Quick Answer
For any deal larger than the acquirer's cash on hand, the banker arranges financing in parallel with bid development. The financing menu runs from cash and revolver capacity (smallest, fastest) through bridge loans, term loan B, senior unsecured bonds, high-yield bonds, mezzanine, convertibles, equity issuance, stock consideration, and seller financing / earn-outs. A committed-financing letter (typically a bridge commitment from the lead investment bank) gives the bid closing certainty in competitive processes.
The financing decision is layered: the banker has to choose the sources of financing (debt, equity, stock, seller paper) and the certainty mechanism (commitment letter, bridge, fully underwritten financing) that the seller will accept as evidence the bid can close.
The Financing Menu
The full financing menu the banker considers for a buy-side deal:
| Source | Use | Notes |
|---|---|---|
| Existing cash and revolver capacity | Smallest, fastest deals | No new financing risk; uses up balance-sheet flex |
| Bridge loan | Acquisition financing pending permanent take-out | Investment-bank commitment; typically 6 to 12 month term; pricing roughly 200 to 500 basis points over a benchmark; provides closing certainty to the seller |
| Term loan B (TLB) | Senior secured permanent take-out, syndicated to institutional investors | Floating rate; 7-year maturity; covenant-lite common |
| Senior unsecured bonds | Permanent take-out, public registration or private resale to qualified institutional buyers | Fixed-rate term financing |
| High-yield bonds | For sub-investment-grade acquirers or above-investment-grade leverage levels | Higher cost but no equity dilution |
| Mezzanine / second lien | Subordinated layer between senior debt and equity | Used in LBO structures; higher cost than senior |
| Convertible bonds | Lower coupon, equity-linked | Convertible into acquirer stock; partially dilutive |
| Equity issuance (follow-on, private investment in public equity (PIPE)) | New acquirer shares to fund cash consideration | Dilutive; market-window dependent |
| Stock consideration to target shareholders | No cash needed; target shareholders become acquirer shareholders | Subject to acquirer-shareholder vote when dilution exceeds 20% under listing rules; merger-registration statement required |
| Seller financing, earn-outs, contingent value rights (CVRs) | Bridges valuation gaps | Defers part of the purchase price; ties payment to post-close performance |
Think of it this way: the financing decision is a stack. Senior secured debt sits at the bottom (cheapest, lowest risk to the lender). Mezzanine and high-yield sit in the middle. Equity (issued or stock consideration) sits at the top (most expensive, but no covenants and no fixed repayment). The banker designs the stack to clear the bid price while staying within the acquirer's credit and dilution tolerance.
The Committed-Financing Letter
In a competitive process, sellers typically require committed financing as a condition of accepting a bid. The committed-financing letter is the bid's closing-certainty proof.
- Bridge commitment letter: investment-bank-issued promise to fund the acquisition financing at signing if the permanent take-out has not closed yet
- Bridge purpose: meant to be refinanced into permanent take-out (TLB, senior unsecured, high-yield) before or shortly after closing; the bridge is a fallback, not the long-term financing
- Why it matters to the bid: a fully committed bid is presented as "fully financed," removing financing as a closing condition
- Cost: commitment fee plus the bridge spread; structuring fees if the bridge funds and is refinanced
Financing Sequencing With Bid Development
The financing workstream runs in parallel with bid development, not after it. By the time the LOI is delivered, the committed financing is in place.
- IOI stage: indicative financing plan; lender discussions started
- Final round / LOI stage: committed-financing letter signed; bid presented as fully financed
- Definitive agreement: financing commitments are confirmed; bridge and permanent take-out are mapped to the closing timeline
- Pre-closing stage: permanent take-out documents (TLB credit agreement, bond purchase agreement) are negotiated; bonds may be sold or held for delayed-draw mechanics
Exam Tip: Gotchas
- A "fully financed" bid is one where financing is NOT a closing condition. The committed-financing letter is the mechanism: the lead investment bank backstops the financing with a bridge, which removes financing risk from the deal even if the permanent take-out has not closed yet.
- Bridge loans are MEANT to be refinanced. A bridge is a 6 to 12 month facility designed to be replaced by permanent debt (TLB, senior unsecured, or high-yield) before or shortly after closing. A bridge that funds and stays drawn is an unintentional outcome, not the plan.
- Stock consideration triggers the acquirer-shareholder vote at 20% dilution. Listing rules require an acquirer-shareholder vote when stock issued in a deal would exceed 20% of pre-deal shares outstanding (or voting power). A stock deal sized above the threshold is a slower, more procedural transaction than an all-cash deal.