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Bridge Over Troubled Waters

“Don’t use it if you don’t have to,” says Bill Beverage, chief financial officer of Outdoor Systems Inc., referring to …

“Don’t use it if you don’t have to,” says Bill Beverage, chief financial officer of Outdoor Systems Inc., referring to the prosaic bridge loan. Beverage has been quite intimate with bridge loans, having arranged a $250 million loan last year to acquire Gannett’s Outdoor Division and build a $680 million facility this year for Outdoor’s acquisition of 3M’s outdoor advertising operations.

Phoenix-based Outdoor Systems, which bills itself as the largest billboard company in North America, has been on a rapid expansion pace since going public in April 1996. After buying Gannett’s Outdoor Division, it picked up, among others, Villepigue Outdoor Advertising for $27 million, Scadron Outdoor Advertising for $24 million, and Van Wagner Communications for $170 million.

The acquisitions expand the company’s geographic diversification throughout the U.S., and “enhances our position as a leader in the out-of-home advertising industry,” says Arte Moreno, Outdoor’s president and CEO.

It was for the very large acquisitions of Gannett’s Outdoor Division ($690 million) and 3M’s National Advertising Co. ($1 billion) that Outdoor took to arranging for bridge loans.

Used most often in acquisitions, the bridge loan is a temporary financing, usually a stop-gap to a junk-bond offering. Companies take on a bridge loan because they can’t arrange other types of financing fast enough to close an impending deal. In Out-door’s purchase of Gannett, the company concluded that to pay for the acquisition it would need to issue additional equity plus a high-yield bond offering, both of which take too much time. To make the deal happen, Outdoor arranged a $250 million bridge loan with CIBC Wood Gundy. It was quickly paid off when the other financing kicked in.

“It’s expensive money,” says Beverage.“You don’t want to have to draw down on it if you don’t have to, but if you are trying to close a deal, it’s necessary.”

A bridge loan is just one financial tool of many that a company uses as it goes forward with aggressive expansion plans, but it’s the larger picture that’s important. As Moreno says of the 3M deal, the acquisition gave “us the opportunity to offer broader national, regional, and local advertising coverage-to be a national provider of the medium.”

With the rapid pace of mergers over the past two years, bridge loans have become a common occurrence, and investment and commercial banks compete aggressively for the business. CIBC Wood Gundy, Chase Manhattan, Morgan Stanley, and Goldman Sachs, among others, hawk the product. It’s good business because of the high premium on the loans, and the premium is there for good reason-high risk. The loans are supposed to be temporary, usually taken out with a subsequent public offering or high-yield bond issuance. However, if the loan is not replaced, it usually means the borrower is in trouble, and the lender is on the hook for a major loss, much like what happened to CS First Boston on a bum bridge loan to Federated Department Stores back in 1990.

Bridge loans are easier to get today, because the amount of capital individual banks commit to any single transaction has greatly increased. The major caution is that the loans are accretive, and interest rates can rise to the 20 percent range. Still, it’s an effective financing tool, and companies as diverse as Community Health Systems, USA Waste Systems, and Vornado Realty have used them in the past two years.

Federal Mogul, now the process of acquiring T&N plc, recently secured a bridge facility through Chase Manhattan. In the $2.5 billion transaction, Federal Mogul, a Detroit-based auto parts manufacturer, will attempt to swallow the larger Manchester, England, auto parts supplier. The bridge facility was necessary because U.K. regulations hold that the acquirer has to have funding fully committed at the time of the offering, explains David Bozynski, Federal Mogul’s vp and treasurer. “When you are buying a company 1.5 times your size, which is what we are doing here, you need to raise several billion dollars. The only practical way is through a bridge loan.”

Unlike Beverage, Bozynski takes a more sanguine approach to bridge loans: “Highly leveraged transactions are quite expensive, but expensive against what? If you are comparing bridge loans to the cost of going to the public marketplace, it is expensive. If you are looking at the cost of the bridge loan structure as it is needed to consummate a transaction, it is not expensive at all.”

Like Arte Moreno at Outdoor, Dick Snell, Federal Mogul’s chairman has put his company on a growth path that includes acquisitions. The bridge loan is one financing tool that has been exceptionally handy in terms of the company’s larger program, and it will be replaced by a capital structure that reflects Snell’s financial goals, with a combination of equity and debt financing.

Steve Bergsman is a Mesa, AZ-based freelance business writer who has written about corporate finance for Reuters, Barron’s, Global Finance and Corporate Finance.

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