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Mezzanine
Financing
Mezzanine financing includes the following transaction
types;
Existing lines of credit have been reduced. New loans from
traditional lenders are harder to obtain. Access to the public
capital markets is almost non-existent and the economic slow
down has been financially challenging for many businesses. Where
then, in these times, does the typical middle-market company
turn for capital? Increasingly the answer may be mezzanine
financing.
A hybrid form of capital, mezzanine financing is squished
between senior debt and equity on a company's balance sheet.
Structurally it is subordinated or "junior" in priority of
payment to senior debt, but senior to common stock or equity.
Mezzanine capital typically is used to fund a growth
opportunity, such as an acquisition, new product line, new
distribution channel or plant expansion. Although it makes up a
small percentage of a company's total available capital,
mezzanine financing has become critical to middle-market
companies in recent years.
Often times mezzanine finance is the factor that
influences whether or not a deal closes. As more cash-flow loans
are being restructured, often there's a gap between the new
asset-based deal and the amount financed previously on a
cash-flow basis. Mezzanine fills that gap.
Gaps of this nature are common for two primary reasons: 1)
accounts receivable, inventories and fixed assets are being
discounted at greater rates than in the past for fear that their
values will not be realized in the future; and, 2) as a result
of defaults and regulatory pressure, banks have placed ceilings
on the amount of total debt a company can obtain. While
additional liquidity can be obtained from equity investors,
equity is the most expensive source of capital. It also requires
a greater "ownership give-up." As a result, mezzanine finance
can be an attractive alternative.
Mezzanine financing is advantageous because it is treated like
equity on a company's balance sheet and may make it easier to
obtain standard bank financing. To attract mezzanine financing,
a company usually must demonstrate a track record in the
industry with an established reputation and product; a history
of profitability; a viable expansion plan for the business (e.g.
expansions, acquisitions, IPO). Mezzanine financing is usually
provided to the borrower very quickly with little due diligence
on the part of the lender and little or no collateral on the
part of the borrower.
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