Mezzanine as a form of debt instrument

Mezzanine as a form of debt instrument

For middle market companies, mezzanine financing is an efficient way to fund expansion and acquisitions. Mezzanine debt has a few important differences than other loans which makes it a unique debt instrument. Firstly, mezzanine is based on cash flow and future growth as opposed to assets. This makes it possible to advance a much larger loan than a bank can. Secondly, mezzanine has a longer term than a bank loan and has back ended principal repayment. As a debt instrument, mezzanine debt is in second position and receives its interest after all senior bank loan payments have been made. Mezzanine instruments are able to reflect future growth and future profitability when determining loan size. For acquisitions that have a lot of synergies, the cost savings from an acquisition are factored into the pro forma EBITDA. This helps in increasing the size of the mezzanine loan instrument because the loan size is predicated on a multiple of pro forma EBITDA. Mezzanine debt instruments also possess a high degree of flexibility. They can be customized to the preferences of borrower with respect to the repayment and the pricing. Repayment can be made earlier than maturity, if the borrower prefers. Also, the mezzanine loan has several pricing components – a current interest rate, a deferred interest rate and a warrant which can be interchanged. Due to the long term orientation and inherent flexibility, mezzanine is often a long term strategic solution for growth companies. Growth companies need capital on a continuous basis. It is efficient for such companies to build and leverage a mezzanine relationship to take advantage of its flexibility, patience and long term benefit.

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