What is Bridge Financing?
The basics of bridge financing.
Bridge financing is generally a short-term debt financing that provides capital to a company to enable it to consummate another transaction, e.g., a terminal event, and is generally repaid from the proceeds of such transaction.
For example, if a company is closing a large funding in 90 days, it may require a smaller short term funding immediately to get to the larger closing and will use of portion of the proceeds of the larger funding to repay the bridge financing.
Other than the terms of the bridge financing, the greatest concerns of a prospective investor are:
Terminal events can be any event which either provides the necessary liquidity to the company to repay the bridge note, e.g., a public offering, a private financing, a contractual payment, etc., or could be an event designed to permit or require the investor in the bridge to convert their bridge note into securities of the company at a discount to the valuation used in the terminal event.
As a result of these factors, a bridge financing, even though relatively short-term in nature, is in many ways riskier than ordinary corporate credit. In addition to the overall credit risk associated with the company, there is the risk that the terminal event will not take place or that counterparties to the terminal event may be required to change as a result of market conditions or otherwise.
In general, bridge financing has the following terms and conditions:
Interest can range from very reasonable to mezzanine level (4% to 18% per annum).
Bridge debt tends to mature within one to two years.
If issued in connection with a terminal event which is a capital transaction, bridge debt is often convertible into the securities to be issued in the terminal event at the lower of a discount to the pricing of the terminal event or at a fix price. Conversion may be at the option of the company or the investor, depending upon the transaction. In the case of public companies, conversion may be mandatory if market price and volume milestones are satisfied.
Non-convertible bridge financings tend to be subject to repayment without premium or penalty, although at times yield protection provisions will be triggered, resulting in an additional payment to the investor. Convertible bridge financings are usually subject to prepayment only with prior written notice with a sufficient time period to permit voluntary conversion by the investor.
Particularly in the case of bridge financings conducted by private companies, although not exclusively, the bridge note may contain provisions requiring an original issue discount (e.g., a payment in excess of the principal amount invested and accrued and unpaid interest).
Bridge notes are often accompanied by equity securities designed to serve as an addition deal sweetener or “kicker”. This kicker can be in the form of warrants or shares of common or preferred stock.
Bridge financing serves a vital function by permitting companies with limited capital to continue operations and growth until important terminal events take place. As a result, bridge financing is often relatively expensive, but can be the perfect “fuel in the tank” which a company needs to execute its business and growth objectives.
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