Kicker

What is kicker?

A kicker is an additional feature, usually an extendable right, an exercisable warrant, or a financial instrument. It attracts potential investors as it works for extending the stake or receivables due from an investment. In case of debts with a kicker, it gives the holder an option to purchase shares of the debt issuing company. In commercial real estate, It may be an additional expense paid on a mortgage to get it approved in commercial real estate. It may also work to give additional equity stake or receipts from a rental property.

Highlights

• A kicker clause is a bonus feature on financial instruments which catches the attention of prospective financiers or investors.
• Instruments with kicker may be offering a lower return at present, but this is due to the future lingering benefit they offer.
• The kicker offered may be range from a low of 10% to an extreme of 80%, depending on the underlying risk of the portfolio.

Frequently Asked Questions (FAQ)

How does a kicker function?

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Kickers are additional features exclusive for the benefit of fund providers to improve their expected return on investment (ROI).

Often an equity kicker is used to lure towards a bond or preferred equity stocks of a company. The bond may be quoted at a lesser than usual interest rate but with an added kicker. The kicker offered may be range from a low of 10% to an extreme of 80%, depending on the underlying risk of the portfolio.

Whenever an additional incentive to a funding requirement is added, whether in the form of bonds or mortgages, it is referred to as a kicker. Though the original lending may be at lower interest rates, they do offer a future exercisable right, which may act as compensation to attract investors or financiers.

Example

It is very difficult to find lenders for a startup company. Such companies need a lot of financial backing, especially in the initial stages of operations. Most lenders may not wish to invest as there are many risks linked to startups’ success in the future. Such firms also do not have a financial track record or steady sales and profit records. In such a situation, startup firms have an option to get finance using equity kickers on current loans. They can devise debt with an added offer to get equity shares at a future date It will benefit the lenders as they will get equity offerings at a lower strike price and an ownership stake as decided in the past.

What is an equity kicker?

An equity incentive to investors of debt securities is called an equity kicker. It is often a clause in bonds or preferred stocks that offer ownership later to cover a reduced rate of interest offered on the instrument.

The equity kicker clause is also offered on share warrants or additional attachments to bonds already issued. In such cases, the kicker benefits investors to obtain a definite number of equity/ownership shares at a predefined price. In addition, the clause is often used for management buyouts or leveraged buyouts of a company or equity recapitalisation.

An equity kicker is an incentive to make access to borrowings easy and feasible for a business, especially startups, during their initial operations. Equity kickers are generally very useful for startups in obtaining finance to sustain and survive. This is because the stress of outflows caused by traditional borrowings is comparatively lesser for new firms opting for such an arrangement. Resources thus can be better utilised for expansion and progress. However, investors who have accepted kickers do expect future ownership or profit-sharing.

What are the benefits of using a kicker?

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The following are the benefits for lenders and borrowers using kicker arrangements to obtain funds-

• Lenders get ownership or additional rights in exchange for funds at a low cost.
• Kickers may reduce the market value of the company but increases its value for lenders.
• Dividend benefits also accrue when results are declared.
• Lenders get a proportionate share of earnings accrued to owners of the company.
• Get benefits accrued to both lenders and owners.
• It is a feasible option for financiers to benefit from the upside movements of the borrowing company.
• Such an arrangement of funds is very useful for early-stage companies.
• It makes securities eye-catching from the investors’ perspective.
• Using kickers is advantageous to create liquidity and meet loan requirements.
• It is a very traditional way to enhance the marketability of a borrower company.
• The arrangement is beneficial to both financers and borrowers using agreements with kickers.

How do agreements with kicker work in real estate?

In real estate, agreements that come with a kicker, loan arrangements are created with an additional share in income, sales proceeds, or rental receipts to be generated in future from the property being financed. The borrowers offer benefits to candy-coat the loan contract.

The transactions entail the borrower's credit risk turning out faulty in making a large down payment on the property. It is the only reason why lenders may need a kicker or ownership in the property deal. The kicker may also be offered in cases where collateral offerings are not available to cover the amount of the funds needed.

The kicker clause may depend on future events like the sale of the property.

For example, consider a real estate company that borrowed US$1 million to purchase a luxury apartment. The company utilises the borrowed funds for renovating the apartment to give it on lease in future. Given at that time, demand for luxury apartments is high, post-renovation, the apartments’ worth triples to US$3 million. Suppose a real estate company offers an equity kicker of 10% on the borrowing initially. It will mean that the company will have to give off 10% of the value gain on the apartments to the financiers of the apartment.

What are the disadvantages of using the kicker clause?

Though a Kicker clause is an easy method to get financing and ownership benefits, it comes with its handicaps-

• Investors in kicker agreements take up high risks.
• Such agreements come with a lot of uncertainty.
• Bonds with equity kickers are offered at discounted interest rates.
• Future benefits may not be as fruitful as they appear initially.
• Borrowers’ future earnings are compromised to obtain funding.
• It results in ownership dilution and is not beneficial to exist shareholders of the borrowing company.