Harmonic Growth and Mezzanine Debt

Posted on: October 13th, 2023

mezzanine-debt

Most middle market growth plans are based on the operator being all knowing and all controlling with respect to driving the growth plan. The plan is presented to the mezzanine debt lender who evaluates its achievability enroute to deciding to fund the deal. Companies often see the mezzanine debt lender as a utilitarian provider of funding with little else to bring to the table. Yet, throughout the history of mezzanine debt lenders from the 1990’s through today, there are many instances of them providing far more than just capital, thereby unlocking a cycle of harmonic growth.

In this scenario, the Company leverages the knowledge of the lender as a sort of super consultant, to grow in a faster yet more sustainable and reliable way. The mezzanine debt lender has tremendous experience with business building and growth. They have insights and are specialists in every aspect of business performance. As lenders, they cannot impose this on a mezzanine debt borrower but rather try to soft sell their advice and contacts to their borrowers in a constructive, hands-off fashion. Smart borrowers realize the inherent wisdom of their mezzanine debt lenders due to their experience and exposure to hundreds of companies with similar acquisition profiles.

When the borrower considers the growth advice offered by the lender, a level of harmonization occurs that increases the likelihood of growth success. Armed with insights and actions to manage the growth, the company is more likely to have a comprehensive and durable growth plan. A mezzanine debt influenced by growth plan will bring more capital and resources to the point of attack thereby de-risking acquisition integration. The relationship between the two parties is also stronger to the extent the borrower heeds the lessons of the mezzanine debt lender. The strength of the relationship allows the Company significant operating and capital flexibility, even if the business underperforms. Moreover, the stronger the harmony between borrower and lender, the more likely that decisions will be made from a position of strength with a view toward maximizing the growth potential of the business.

As new acquisition financing credit funds pivot to non-private equity sponsored deals, many lack experience with the asset class. Non-sponsored deals such as direct loans to companies or loans to independent sponsors making acquisitions are quite different from private equity backed deals and require a different thought process and engagement style from the lender.

During their underwriting processes, acquisition financing providers analyze probable performance projections for their proposed borrowers. The underwriter often toggles between a few scenarios to sensitize the growth variables leading to slower revenue and margin growth over time. The lender’s underwriting view is usually an extension of its credit intelligence and historical experience.

Mezzanine debt loans occupy the risky echelon beneath the bank but ahead of the equity in a capital structure. They are naturally subordinated to the bank loan via an intercreditor agreement wherein the senior lender retains the power to block their interest or force them to standstill.