My Banker's Conflicted and I Couldn't Be Happier: The Curious Durability of Staple Financing

Abstract

Staple financing refers to a prearranged financing package offered by a target corporation's financial advisor to potential bidders. Staple financing was commonplace during the deal boom leading up to the credit crisis. During this period, it received a considerable amount of negative coverage by the popular media. The problem is that the investment bank advising the target corporation also receives a fee from the bidder or receives a benefit by placing the debt, so the bank is in a conflicted position. The fear is that the bank would steer an auction towards those bidders using the staple financing, so that the bank can receive the financing fees, even if those bidders would not offer the best price.

There have been some articles in the popular media warning against staple financing, and there have been several articles, written mainly by partners at large New York law firms, defending the practice. On both sides, these articles invariably measure the benefits gained by using staple financing against the adverse impact of the bank's conflicted position. These articles are, however, written from the perspective of a period when credit markets were robust and financing was available.

This article is different and novel in that it looks at staple financing in poor credit markets. In poor credit markets, banks and bidders obviously want to escape their obligations to close on deals. It turns out that staple financing has positive results in poor credit markets because it is more likely that a staple-financed deal will close. The reason is curious. It turns out the bank's conflicted position, which was the major problem in good credit markets, makes it less likely that the lender will break its commitment to lend in poor credit markets. A bank offering staple financing will be less likely to back out of its commitment because if it backs out, it will also lose the advisory fee. Thus, the advisory fee acts as a buffer to deal break-ups.

Keywords: staple finance, staple financing, mac, mae, stapled finance, stapled financing, toys, ortsman, material adverse, break up