Ranking in the Capital Structure
In corporate financial jargon, mezzanine capital generally refers to a tier in a company’s capital structure between debt and equity. Mezzanine financing takes the form of subordinated, unsecured debt, and in some cases, it is secured by a second lien.
Ranking in the capital structure– an important mezzanine term to be negotiated
Since mezzanine financing can take on so many different roles in the capital structure, a key consideration should be to determine the position of the mezzanine debt within the issuer’s capital structure. Mezzanine debt holders typically agree to be contractually subordinated to existing and certain future holders of senior debt of the issuer. This puts them in position of being under the senior lender for which they are paid a higher interest rate plus additional upside return.
This subordination can take the form of structural subordination. Structural subordination means the lender is subordinated withrespect to payment of interest and principal. They are also subordinated with respect to exercising certain rights and remedies against the issuer in the event of a default on the loan, as long as there is a senior lender ahead of them in the capital structure. This enables the senior lender to work with the issuer to ensure the company can work out its financial issue and return to profitability.
In the current financing environment, where the market for mezzanine capital is fluid and constantly evolving, mezzanine deals are not defined by a rigid set of standard terms and therefore need to be expertly negotiated by financial experts. However, on the positive side, this provides for highly customizable deals designed to suit the particular situation. There is a surplus of capital available in the middle market currently. This makes it a good environment to tailor loans to the specific capital needs of the issuer.
Attract Capital, has tremendous mezzanine market expertise and can help you negotiate these structure ranking issues. Attract Capitalâ€™s work flow process and lender platform can help provide quick sourcing solutions for your mezzanine debt financing needs.
Contact us today to speak to one of our financial advisors.