Bridge Loans

A bridge loan is interim financing for an individual or business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to "take out" (i.e. to pay back) the bridge loan, as well as other capitalization needs. Bridge loans are typically more expensive than conventional financing to compensate for the additional risk of the loan. Bridge loans typically have a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other "sweeteners" (such as equity participation by the lender in some loans). The lender also may require crosscollateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation. Bridge loans in business finance are a short term financing arrangement. When long-term loans have phase-by-phase sanctions, the amount in each phase might not be sufficient. Sometimes long term loans in infrastructure can be delayed. To support immediate business finance requirements, bridge loans or swing loans are taken.

Bridge loans are important business finance vehicles. Without it, businesses or individuals can find it difficult to keep their business continuity. One main drawback of bridge loans is that they are expensive. Interest rates are high. Given the fact that most bridge loans are taken in real need, the bridge loan vendor might even demand equity. Collateral for the larger loan is used for bridge loans. Tough to classify it as collateral mortgage, but bridge loans leverage this arrangement for quick cash. Bridge loans are common in India, given the nature of the Indian economy. Growing economies need flexible business finance options. News articles are abounding with companies taking bridge loans. Recently Sesa Goa took a bridge loan of around ` 2500 crores to fund its investment in Cairn India steel company. GMR infrastructure is another company that took a bridge loan of around $737 million to acquire equity presence in InterGen. The above two examples just highlight the corpus of amounts that companies take with regards to bridge loans.

Unlike other sectors, the real estate sector is often given a cold shoulder by bridge loan providers. Banks shy away from giving bridge loan business finance to this sector. Real estate in India is characterized by a lack of organization. Most real estate ventures are financially insecure, and not backed by fact. Banks face a tough time to convince its stakeholders to agree to giving bridge loans as business finance in this sector. Even if property developers manage to obtain a bridge loan, it attracts high interest rates. Property developers use bridge loans to -show the property and sell advance bookings. Banks would also consider business finance options to semi-completed properties. Once the developers obtain advance booking amounts or bank loans, they use this to close the bridge loans.

USE OF TERM LOANS:In Real EstateBridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long-term financing. Bridge loans on a property are typically paid back when the property is sold, refinanced with a traditional lender, the borrower's creditworthiness improves, the property is improved or completed, or there is a specific improvement or change that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may arise from project phases with different cash needs and risk profiles as much as ability to secure funding. A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans obtained due to short-term, or unusual, circumstances. The difference is that hard money refers to the lending source, usually an individual, investment pool, or private company that is not a bank in the business of making high risk, high interest loans, whereas a bridge loan refers to the duration of the loan.

CHARACTERISTICSBridge loan interest rates are usually 1115%, with typical terms of up to 12 months 24 points may be charged. Loan-to-value (LTV) ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value. A bridge loan may be closed, meaning it is available for a predetermined timeframe, or open in that there is no fixed payoff date (although there may be a required payoff after a certain time). A first charge bridging loan is generally available at a higher LTV than a second charge bridging loan due to the lower level of risk involved, many UK lenders will steer clear of second charge lending altogether. Lower LTV's may also attract lower rates again representing the lower level of underwriting risk although front-end fees, lenders legal fees, and valuation payments may remain fixed.

EXAMPLES

A bridge loan is often obtained by developers to carry a project while permit approval is sought. Because there is no guarantee the project will happen, the loan might be at a high interest rate and from a specialized lending source that will accept the risk. Once the project is fully entitled, it becomes eligible for loans from more conventional sources that are at lower-interest, for a longer term, and in a greater amount. A construction loan would then be obtained to take out the bridge loan and fund completion of the project. A consumer is purchasing a new residence and plans to make a down payment with the proceeds from the sale of a currently owned home. The currently owned home will not close until after the close of the new residence. A bridge loan allows the buyer to take equity out of the current home and use it as down payment on the new residence, with the expectation that the current home will close within a short time frame and the bridge loan will be repaid. A bridging loan can be used by a business to ensure continued smooth operation during a time when for example one senior partner wishes to leave whilst another wishes to continue the business. The bridging loan could be made based on the value of the company premises allowing funds to be raised via other sources for example a management buy in. A property may be offered at a discount if the purchaser can complete quickly with the discount off setting the costs of the short term bridging loan used to complete. In auction property purchases where the purchaser has only 1428 days to complete long term lending such as a buy to let mortgage may not be viable in that time frame whereas a bridging loan would be

IN CORPORATE FINANCEBridge loans are used in venture capital and other corporate finance for several purposes:

To inject small amounts of cash to carry a company so that it does not run out of cash between successive major private equity financings To carry distressed companies while searching for an acquirer or larger investor (in which case the lender often obtains a substantial equity position in connection with the loan) As a final debt financing to carry the company through the immediate period before an initial public offering or an acquisition.

EXAMPLEIn December 2010, Kohlberg Kravis Roberts (KKR) and partners marketed a bridge loan for its upcoming acquisition of Del Monte Foods. As is common in such cases, KKR planned for the newly private company to borrow money by issuing corporate bonds. To ensure the money would be available, KKR sought $1.6B in bridge loan guarantees, for which it promised to pay 8.75% interest for 60 days and 11.75% thereafter. At KKR's option, these loans could then be replaced with eight-year corporate bonds (in effect, a put option) paying 11.75%. In return for the loans and guarantees, KKR was offering roughly 2% in fees.