MEZZANINE
FINANCING:
Capital Benefits
Group can provide businesses with flexible "Mezzanine"
financing that can be structured as long term, fixed rate
subordinated debt with some equity features, generally in
the form of stock warrants. Debt service can be
interest-only for a considerable portion of the overall
maturity, thus creating a highly effective method of
financing corporate growth.
Mezzanine borrowers must have demonstrable debt servicing
capacity and minimum annual revenues in the general range
of $5 to $20 million; transaction sizes range from $2
million and above, depending on the size and
creditworthiness of the client company.
As with equity financing, Capital Benefits Group assists
clients with all phases of arranging mezzanine capital
including the preparation of a comprehensive business plan
and solicitation of appropriate private and institutional
lenders. We are typically able, for appropriate
transactions, to procure and negotiate multiple financing
proposals, thus creating an efficient market and minimizing
interest costs and shareholder dilution. We do this with
transparency and determination of risk.
Characteristics of Mezzanine finance:
Mezzanine capital (or mezzanine debt) is a broad financial
term that refers to unsecured, high-yield, subordinated
debt or preferred stock that represents a claim on a
company's assets that is senior only to that of a company's
shareholders.
Structure:
Along with the
typical interest payment associated with debt, mezzanine
capital will often include an equity stake in the form of
warrants attached to the debt obligation or a debt
conversion feature similar to that of a convertible bond.
Mezzanine capital is a more expensive financing source for
a company than secured debt or senior debt. It is more
expensive because of the increased credit risk, i.e. in the
event of default; mezzanine debt is less likely to be
repaid in full. It is only secured by the equity of the
company, and not directly by the company's tangible assets
(e.g., property, liquid securities or accounts receivable).
In compensation for the increased risk, mezzanine debt
holders will require a higher interest payment or an equity
stake in the company. However, it is a cheaper source of
financing than equity as the current equity holders achieve
less dilution.
Uses:
• Financial
sponsors may seek to help finance a leveraged buyout with
mezzanine capital in order to reduce the amount of the
equity investment.
• An early stage company may choose to raise money with
mezzanine capital if the company does not have sufficient
assets to collateralize, but does not want to achieve
further dilution by raising additional equity.
• Middle market companies may be unable to access the high
yield market due to high minimum size requirements, which
create a need for flexible, private mezzanine capital in
the $5 million to $50 million range.
