Bridge loans are a sure fire way for banks to claw back some fees from companies which they spend the rest of the time lending to at pricing politely called "relationship-driven".
Thanks to M&A financings, usually bridges, loan teams can sometimes say they have washed their faces at the end of the year.
But the chaotic market of the last week lays clear how risky this type of lending is for now.
Almost every corporate acquisition for cash of any size needs an underwritten bridge loan, to give the seller certainty that the buyer is good for the money.
The facility may get drawn to pay for the deal, but doesn't always — often the acquiror has other sources of cash, or can borrow the money in the bond market, even before the takeover closes.
Sometimes bridges are used for other reasons, such as in the run-up to an IPO.
For banks, this is nice work if you can get it. Pricing in the workaday investment grade loan market can be nonsensical when taken at face value, with higher rated borrowers often paying tighter margins than the bank’s own cost of funding.
Lenders rely on a complex matrix of relationship banking considerations to decide whether providing cheap money is worth it for them. That it often is can be deduced from how often investment grade loans are heavily oversubscribed.
Money down
But bridge loans are a different beast. The company needs the money — or at least the commitment — now, so banks can charge solid fees.
And since the borrower has an explicit plan to refinance the debt soon, the two or three underwriters are often happy to keep all that fee-rich debt close to their chests, rather than syndicating it — even though that means providing far bigger tickets of debt than they would usually extend to one borrower.
They often get the bonus of taking the top bookrunner roles on a bond take-out.
While banks love the returns they can make from bridge loans, they are like hot potatoes — uncomfortable to hold for long.
Especially when drawn, the facilities add a lot of risk-weighted assets to the capital ratio, and involve big risk concentrations.
Banks want them off their books as soon as possible.
Almost overnight, this has become much harder to achieve. Global financial markets have been in turmoil since the US announced its tariff regime on Wednesday April 2.
The S&P iTraxx Europe Main credit index opened at 87bp on Monday — its widest level since October 2023 and almost 20bp wide of where it was two weeks ago.
The Crossover was much the same — starting the week at 428bp, more than 100bp outside where it ended March. Equity markets fell deep into the red, though are finding more stable footing on Tuesday after days of 4%-plus falls.
Both credit indices have come in since Monday, to 79bp and 401bp on Tuesday, but the volatility is clear for all to see.
Shuttered markets
The investment grade corporate bond market is, for the time being, shut to new issues. Many, even in the corporate credit market, are looking to Tuesday’s European Union bond syndication to see how willing investors are to add risk in what is already a chaotically risky market.
This throws the viability of providing bridge financing into uncertain waters. It is now far more difficult to know whether a market will be there to refinance the debt.
This is a sharp reversal of Europe's corporate bond market for the last few years, when money poured into the asset class and issuers could rely on high demand.
Even if issuers do start tip-toeing back, the escalating trade war tit-for-tat between the US and China can slam the brakes on deals at a moment’s notice.
Lenders beware. Bridge financing brings in the fees, but with markets as wild as this, there is a high chance you could be stuck on a long bridge to nowhere.