UW a TL vs bridging a bond?

Hi - quick question. Was listening to some of my MD's speak on this subject and I wanted to know - is there a specific difference in terms of both process, and risk?

Obviously if after underwriting a TLB, no one wants to buy it - you're stuck with 300mm in paper. Is this the same idea for bridging a high yield issue?

Thank you in advance (and please don't hesitate to tell me I'm completely wrong if so)

Comments (3)

Apr 5, 2013

When you underwrite a term loan you usually never fund it prior to syndication. Company comes to you and wants you to uw a 300mm TLB. You write all the documentation related to the deal, terms, etc. The bank will then go to out to market and try to line up the investors to fill the book. Most of the time (but not all the time) the bank hasn't actually given the money to the company yet (funding the deal long). If you fully syndicate the deal then you close into the syndicate and they all pony up their share of the money and the bank never carries the full value on their books. If the syndication isn't going well, the bank will have the ability to "flex" the deal. This will usually mean they can increase pricing, increase the original issue discount, increase LIBOR floor, etc. Then if they still can't fill out the book given the more investor friendly terms, they will have to carry the risk. Usually a bank won't actually leave it on their books even if this happens, but rather they'll flex the deal even more but at their own cost (aka they'll start eating through their arrangement fees or even take a loss at whatever extra discount they have to give for the deal to clear market).

Essentially when you underwrite it you are guaranteeing that the company will get its money no matter what. Most of the time the syndication goes fine and that's that. Underwriting serves its purpose in scenarios where the company needs to have guaranteed financing in place (an acquisition or something similar).

Apr 5, 2013

Bridging a bond is basically arranging short term financing for what the eventual size of the bond will be. So you want to do a 300mm bond in order to fund an acquisition, but you need the funds right away instead of the couple week process a bond will take, a bank will arrange bridge financing to do so. Terms include a really short term maturity and a bunch of stuff around what happens if you can't close on the bond deal in a certain amount of time. One bank usually won't hold the entire bridge facility, but rather it will be a collection of banks / other investors. Once the bond deal closes, the bridge facility gets paid off and that's that. Essentially you are "bridging" the time it takes to get the bond deal done when you need financing in place ASAP.

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Apr 5, 2013