruptcy." If the company cannot generate enough capital to pay off its creditors, then it will slide down the scale to Chapter 7, complete liquidation.
When assessing bridge loan proposals, closely assess the likelihood that the repayment source will materialise. For example, we did a bridge loan to a hospital group on the basis that the bridge would get repaid from the sale and leaseback of the hospital building. When the property market fell and they were unable to sell the property as quickly or for as much as they envisaged, the had to restructure the bridge at high expense. Of course, lenders will want to take a charge on the property as a secondary source of repayment.
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