When Arch Communications Group Inc. announced plans in August to buy ailing MobileMedia Corp. for $546 million, dealmakers sought a bridge loan to give the combined company fresh cash.
Bank of New York, Bear, Stearns & Co., Toronto-Dominion, and Royal Bank of Canada quickly stepped forward to help the Westborough, Mass., telecommunications company.
But in the ensuing weeks, the high-yield market that Arch Communications had hoped to tap for additional capital evaporated. Syndication of the $200 million bridge loan was delayed, and the credit-challenged company was forced to pay more than $1.5 million in additional costs on a separate term loan for the deal.
Arch Communications' plight shows just how badly the stalled high-yield bond market has crippled the corporate finance business. Echoing the late 1980s, borrowers holding bridge loans-short-term loans repaid when a borrower receives longer-term financing through equity or bond issues-are suddenly unable to repay.
Michael D. Rushmore, an analyst with BankAmerica Corp., said the problem lies with the short maturities and rapidly escalating interest rates on bridge loans.
Companies with bridge loans "that were counting on issuing debt are reworking financing plans," he said. "These types of loans must be made only very selectively and only with clearly defined alternative sources of repayment."
If recent deals are any indication, some cash- and credit-strapped companies may be in trouble. This summer Lynx Golf Inc., a San Diego-based sporting goods maker, received a waiver on repayment of a $3.4 million remaining bridge loan made by Union Planters Bank of St. Louis. But Lynx Golf failed to secure new financing and filed for bankruptcy protection July 27.
The Lynx story is reminiscent of a number of bridge loans that defaulted in the late 1980s when the high-yield bond market disappeared. In the record years of 1988 and 1989, bridge loan volume averaged $63.5 billion. This year lenders have syndicated 39 bridge loans worth $15.9 billion, according to Securities Data Co.
Though far short of those record years, the total through Oct. 22 is already the biggest year in the 1990s for bridge lending. Nearly two dozen banks have provided syndicated bridge loans this year, led by Chase Manhattan Corp.'s 15 loans worth $9.1 billion.
Chris Ryan, head of loan trading at Lehman Brothers, the No. 2 bridge loan originator, said many of today's bridge loans are structured to afford borrowers breathing room in the event of market change. Lenders often will commit to bridge loans but not fund them until the money is needed.
In Lehman's experience, most bridge loans that were not drawn upon "were restructured," Mr. Ryan said. "A few of them didn't happen."
More of a problem are funded loans, in which money has actually been used by the borrower. Mr. Ryan would not say whether any Lehman-led funded bridge loans were struggling, but did acknowledge "nasty situations" in the market.
Bankers say that in many cases lenders are restructuring existing debt to absorb bridge or short-term loans. Unfortunately for borrowers, the new terms have to be approved by investors holding existing debt, and that usually comes at a substantial cost.
But Mr. Rushmore says he believes banks "will remain supportive of their clients" and adjust loan terms to keep companies on their feet.
Another way borrowers are getting out of their bridge commitments is through mezzanine financing. Mezzanine financing is typically used as part of a merger or acquisition and is made up of subordinated debt, usually preferred stock or notes that can be converted to stock. In the capital structure, mezzanine debt is senior to venture capital but junior to bank loans.
David Buttolph, a principal at Canterbury Capital LP, a $160 million private mezzanine finance company in New York, said that in the last month banks have pulled back on providing new money or agreeable credit terms for borrowers, especially those in middle markets.
"Now they're coming to us," he said."We've been buried with opportunities. (With) everything that's happened in the high-yield market, it's just terrific for us right now."
Until two weeks ago, two-year-old Canterbury Capital had invested $80 million of its fund with borrowers. Since then, the firm has committed $37 million, mostly to customers referred by banks.
"We're constantly turning people away," Mr. Buttolph said, adding that the firm invests in only 4% of applicants. "There have been some great opportunities lately."
BankAmerica's Mr. Rushmore said Mr. Buttolph's gain is not necessarily a bank's loss. The bridge loan debacle of the early 1990s "educated everybody about what could go wrong," he said.
"Those situations were so difficult bankers have a very acute memory of it. We don't let ourselves get into those positions today."
