What Is a Bridge Loan?
A bridge loan is temporary debt designed to bridge the time between when money is needed and when permanent financing can be put in place. In corporate finance, the classic use is an acquisition: a buyer must show committed financing when it signs a deal, so banks provide a bridge commitment that will later be replaced by bonds or term loans sold to investors.
Bridges typically mature within a year and are deliberately expensive to keep in place. The intent on all sides is that the bridge is either never drawn or is refinanced quickly in the capital markets.
How It Works
Bridge loans carry escalating economics that push the borrower to refinance fast: the interest rate often steps up every quarter the loan remains outstanding, subject to caps negotiated upfront. Banks earn commitment fees for providing the bridge and additional fees if it is actually funded.
If markets are shut and the bonds cannot be sold, many acquisition bridges convert into longer-term loans or are exchanged into securities, but at punitive rates. This is the scenario banks fear, known as a hung bridge, where they are stuck holding debt they intended to distribute.
Example
Suppose a company signs a 2 billion dollar acquisition and its banks commit a 1 billion dollar bridge loan priced at a 4 percent benchmark plus a 4 percent spread, with the spread stepping up 50 basis points every 90 days. If the deal closes on the bridge, initial interest runs at 8 percent, or about 80 million dollars annualized.
Two months later the company issues 1 billion dollars of 7-year bonds at 6.5 percent and repays the bridge in full. The bridge existed for only about 60 days, but it was what allowed the acquisition to sign with certainty of funds.
Why It Matters
Bridge commitments are central to how large M&A gets done, because sellers demand committed financing rather than a promise to raise money later. The fee income is lucrative for banks, but hung bridges during market freezes, such as in 2007 and 2022, have saddled underwriters with billions in losses.
In debt capital markets and leveraged finance groups, structuring bridge commitments and then executing the bond takeout is one of the highest-profile workflows a junior banker can touch.
