Kicker

What Is a Kicker?

A kicker is a right, exercisable warrant, or other feature that is added to a debt instrument to make it more attractive to likely investors by giving the debt holder the possible option to purchase shares of the issuer.

In real estate, a kicker is an additional expense that must be paid on a mortgage to get a loan approved. A model would be an equity stake in the receipts of a retail or rental property.

A kicker is likewise called a sweetener or a kink.

How a Kicker Works

Kickers are features that are added to "finish the deal" as they are solely for the benefit of lenders and used to add to their expected return on investment (ROI).

For instance, a lender might be careful about loaning money to a startup company, which might require the money to finance beginning phase operations. Without a financial history showing consistent sales growth and profits, the startup might face a daunting task in getting funding. The youthful company might have to structure an equity deal to tempt the lender, offering a kicker of equity ownership in the company. In return for loaning money to the company, the lender will receive a stake in the company and a certain percentage of future profits.

Equity Kickers

In effect, a kicker is an extra incentive to urge investors to purchase debt securities, like a bond or preferred share. At the point when a bond has a embedded option that might be exercised by the bondholder to purchase equity at the responsible firm at a discount price, the option is supposed to be a kicker. An investor will be boosted to purchase a bond with a kicker as this permits the investor to participate in any increase in the value of equity ownership.

Two common types of equity kickers are a convertible feature on certain bonds that permits the bonds to be traded for shares of stock, and warrants to purchase stocks that are sold in combination with another bond issue.

Equity kickers are frequently utilized for leveraged buyouts (LBOs), management buyouts (MBOs), and equity recapitalizations since they are viewed as too risky for traditional financing offered by senior, secured lenders.

A company that adds a kicker (for instance, a rights offering) to a bond issue is just doing as such to get the whole issue into the hands of investors. The kicker could possibly actually be usable out of the blue during the life of the bond. Frequently a certain breakpoint must be reached, for example, a stock price over a certain level, before the kicker has any real value.

For instance, a bondholder that has the option to purchase shares in the company for $20 per share, will possibly exercise this right assuming the shares are trading above $20. In any case, there's no financial advantage to purchasing the shares.

Real Estate Kickers

In real estate loans, a lender might be offered, notwithstanding interest on the loan, a share in the total income or gross rental receipts that will be produced from the investment property being financed, assuming the income surpasses a predefined amount. This benefit might be offered by the borrower or demanded by the lender to add to the loan arrangement.

On the off chance that the borrower can't make a large down payment on the property or there is some situation that makes the transaction a credit risk, the lender might require an equity kicker or percentage ownership in the property of some sort or another. For instance, the lender might consent to a real estate investment loan gave they receive a percentage of the sales proceeds after the borrower revamps the property and exchanges it at a higher price.

Special Considerations

The term kicker ought not be mistaken for the term kickback, which is an illegal payment given as compensation for particular treatment. In real estate transactions, people and companies that disregard the preclusion against kickbacks can face civil and criminal liability. From a legal perspective, all settlement costs must be unveiled in consumer loans as part of the finance charges.

Congress enacted the Real Estate Settlement Procedures Act (RESPA), which became effective in June 1975, to safeguard consumers from abusive settlement practices, like kickbacks. RESPA requires lenders, mortgage brokers, or servicers of home loans to furnish borrowers with exposures in regards to the nature and costs of the real estate settlement process.

Features

• For investment real estate loans, a common type of kicker is for the borrower to offer the lender a share of the total income or gross rental receipts produced from the investment property.
• A kicker, otherwise called a sweetener or a kink, is a feature added to a debt instrument that makes it more attractive to prospective lenders or investors.
• Two well known types of equity kickers are convertible bonds and warrants to purchase stocks.
• Kickers furnish investors with an extra incentive to purchase debt securities (like a preferred share or bond) since they add to the investors' expected return on investment (ROI).