An All-Equity Deal is a Bridge To Nowhere

The whole “bridge now, finance later” theme began last year when buyers realized they weren’t able to guarantee financing for deals. Rather than depend on lenders to get deals done, take out a bridge loan for the deal, which can be financed out later. Seems simple enough, right? Just another day of “creative dealmaking in a challenging environment,” as buyout pros like to tout.

A recent example of that is Advent International’s buyout of Charlotte Russe, the listed mall retailer. According to Roger Hoit, MD at Moelis & Company, Advent International wrote the entire check itself, and said (in his words), “we’ll worry about financing down the road.” A deal like that would have received 4x to 5x leverage several years ago, he added.

That seems good and well. Unless, of course, that refi never comes. Some buyout pros are wary of that risk. John Howard, CEO of Irving Place Capital, said, “You can’t go into it with the need to refund it later. You have to be okay with the capital structure when you do it.” He added, “If you can refinance later, that’s great, but you may not be able to do that for awhile.”

Robert Nolan, managing partner at Halyard Capital, echoed that sentiment. “In this marketplace, the notion of bridging is more risky. You can only do that if you are willing to believe that the returns promised are big enough overcome the equity outstanding.”

Casey Zmijeski of Fifth Street Finance said he’s seen the negative effects of this move. Sponsors which bridged their deals a year ago are now in a tough position. “They’re coming back to market to get the financing, and we just shake our heads, because it’s not a good time to get senior financing lined up.”

Previously: With Charlotte Russe, Financing Trumps Price