Bridge financing

What a bridge loan is

A bridge loan provides money now that is meant to be repaid soon by something else: a bond issue, an equity raise, an asset sale or permanent financing. Bridges fund acquisitions that need to close quickly, construction before permanent financing, or a gap before a planned sale.

The lender's main question isn't long-term cash flow. It's how likely the take-out is, how soon, and what the lender owns if it doesn't happen.

Documents in the packet

• Sources and uses, including how the bridge fits with any permanent capital.
• The take-out plan: which market or buyer, the size, and the conditions.
• The timeline, with key milestones and dependencies.
• Fees and the interest step-up schedule that rises the longer the bridge stays outstanding.
• Extension options and the tests that must be met to extend.
• Any interest reserve set aside to pay interest during the bridge.

Key metrics

Typical risks

• Take-out failure: the bond, equity or sale market closes, or the price is too low.
• Extension risk: a short loan quietly becomes a long one at a time of stress.
• Mark-to-market: the asset value falls while the bridge is outstanding.
• Ranking: where the bridge sits relative to permanent capital if the take-out only partly happens.

Scenarios to model

Model at least three paths, because a bridge's risk is about timing as much as value.

Illustrative only: a $100M bridge against an asset worth $160M is about 63% LTV. If the asset's value falls 25% while the take-out is delayed, LTV rises to about 83%, which leaves much less room if the lender has to enforce.

Protections to look for

• Extension tests with real teeth, such as a maximum LTV or minimum coverage at each extension.
• A funded interest reserve that covers interest through the expected take-out date.
• Step-ups that make delay expensive enough for the borrower to act.
• A mandatory prepayment from any partial take-out, so the lender is repaid first.

Questions an IC will ask

• What is the evidence the take-out market will be open when we need it?
• If the take-out is half the size planned, where does the rest of our money come from?
• What is the asset worth in a forced sale, and how long would that take?

Common memo mistakes

• Assuming the take-out happens on schedule, with no failure case.
• Underwriting the borrower's long-term cash flow and ignoring the repayment source.
• Ignoring how step-ups and fees change the borrower's incentives over time.
• Not stating what the lender owns, and is worth, if the bridge has to be held to maturity.
• Skipping the extension tests, which are where the real protection sits.

Practice on the acquisition bridge case in the library. The model template for that case runs month by month: step-up pricing, duration fees, the interest reserve and the take-out, then an extension test and downside if the take-out fails.