What Exactly Is a Kicker in Finance?

Kicker increases the attractiveness of financial instruments and are often added to attract lenders and investors and providing them the opportunity to buy shares of the company.

When it comes to real estate, a kicker is a further cost that must be paid on top of a loan in order for the loan to be accepted. As an example, consider a financial investment in the revenues of a retail or rental facility. It is sometimes referred to as a sweetener or a wrinkle in certain circles.

Key Points Briefly

  • When a kicker is included in a financial instrument to make it more appealing to potential lenders or investors, it is also known as a sweetener or a wrinkle, depending on the terminology used.

  • The addition of kickers to debt securities provides investors with an additional incentive to buy debt securities since they increase investors' anticipated return on investment (ROI).

  • Convertible bonds and warrants to buy stocks are two kinds of equity kickers that are often used.

  • Kickers are prevalent in investment real estate loans, with the borrower often agreeing to provide the lender with a percentage of the total revenue or gross rental receipts produced by the investment property in exchange for the loan.

What a Kicker Does and How It Works

Kickers are characteristics that are introduced to a transaction in order to "get the deal done," since they are only for the advantage of lenders and are used to increase the anticipated return on their investment (ROI).

In the case of a startup business, a lender may be cautious about lending money to the company since the money would be used to fund the company's early-stage activities. If a startup's financial track record does not demonstrate consistent sales growth and profitability, it may have an uphill fight in getting financing.

It is possible that the new business may need to arrange an equity transaction in order to attract the lender, with the added incentive of stock participation in the company. Because the lender is providing financial assistance to the organization, the lender will get an ownership interest in the organization and an agreed-upon portion of future earnings.

Equity Kickers are a group of people that believe in the value of equity.

As a result, a kicker serves as an additional incentive for investors to buy debt instruments, such as bonds or preferred stock, rather than equity. It is referred to as a kicker option when a bond has an embedded option that may be exercised by the bondholder to buy stock at a discounted price from the issuing company. An investor will be motivated to buy a bond that includes a kicker since doing so will enable the investor to participate in any rise in the value of equity ownership.

Some bonds include a convertible feature that enables them to be exchanged for shares of stock, and some bond issues include warrants to buy shares of stock that are offered in conjunction with a new bond issuance.

A business that includes a kicker (for example, a rights offering) in a bond offering is only doing so to ensure that investors get the whole issue. During the course of the bond's duration, the kicker may or may not be really useful at any point. It is common for a particular breakpoint to be achieved, such as a stock price rising over a certain threshold, before the kicker may be considered valuable.

Example − A bondholder who has the right to buy shares in a business for $20 per share will only practice this right if the company's shares are trading above $20 per share during a certain time period. Aside from that, there is no financial benefit to buying the stock.

Kicker in the Real Estate Industry

Let us consider a scenario where the borrower who has taken a huge mortgage is struggling to make the repayment due to several factors of job and in this case the lendor could exert his right and ask for equity kicker. This is a an additional payment over mortgage payment that the borrower would have to make. This perk may be provided by the borrower or required by the lender to sweeten the loan transaction.