The bridge defers the sponsor's cheque to commercial operation, so the IRR rises whenever the bridge costs less than the equity return; value is created only when it costs less than the sponsor's cost of capital.
An equity bridge loan funds the sponsor's equity during construction and is repaid when the project reaches commercial operation, so the sponsor's cash goes in later and the equity IRR rises whenever the bridge costs less than that IRR. On an illustrative project with 100.0 of equity drawn over two years, a bridge at 6 per cent lifts the equity IRR from 11.25 to 12.42 per cent, about 116 basis points. At a 10 per cent cost of equity the same bridge is worth only 5.22 of NPV, and the equity multiple falls from 3.00x to 2.75x.
Worked in full in The Project Finance Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
In a conventional project financing the equity goes in first or pro rata with the senior debt during the build. An equity bridge loan replaces those contributions with a short bank facility, typically secured on a sponsor guarantee or letters of credit rather than on the project, because the lender is really taking the sponsor's credit. At commercial operation the sponsor injects its committed equity, the bridge is repaid, and the project's cash flows are untouched. Only the timing and the amount of the sponsor's cheque move.
That is why the right test is not the IRR. The IRR measures how fast money comes back relative to when it went in, so deferring the outflow always flatters it as long as the deferral is cheaper than the return. Whether the sponsor is richer is a separate question, answered by discounting at its own cost of capital.
| Input | Value |
|---|---|
| Total project cost | 400.0 |
| Senior debt (75%) | 300.0 |
| Sponsor equity (25%) | 100.0 |
| Equity draws: start of year 1, start of year 2 | 50.0; 50.0 |
| Commercial operation | end of year 2 |
| Distributions to equity, years 3 to 22 | 15.0 a year |
| Bridge all-in rate, interest rolled up (illustrative) | 6% |
| Sponsor cost of equity (illustrative) | 10% |
The distributions are taken as given: they are what the waterfall leaves after senior debt service, and the bridge does not touch them. If your bridge interest is capitalised into project cost and partly funded by senior debt, the mechanics are the same but the senior loan grows; the version here, with the sponsor paying all of it, is the cleaner one to reason about.
1. Without the bridge, equity cash flows: −50.0 at year 0, −50.0 at year 1, +15.0 a year in years 3 to 22. IRR = 11.25%.
2. With the bridge, each draw accrues at 6% to completion: 50.0 × 1.062 = 56.18 and 50.0 × 1.06 = 53.00.
3. Sponsor repays the bridge at year 2: 56.18 + 53.00 = 109.18, of which 9.18 is interest.
4. Equity cash flows: −109.18 at year 2, +15.0 a year in years 3 to 22. IRR = 12.42%.
5. NPV at 10%: present value of distributions 105.54. Contributions 95.45 without the bridge (50.0 + 50.0 / 1.10) and 90.23 with it (109.18 / 1.102). Gain = 95.45 − 90.23 = 5.22.
Excel: =IRR(EquityFlows) on each row, and =NPV(CoE, Year1:Year22) + Year0 for the value test.
| Measure | No bridge | 6% bridge | Change |
|---|---|---|---|
| Equity contributed | 100.00 | 109.18 | +9.18 |
| Distributions | 300.0 | 300.0 | 0.0 |
| Equity multiple | 3.00x | 2.75x | −0.25x |
| Equity IRR | 11.25% | 12.42% | +116 bp |
| NPV at 10% cost of equity | 10.09 | 15.31 | +5.22 |
The sponsor puts in 9.18 more and gets back the same 300.0, so the multiple falls. It still ends richer by 5.22 in present value terms, because it kept its 100.0 at work elsewhere until completion, half of it for two years and half for one, at an assumed 10 per cent, and paid only 6 per cent for the privilege. The gain is the spread between the two rates on the deferred money, not the 116 basis points.
| Bridge rate | Repaid at completion | Equity IRR | IRR change | NPV gain at 10% | Multiple |
|---|---|---|---|---|---|
| 5% | 107.62 | 12.65% | +140 bp | 6.51 | 2.79x |
| 6% | 109.18 | 12.42% | +116 bp | 5.22 | 2.75x |
| 7% | 110.75 | 12.19% | +93 bp | 3.93 | 2.71x |
| 8% | 112.32 | 11.96% | +71 bp | 2.63 | 2.67x |
| 10% | 115.50 | 11.52% | +27 bp | 0.00 | 2.60x |
| 11% | 117.11 | 11.31% | +5 bp | −1.33 | 2.56x |
| 14% | 121.98 | 10.68% | −57 bp | −5.36 | 2.46x |
Two thresholds sit in this table. The IRR keeps rising until the bridge costs as much as the unbridged equity IRR, 11.25 per cent. The value gain disappears at the sponsor's cost of equity, 10 per cent. Between the two, a bridge at 11 per cent reports a better IRR and makes the sponsor poorer by 1.33.
A longer build makes the effect bigger in both directions. Spread evenly over one, two or three years, a 6 per cent bridge adds 90, 116 and 135 basis points of IRR and 3.64, 5.22 and 6.67 of value, while the interest the sponsor pays rises from 6.00 to 12.49.
How the funding requirement, interest during construction and the equity return are built on the book's two projects is in the free workbooks for this case; the split between project and equity returns is worked in project IRR vs equity IRR, and the build itself in the project finance model template.
The sponsors, at or shortly after commercial operation, by injecting the equity they had committed, usually backed during construction by a sponsor guarantee or letters of credit. In the illustrative case the sponsor pays 109.18 at completion to retire 100.0 of bridge draws plus 9.18 of rolled-up interest at 6 per cent.
Only while its all-in cost is below the equity IRR without it. In the illustrative case that crossover is 11.25 per cent: a bridge at 11 per cent still adds 5 basis points of IRR while destroying 1.33 of value at a 10 per cent cost of equity, and a bridge at 14 per cent takes 57 basis points off.
Because the distributions are unchanged while the sponsor's total contribution grows by the bridge interest. On the illustrative project 300.0 of distributions against 100.0 of equity is 3.00x; against 109.18 repaid at completion it is 2.75x. The IRR rises because the money goes in later, not because more comes out.
This article is one calculation from The Project Finance Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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