Chase Manhattan Corp. has established a $625 million fund to provide temporary "bridge" loans for buyouts and other highly leveraged corporate transactions.
In the past year, bridge financings have been regaining acceptance in the loan market, after failing into disrepute at the end of the 1980s buyout boom.
The Chase fund is one of only two active funds of its kind, and the first to have been set up since the 1980s. The older fund is run by Donaldson Lufkin & Jenrette Securities. Others, though, could follow.
"We look at it from time to time," said Ted Virtue, a managing director at Bankers Trust New York Corp.
Bridge loans provide a way for borrowers to get cash quickly to complete a deal. In theory, they are supposed to be repaid within six months to a year, typically through asset sales, a public offering of high-yield "junk" bonds, or a combination of the two.
"Those markets can open and shut, and when they shut, you're in trouble," said an acquisition finance specialist at a big European bank, recalling the collapse of the junk bond market in 1989.
The attraction for lenders, though, is that bridge loans can be quite lucrative.
Chad Lear, managing director of loan syndications at Chase, said bridge loans typically carry interest rates of two to four percentage points above the prime lending rate, with fees amounting to three to four percent of the loan amount.
Trickle of Activity
While bridge lending has not come back in full force, there is at least a steady trickle of activity.
Chase recently provided a $45 million bridge loan to help finance a change in control of privately held Waldorf Corp. of St. Paul, Minn. In an earlier deal, Chase provided a bridge loan to Canandaigua Wine Co., which was taken out with a Chase-led offering of junk bonds late last year.
Chase hopes the new fund will help it land more underwriting assignments for its fledgling junk-bond department, said Mr. Leat, who is one of three Chase officials in charge of managing the fund. The other two are Nicholas Daifotis, head of high-yield origination, and Maria Willetts, executive vice president of merchant banking.
The advantage of the fund is that it will allow Chase to make commitments quickly without worrying about the need to syndicate the bridge loans. Chase didn't bother syndicating the Waldorf bridge loan, which was fairly small, but doing the same with a larger bridge loan could be dicey.
Mr. Leat said individual loans by the fund could be as large as $200 million.
Some bankers argue that the loan market is so liquid right now, that a committed fund probably isn't necessary. At the same time, they acknowledged that this was an opportune time to be raising commitments for such a fund, given the liquidity in the market.
Investors in the fund include Bank of Boston, Shawmut National Corp., National City Bank of Ohio, foreign banks; and insurance companies.