Mezzanin Capital: specialista na mezaninové úvěrové produkty?

Product

Mezzanine debt (or loan) can be structured as a specific form of debt (structurally or legally subordinated debt – the most common form of mezzanine financing in the conditions of the Czech Republic) or as preferred shares. It is typically not materially secured, does not require personal guarantees from the company owners, and is typically provided based on the financial performance of the potential borrower, measured by debt capacity defined based on the company’s cash flow.

Mezzanine debt inherently carries a significantly higher risk than standard senior (bank) debt, and its price reflects this, being significantly higher than the price of bank debt.

In most cases, the price (interest) of mezzanine debt consists of two components: (i) Regular interest payment in cash, and (ii) PIK (Payment-In-Kind) interest component, which is a capitalized part of the total interest and is paid at the maturity of the respective loan. In some situations (especially in the case of financing company acquisitions by their managers), the provider of mezzanine financing may also require a certain share of the future equity value of the financed company.

Mezzanine debt is typically structured based on the so-called EBITDA multiple (or multiple of the borrower’s gross cash flow), with a higher use of financial leverage than in the case of standard bank debt (measured based on Net Financial Debt / EBITDA), and its maturity typically extends beyond the maturity of senior (bank) debt, with a profile of a one-time loan repayment at maturity.

Mezzanine debt (loan) is a flexible, long-term source of financing that allows for accelerating the growth of the respective borrower and increasing value creation for its owners.

Uses of Mezzanine Financing

Borrowers can use mezzanine financing (typically not exclusively, but mostly in combination with senior debt) if they want to achieve the following objectives:

  • Significant expansion of business activities and/or investment in new technologies
  • Financing the purchase (acquisition) of a new company
  • Optimizing the capital structure and risk profile of their business
  • Recapitalization; changing the ownership structure Bridging a short-term liquidity shortage Acquisition of assets as part of business restructuring
  • Financing the restructuring process (of the borrower)

Whether mezzanine debt is used as part of acquisition financing, financing a growth story, refinancing a company’s balance sheet, or an owner buy-out, this financial instrument can always provide significant added value to all parties involved in the respective transaction.

Advantages of Mezzanine Financing

Despite its higher cost, mezzanine debt offers significant (structural) advantages that make it a suitable form of financing in many situations:

  • Fills the financing gap caused by limited access to senior debt or equity.
  • Enhances the return of equity investors due to reduced amounts of equity required in the transaction.
  • Minimizes equity dilution for shareholders and lowers cost of capital relative to equity.
  • Mezzanine financing eliminates the need to sell a majority or significant portion of shareholding in a company in order to finance equity intense strategies.
  • Mezzanine loans (solely or in combination with bank financing), under certain circumstances of adequate debt capacity and equity value, can provide 100% of the own capital needed for a transaction.
  • The Mezzanine loan volume is structured based on a company’s cash flow rather than underlying asset value.
  • Helps to finance transactions even if the investor lacks equity at a higher risk appetite, and EBITDA multiples result in a far higher leverage than a bank loan.
  • Mezzanine loans usually have no personal guarantees and have longer terms than bank loans.
  • Mezzanine loans have back-ended principal (and capitalized interest components) repayments in comparison to bank loans.
  • The terms and conditions are more flexible than those of banks or junior bonds, and less intrusive than an equity investor.

In principle, the terms of mezzanine financing are always more flexible (more tailored) than the terms of standard bank debt, and the requirements of the mezzanine lender (relating to aspects such as management influence, reporting, and yield requirements) are orders of magnitude lower than those of an investor holding an ownership stake in the company.