Monday, August 13, 2007

edu: bridge loan

--In theory, a bridge loan is similar to a home buyer who takes out a short-term loan to cover the down payment, which he plans to repay as soon as he sells his current home. But what if the current home can't be resold? The lender can try to resell the loan, but as current market conditions suggest, that isn't always possible. Banks now face a similar quandary. They lent private equity firms hundreds of millions of dollars to use as equity in the buyouts. The bridge loans (equity bridges ) were supposed to be repaid as soon as the buyout firms found other investors who wanted an equity stake in the leveraged buyouts. But as market conditions have tightened, private equity firms have found it difficult to find investors to take some of the bridge loans from the banks. The banks can keep trying to sell the loans, a tough bet in the current market. Or they can keep them on their books—and possibly have to write down their value. --So why would a banker agree to such a deal? As a favor to big private equity firms, which have been among the banks' most lucrative customers, generating a record 22% of investment banking revenue over the past year, according to researcher Dealogic. --Dimon said equity bridges are particularly risky, even compared to highly leveraged loans. That's because equity bridges are made with little or nothing in the way of seniority or collateral, which is a crucial issue for bankers and investors in bank debt --Banks typically sell, or syndicate, their loans to other banks and investors. Hung loans and equity bridges that can't be sold to secondary investors make it hard to spread the risk. "It's a matter of concentration. Banks are supposed to be in the business of diversifying risk --

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