What is Junior Debt Capital — its Role and Value to an Acquirer

Posted on: October 6th, 2016

Junior Debt Capital

Junior debt is a form of capital used to supplement a bank loan in a Company’s capital structure. Junior debt, as the name suggests is of low priority when compared to senior debt when it comes to ranking and repayment.

Thus, during repayment, the senior debt — both principal and interest — need to be paid off first and junior debt, second. Junior debt capital has characteristics of equity capital, due to its long term maturity.

Role of Junior Debt Capital

Junior debt financing is a form of patient capital that can be used for development, growth or acquisitions. This is a perfect solution for companies without tangible assets to offer as collateral for a bank loan.

Acquisitions are usually funded with a blend of senior debt also known as bank loans and junior debt capital, also known as mezzanine debt, subordinated debt or second lien debt.

Acquirer’s benefit from the back-ended principal repayment structure, allowing them to have more cash and reinvest cash flow in the business without having to make heavy loan principal repayments.

Value of Junior Debt Capital

Acquiring Businesses

If your business is in the acquiring stages, internal cash flow won’t be sufficient. You will have a capital gap that a bank loan will not be able to bridge.

You will need outside capital to help you fund your purchase and the subsequent growth. Junior debt capital removes capital access as a barrier to growth.

Low Cost Equity Alternative

Junior debt carries a 12% interest rate and a small return kicker known as a warrant. The overall cost is about 14% to 15% per year. Most investors usually want a controlling interest in your company, or 50%+ of the outstanding shares.

Investor target returns greater than 25% on average per year. Because you pay interest to the junior debt providers, they are satisfied with the overall return and do not need to own a large chunk of your business.

Flexible Structures

Junior debt can be customized to each specific deal and can be used to fund any type of company cash need. This can include a buy-out of a partner, a refinance of a loan, an acquisition or growth capital.

You can overfund a deal and bring more cash on to your balance sheet, to increase your cash liquidity. Mezzanine lenders are very creative providers of junior debt capital and work collaboratively with companies to provide the optimal blend of funding and maturity.

Mezzanine debt financing happens to be one of the junior debt financing options offered by Attract Capital. With it, most middle-market companies like yours can grow and become a leader in their respective fields.

Visit their website today to get started on the journey to mezzanine debt financing now!

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.