Like A Bridge Over...Make That "To" Troubled Water

July 23, 2007

OK, call me a sheep, a lemming, a member of the herd, but I can't resist. It seems everywhere I turn, someone is talking or writing about equity bridges. They are the villainous stars of the moment, criticized most recently by even the heads of the banks that provide them, and for good reason.

The practice of using equity bridges on big LBO deals could bog down the already stumbling leveraged finance markets for months to come. If enough debt piles up on the books of the investment banks, it could affect available credit, which could cause companies coming back to the market to restructure to go without, which, in turn, could cause defaults to rise.

Banks extended $33 billion in buyout-related bridge loans in the first half of 2007, according to data compiled from Reuters LPC. Already a number of the deals partially funded with a bridge loan have seen the syndication of the high yield bonds or loans meant to replace those bridges fail. While underwriters can, and will, restructure and bring these deals back to market, there is little they can do about pricing once they've signed a commitment paper with the sponsor, a.k.a. the private equity firms.

These guys are not going to show the love and take on a higher interest rate so that the investment banks don't have to hold the debt or sell at a discount. And in the end, should they?

Even the bankers themselves know the answer to this one. "We all know the game we play," one banker says. "And if it turns around and bites you in the butt, you have no one to blame but the person in the mirror."

The head honchos, too, are getting critical. JPMorgan Chase's Chief Executive Jamie Dimon recently called the practice of extending equity bridges "a terrible idea." And Goldman Sachs has reportedly told its mergers and acquisitions staff to avoid them.

That doesn't mean the sponsors will stop trying. The private equity firms that plan to acquire Bell Canada Enterprises - Teachers Private Capital, Providence Equity Partners and Madison Dearborn Partners - are reportedly asking banks to fork over roughly $4 billion in an equity bridge.

Hopefully, the banks will do better than I and begin to resist the herd mentality, despite the fierce competition for deals. Hopefully, they'll begin to say "no."

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