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 desirable to potential investors by giving the debt holder the potential option to purchase shares of the issuer.
In real estate, a kicker is an added expense that must be paid on a mortgage in order to get a loan approved. An example would be an equity stake in receipts of a retail or rental property.
A kicker is also called a sweetener or a wrinkle.
Kickers are essentially features that are added to "get the deal done", as they are exclusively for the benefit of lenders and used to add to their expected return on investment (ROI).
In effect, a kicker is an extra incentive to encourage investors to purchase a debt security, such as a bond or preferred share. When a bond has an embedded option which may be exercised by the bondholder to purchase equity at the issuing firm at a discount price, the option is said to be a kicker. An investor will be incentivized to purchase a bond with a kicker as this allows the investor to participate in any increase in the value of equity ownership.
Two common types of equity kickers are a convertible feature on some bonds that allows the bonds to be exchanged for shares of stock, and warrants to purchase stock that are sold in combination with a new bond issue. Equity kickers are often used for leveraged buyouts (LBOs), management buyouts (MBOs), and equity recapitalizations since they are considered too risky for traditional financing offered by senior, secured lenders.
A company that adds a kicker (for example, a rights offering) to a bond issue is only doing so to get the entire issue into the hands of investors. The kicker may or may not actually be usable at any time during the life of the bond; often a certain breakpoint must be reached, such as a stock price above a certain level, before the kicker has any real value. For example, a bondholder that has the right to purchase shares in the company for $20 per share, will only exercise this right if the shares are trading above $20. Otherwise, there’s no financial advantage to purchasing the shares.
Real Estate Kickers
In real estate loans, a lender may be offered, in addition to interest on the loan, a share in the total income or gross rental receipt that will be generated from the investment property being financed, if the income exceeds a specified amount. This benefit may be offered by the borrower or demanded by the lender to sweeten the loan deal.
From a legal viewpoint, kickers have to be disclosed in consumer loans as part of the finance charges. However, real estate kickers can be shady practices, and are even illegal in some jurisdictions.