Bridge Loan

Deals run on certainty. When a company signs a purchase agreement, the seller wants assurance the buyer can actually pay — and high-yield bond and equity markets can take weeks to access and can close entirely during volatility. A bridge loan solves this: the acquirer's banks provide a committed bridge facility as part of the financing commitment, guaranteeing funds at signing so the buyer can win the deal and close on schedule. The bridge is never meant to stay outstanding. It's a placeholder for the permanent financing (typically high-yield bonds, hence "bridge to bonds," or sometimes a "bridge to sale" repaid by divesting an asset). Banks underwrite the bridge knowing they'll syndicate or refinance it quickly, earning fees on both the bridge commitment and the eventual bond issuance.

Bridge facilities are deliberately punitive so the borrower refinances fast. Pricing starts above the expected permanent-debt rate and steps up at fixed intervals (e.g., +50bps every quarter) until it reaches a contractual interest cap. If the bridge isn't repaid within a stated period (often one year), it 'rolls' into longer-term 'rollover loans' and can be converted into exchangeable notes the lenders may sell. Key features: a commitment/funding fee, a ticking fee if drawdown is delayed, the rate step-ups, and a hard cap. The structure deliberately makes the bridge the most expensive money in the capital structure, incentivizing the borrower to issue permanent bonds the moment markets allow.

A bridge loan and the permanent financing it replaces fund the same dollars — the difference is duration, cost, and intent. Permanent term loans and high-yield bonds carry multi-year maturities, lower coupons, and are the real long-term capital. A bridge is short-dated, more expensive, and exists only to span the timing gap. Contrast it with a revolving credit facility: a revolver is a reusable, ongoing source of working-capital liquidity, whereas a bridge is a one-time, term commitment tied to a specific transaction that disappears once refinanced. In real estate, a 'bridge loan' similarly funds a property purchase before a sale or long-term mortgage closes.

The chief risk is market risk: if high-yield or equity markets freeze before the bridge can be taken out, the underwriting banks are stuck holding the loan on their balance sheets — exactly what happened to banks on several 2007–2008 LBO commitments. The escalating rate caps the lenders' upside but also signals how costly a failed take-out is for the borrower. Bridges also concentrate refinancing risk at a single point in time and can pressure deal economics if rates have risen since the commitment was signed. For the borrower, an unrefinanced bridge that converts to high-coupon rollover notes can meaningfully damage credit metrics and equity returns.