Leveraged Lending

Distributions and Bridge Financing

Asset sales, participations, syndication, and other means of distribution are critical elements in the growth of leveraged financing. Distributions most often consist of “club” arrangements, “best effort” syndications, and “underwritten” deals.

“Club” deals usually consist of smaller credits, which the arranger markets to a small group of relationship lenders. A club deal may not be governed by a single loan agreement; however, participating lenders usually have very similar, if not identical, terms. “Best efforts” and “underwritten” syndications support larger transaction sizes. In a best effort syndication deal, the underwriter agrees to use all efforts to sell as much of the loan as possible. However, if the underwriter is unable to sell the entire amount of the loan, they are not responsible for funding any unsold portions. Such deals may include flex language that provides for pricing changes if the credit markets or borrower’s conditions change to facilitate the arranger gaining market acceptance for the credit. An “underwritten” deal, on the other hand, is one in which the arranger commits to the borrower the entire loan amount before syndication of the loan. If the arranger cannot fully syndicate the loan, it must hold the unsold portion, which exposes it to price risk.

Banks can also provide temporary bridge financing during the syndication period to be repaid through subsequent debt or equity offerings. Risk increases with this activity as the source of repayment is dependent on investor appetite, liquidity, and market demand, which may significantly change during this period. In addition to providing temporary financing for the borrower’s debt, syndicating institutions may bridge the equity level of the transaction until the ownership group is finalized. Because national banks have statutory restrictions against owning equity, equity bridges are typically provided by the parent holding company or securities affiliate. Equity bridges carry additional risk, including the heavy reliance on sponsors to sell equity to limited partners and other investors, potential contractual limits on sales rights, a limited secondary private equity market, and the questionable ability to place the equity if the deal sponsor has tried and failed.

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