Mezzanine Debt Fortune Favors the Prepared

Posted on: September 22nd, 2023


In the mezzanine debt arena, fortune favors the prepared borrower. Unlike other loans which require only form filling, mezzanine debt requires borrowers to have certain things in place before the process even starts. It requires a high level of intelligence and sophistication as to information standards, presentation frameworks and diligence responsiveness. The borrower needs to take stock of their internal readiness to simultaneously handle a multitude of information requests. Mezzanine debt lenders assess financial performance as well as operational strength and market growth potential. This multi-faceted level of scrutiny requires preparation across the whole enterprise and often requires developing new materials and ways of articulating things. The mezzanine debt screen in part tests for resource depth to ensure the Company has sufficient management bandwidth. To conduct a successful mezzanine debt, raise process, a borrower should review the following areas and make sure they are up to standard.

  1. High Quality Financial Statements – mezzanine debt lenders need either reviewed or audited statements as well as high quality monthly financial statements to assess the underlying performance of the business. If your numbers are a bit shaky, they should be cleaned up before advancing with the process.
  2. Deep Bench of Management – middle market companies need a professional team beyond a charismatic founder to be mezzanine debt worthy. Testing for organizational strength and resilience is a key underwriting consideration for the lender.
  3. Growth Story – all companies need a narrative structure to hook the mezzanine debt lender on their future growth. It is not enough to describe what the company currently does. There should be a clear and compelling story as to how the growth will unfold, preferably as an extension of the core business.
  4. Strong current performance trend – the best time to raise mezzanine debt is when the business trend is positive. Overperformance reinforces the foundations of your growth story and makes future growth highly credible.
  5. Professional Presentation – Companies need to explain their specialization in a sophisticated manner. This articulation should go beyond the basics and describe the Company through conceptual business model frameworks.
  6. Internal Firepower and Desire – A mezzanine debt process is demanding and requires a lot of manpower. All senior management need to buy into the process to ensure a successful closing.