Archive for the ‘Mezzanine Financing’ Category
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Mezzanine Debt Financing – Your Ultimate Guide
Have a thriving business, with a competent staff you can deploy, and poised to expand to new emerging markets & strike while the iron is hot? Or looking to undertake a large-scale corporate restructuring, or maybe acquire or buy out a business which can evolve to something big, but lacking hard assets? For the determined entrepreneur whose bank may not quite look at things in the same perspective, this is but a temporary setback.
If your bank disapproves your request for loan that may allow you to carry out your business expansion plans or to fund an attractively priced acquisition target, the alternative is to opt for mezzanine debt financing.
Yes, companies with strong cash flow but which traditional banking institutions do not consider bankable even if their businesses are picking up (and despite the fact that they are owned & run by go-getting, relentless entrepreneurs who are prepared to think and expand globally) can turn to mezzanine debt financing to obtain additional capital.
In essence, mezzanine debt financing has become a workable way for buyout firms to raise capital. Reports show that more companies opted for this type of financing last year or the previous year. An investment bank can offer the most cost-efficient access to such type of funds.
Companies – like franchise firms that have gone through the birth pains, established strong footing in the marketplace, and show much promise of catapulting their business to greater success – are among those best suited to avail of such capital infusion. Well-established, lucrative businesses belonging to diverse industries ranging from communications to specialty retailing to business services and many others, including mid-range firms with huge potential to flourish, are targeted by mezzanine lenders.
Mezzanine debt financing lies in the category between a regular bank loan (it actually begins that way, but at higher interest rates) and a private equity investment. Lenders of this type of loans tend to look into the future to ascertain things like whether companies will be going public or issuing equity. Mezzanine lenders shoulder higher risks by funding and facilitating business propositions but eye higher returns.
Since there is not much due diligence on its part (and requires no collateral from the borrower), the mezzanine lender may eye a high rate of return of about 20 to 30 percent. Unlike traditional banks whose main focus is to get back in timely fashion (or earn interests for those who are remiss in loan payments) loans plus interests that accrue, mezzanine lenders offer more complex terms.
Besides provisions for interest payments, origination fee and the amortization rates, there are warrants structured into the loan so that in the event that the debt is not paid as required, the loan can shift to an equity loan (a piece of ownership in the business in lieu of capital). The portion of principal rights or stock in the business gained by the mezzanine lender in case of default of loan payment can be bought back at a predetermined price by the borrower.
Mezzanine debt is usually structured to mature in five to seven years. The interest rate is about 12 percent per year, usually with no principal payments for the first three years.. Lenders may opt to take a small equity warrant in the business ranging from 5 to 20 percent. Such long-term funds can be provide immense help in funding deals that can jump start or propel a company to greater success.
Mezzanine Financing FAQ:
Question: In commercial real estate, difference between permanent, interim, bridge & mezzanine debt/financing?
Answer: Permanent, is the loan on the building, like a home loan. Interim/construction financing is usually for 2-3 year terms and can be incremental for the construction of building. Bridge/Mezzanine financing is the extra amount of funds needed to get the building financed. Usually at a different rate, it is the extra funds because the original permanent loan usually will only go to 80-85% of loan to value on the building.
Question: What is mezzanine financing as it relates to commercial lending?
Answer: This is a loan that gives the lender the right to convert to an ownership or equity interest if the loan is not repaid in full as agreed.
Question: Does anyone know any firms that are actively providing Mezzanine Financing in China ?
Would be nice to know who is active in Asia/China.Answer: No, I never needed unsecured loans. I’m sure it happens, the problem I could see is that if you pick the wrong company there you could be jumping into bed with the devil, corruption and links to certain groups would certainly be part of the package once you go outside all but the major players. Most unsecured loans in China that I have come across seem to be through trusted business colleagues or family as is the way of guanxi over there.
Question: How Does Mezzanine Finance Work?
Answer: Mezzanine financing meets the needs of a new but profitable company prior to a bank being willing to offer lines of credit. It generally includes subordinated convertible debt and yield based preferred shares, often structured with warrants or options.
Examples of mezzanine transactions:
Management/leverage buyouts
Expansion financings (internal growth and/or acquisitions)
Recapitalizations and divestituresAn ideal candidate profile:
Post-”second round” and pre-IPO company, operated by experienced management.Investment interest:
Typically, this will always be a minority interest that has no voting control.The Bottom Line:
Where you see mezzanine, think “interim”. It’s almost always short-term, high risk and therefore high yield financing.Question: What is mezzanine financing?
Answer: Mezzanine financing is a hybrid of debt and equity financing. It is generally used to finance the expansion of existing companies. Basically, it is debt capital, with current repayment requirements, but with rights to convert to an ownership or equity interest in a company. It is generally subordinated to debt provided by senior lenders (such as a bank) and is referred to as subordinated debt. Mezzanine financing is advantageous in that, on the balance sheet of a company, it is treated like equity and may make it easier to obtain standard bank financing.
Mezzanine financing, being a hybrid of debt and equity financing, is generally not collateralized. Often, there is a repayment obligation with mezzanine financing. It may also be riskier than debt financing and therefore is not generally available with standard commercial lenders. Mezzanine financing is typically found with venture capital companies and/or alternative lending institutions seeking a higher rate of return. Most companies providing mezzanine financing are looking for returns of 20% or higher.