BANKING ON REAL OPTIONS

Abstract

This article discusses why many companies use committed bank facilities to finance their real options. The pace of change in the current economic environment has increased the value of financial flexibility. If and when companies choose to exercise their real options, they often require capital to finance these initiatives. Committed bank facilities meet this requirement by providing the assurance of funding (subject to explicit conditions), or at least a starting point for raising the new capital. Raising the capital necessary to finance very large real options is so critical that many companies use a single financial advisor to evaluate M&A transactions and raise the funds. In the case of ClubCorp, Bank of America provided M&A advice and an interim loan to finance an acquisition that exceeded the company's committed bank capacity. Later that year, Bank of America “agented” a new deal to refinance this acquisition debt. In a second case, Ferrellgas hired Bank of America to evaluate, help negotiate, and finance its acquisition of Thermogas. Financing this transaction required a bridge loan and synthetic lease as well as monetizing $175 million of equity securities.