The term, M&A, suggests one of two principles: either the merging of two companies into a separate, new company, or, the buying of one company by another. A good portion of the funding that is needed to complete a merger or acquisition comes from an outside source. Mezzanine debt can be extremely helpful to fulfill the capital requirements needed in a merger and acquisition. Mezzanine debt has recently assumed a more active role as a form of direct lending to companies. Instead of passively funding into private equity-backed buyouts, mezzanine debt providers are seeking companies that have M&A needs that they can fund. By funding a company based on cash flow, mezzanine lenders can meet the capital requirements of acquisitive, middle market companies.
Frequently, mezzanine loans can provide 100% of the funding needed for an acquisition or buyout. Mezzanine lenders assess creditworthiness through stability of the company’s cash flow over time. The loan is viewed as a multiple of the businesses EBITDA, or earnings before interest, taxes, depreciation, and amortization. For example, a multiple of 4 means that the total financing over the EBITDA is equal to 4. This is considered to be high. Market multiples usually range from 2.5 to 4.0 times EBITDA. Moreover, this loan can be used as a senior loan as well if a company wishes to have a one stop lender. Often, in middle market M&A, with smaller deal sizes, it is not worth it to bring in a senior lender for small tranche of debt. Better to have the mezzanine lender provide all of the financing, and have an easier path to the closing table.
A mezzanine lender charges an interest rate and participates in the upside of the company through a warrant. This approach effectively aligns the lender and the company to pursue additional growth and acquisitions, creative a win-win atmosphere.
Another benefit of a mezzanine loan to meet the huge capital requirements in M&A is that mezzanine lenders have a long-term focus. They are patient lenders and allow their borrowers to use the money to transition in a new direction be it an acquisition or new business development. A mezzanine loan is a great solution that assists in providing all-around growth, organic and inorganic, expansion, and prosperity for a company.
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