kicker is a right, an exercisable warrant, that is added to a debt instrument as an incentive for potential investors, giving the debt holder the potential option to buy shares in the issuer. It is used exclusively for the benefit of lenders to increase their expected return on investment (ROI), as it allows them to participate in any increase in the value of the equity property.
The lender provides a loan at a lower interest rate and, in return, obtains an equity position in the borrower’s business. The equity-kicker is structured as a conditional reward, in which the lender obtains an equity stake that will be paid off at a future date when the company reaches specific performance targets.
Most companies that offer a built-in equity-kicker option are unable to access credit from traditional lenders because they are early stage companies that have not yet accumulated enough assets. Equity-kickers are often used for leveraged buyouts (LBOs), management buyouts (MBOs), and capital recapitalizations, as they are considered too risky for traditional financing offered by senior and guaranteed lenders.
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