MEZZANINE FINANCING

Mezzanine Financing



Mezzanine Financing

Introduction

Mezzanine financing offers a way for publicly and privately held companies to attain financing without going public and potentially ceding ownership of their company. It is a blend of traditional debt financing and equity financing, reaping some benefits of both. Like equity financing, mezzanine financing is an unsecured debt, requiring no collateral to be put up unlike traditional bank loans. Like debt financing, mezzanine financing is very fluid and does not necessarily involve giving up an interest in the company.

Mezzanine financing relies on very high interest rates in the 20-30% range to make it profitable. Unlike a bank loan, mezzanine financing does not hold real assets of a company as collateral; instead, lenders offering mezzanine financing have the right to convert their stake to an equity or ownership in the event of a default on the loan (Esty, 2001).

Mezzanine financing is a particularly appealing form of liquidity for owners of privately held companies. It is traditionally understood that a privately held company simply cannot achieve the same sort of fluid capital flow as a publicly held company, but mezzanine financing offers a way to balance that situation without going public. In addition to the fact that mezzanine financers do not retain an interest in the company except in the event of a default, there is also the important consideration that they actively do not want an interest in the company. While traditional equity investors are often striving towards some level of control, a displeasing thought to many private owners, with mezzanine financing one can rest assured that the financers will do what they can to ensure you pay off your debt without resorting to default.

Recent market conditions have re-established mezzanine financing's appeal as a tax-efficient source of long-term capital. With the reduction of traditional senior bank credit and the reluctance of banks to lend under the lenient terms and low rates offered over much of the last decade, mezzanine is one of the more effective vehicles for owners of closely held private companies interested in facilitating liquidity for wealth diversification or succession purposes, pursuing acquisitions, or funding organic growth (Harvey and Viskanta, 2004).

Mezzanine financing involves making unsecured loans to companies who do not have the collateral available to allow them to qualify for traditional bank loans. Ideally, it allows privately held companies to obtain the financing they need for expansion without relinquishing control of their company to investors.

Mezzanine financing is typically difficult to obtain and comes with a high rate of interest, often in the 20% - 40% range. That is why it is for successful companies in growing industries looking for a fluid source of capital. Mezzanine financiers want to see a relatively high rate of growth in the companies in which they invest.

How are Mezzanine Loans Structured

The term of mezzanine loans is generally 3-5 years and the bulk of the principal is often paid at the end of the loan. That gives the company who is granted the loan the ability to use the principal ...