2009 • Volume 34 • Number 2

My Banker’s Conflicted and I Couldn’t Be Happier: the Curious Durability of Stable Financing

Christopher Foulds

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 recent credit crisis. During this period, it received a considerable amount of negative coverage by the popular media and some skepticism by the Delaware Court of Chancery. The perceived problem is that the investment bank advising the target corporation stands on both sides of the deal in a potentially conflicted position. The fear is that the bank could steer an auction towards those bidders using the staple financing, even if those bidders would not offer the best price, so that the bank can receive the financing fees, as well as the advisory fee.

There also have been several articles, written mainly by partners at large New York law firms, defending the practice. On both sides of the debate, 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 in that it looks at staple financing in poor credit markets. In poor credit markets, banks and bidders may have a strong incentive to escape their obligations to close on deals. It turns out that staple financing has positive results for a target corporation’s shareholders in poor credit markets because it is more likely that a staplefinanced 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.