Investment banks are setting up more bridge loan funds, to compete with commercial banks for yet another piece of the corporate-finance pie.
Salomon Brothers Inc. is reportedly closing its new $1.1 billion Millennium fund, and Bear, Stearns & Co. is seeking commitments for a $1 billion fund of its own, according to market sources.
Commonly used in leveraged acquisitions, bridge financing lets banks give buyers a committed source of funds that is typically replaced by a high-yield bond issue before the loan is actually used.
For financial institutions seeking the lucrative bond management role, bridge financing is the key to winning business.
"If you're going to be in the high-yield business, you should probably also be in the bridge business," said Richard Atterbury, managing director and head of leveraged finance for BankAmerica Corp. in Chicago.
Left with a somewhat tarnished reputation by the late-1980s' junk bond fallout, necessity has returned some of the sheen to bridge funds.
Bridge lending is a crucial aspect of leveraged finance because it allows lenders to react quickly to a buyer's request for funds-typically within 10 days. It also allows the increased confidentiality that many acquisitions require.
The fund structure also provides for diversification of risk among a group of investors, typically other banks.
Most large commercial banks doing leveraged finance now have a bridge fund in place, and some have formed bridge funds in partnership with investment banks. Citicorp and Goldman, Sachs & Co. established two bridge funds in June 1996, the West Street and West Street Annex funds, totaling $1.84 billion, while BankAmerica and Lehman Brothers have put together their $675 million Strategic Resource Partners fund.
Other investment banks, including Merrill Lynch & Co., Donaldson, Lufkin & Jenrette Inc., Morgan Stanley & Co., and Smith Barney have already set up their own bridge funds.
But the recent entry of Salomon and Bear Stearns makes it clear that bridge funds are now a vital part of the "one-stop shopping" capability that is the current battle cry of both commercial banks and Wall Street.
Without a bridge fund, investment banks must either forgo bridge financing, diminishing their chances of winning the subsequent high-yield bond business, or deliver a bridge loan from their own capital, which both increases their risk and limits the number of financings they can do simultaneously.
"If you don't have the capability to do large bridge loans, then you're at a disadvantage," said Douglas H. Greeff, a managing director at Citicorp in acquisition finance and syndications.
"The fact that most major leveraged lenders have a high-yield lending capability today means that all players will have to establish a bridge fund to meet client needs," he said.
"In the near future, it is most likely that every major investment bank and leveraged lending bank will have to have some kind of fund to do high- yield loans."
