Bridge loan

In acquisition finance, a bridge is the banks' commitment to lend the purchase price at closing so the buyer can sign and complete on the deal's timetable rather than on the bond market's. The stated maturity is typically 364 days rather than a round year, a convention that comes from how bank commitments of under a year have historically been treated for regulatory capital.

It exists because of a timing mismatch. Financing has to be committed at signing, which in Europe can be nine or twelve months before completion once merger control and foreign investment clearances are counted, and in a UK public bid before the offer is even announced. A bond cannot be marketed that far ahead of a completion that is still conditional.

The structure is deliberately unpleasant to keep. Pricing escalates the longer it is outstanding, and there is normally a conversion mechanism into a longer term loan and then into exchange notes at a capped rate, which gives the banks a defined exit. The result is that most bridges are never drawn: the permanent financing is executed at or before closing and the commitment expires. It is insurance the acquirer pays for whether or not it claims.

The take out is the permanent stack that repays it, typically a revolving facility, term debt and bonds, with the mix set by the pro forma rating, the fixed against floating decision, covenant flexibility, maturity laddering and currency matching. Where the timetable allows it, a European alternative is to issue notes early into escrow with a special mandatory redemption if the deal fails.