A Changing Landscape in the Debt Market with Mezzanine Debt

Mezzanine debt is growing in the debt markets and becoming an increasingly important player. As banks tighten lending standards to asset based levels, term loans once provided by banks are no longer available. Term loans are essential building blocks for a corporate growth strategy as they facilitate long term investment. As projects mature in the future, they contribute cash flow which can then repay the term loan principal. Term loans were historically provided by banks based on a company cash flow and ability to service debt payment. Many of them were not fully collateralized by assets, yet banks were able to gain comfort with future cash flow generation. Nowadays, banks are largely unable to provide loans against future cash flow except in limited cases. This has created a need for direct lending to middle market companies for acquisition financing or growth capital financing. Mezzanine lenders are filling this void by offering a variety of loan structures including second lien, unitranche or traditional subordinated debt. As the mezzanine lender market matures, funds are seeking the public markets to more efficiently fund themselves, thereby lowering their cost of capital. As the cost of capital decreases, lenders are able to offer better loan pricing to their borrowers. Mezzanine debt, due to its progressive approach, allows for much larger loan sizes and more flexible repayment terms than a bank loan. Loan sizes can be up to 2 to 3 times the size of a bank loan. Loan terms are usually 5 years with principal due at the end of the term. This means more capital and more time to repay which can be tremendously beneficial for a company. It allows a company to be ambitious and make strong growth moves such as acquiring another company or moving into a new market. Middle market companies see the value of the mezzanine approach and are increasingly using it for that added boost of financial momentum.

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