The History of Mezzanine Debt

Mezzanine debt, which is used by cash flow positive companies, for growth expansion projects, acquisitions, recapitalization and management or leveraged buyouts, has been around for nearly 30 years. However, its use in Northern America though relatively new is fast growing since leading companies are starting to realize that mezzanine debt can fund the growth they need today, which chartered banks will generally not fund until tomorrow.

What is mezzanine debt?

Mezzanine debt capital generally refers to the layer of financing that lies between a company’s senior debt and equity, filling the gap between the two. In structural terms, it is subordinate in priority of payment to senior debt, but senior in rank to equity or common stock. When used in conjunction with senior debt, it can reduce the amount of equity in the business. Since equity is the most expensive form of capital, mezzanine debt provides a cost-effective way to create a capital structure that secures the most funding, offers the lowest cost of capital and maximizes the return on equity. Mezzanine debt may take the form of convertible debt, senior subordinated debt or debt with warrants.

How did the concept of mezzanine debt grow?

Mezzanine debt has been around for close to three decades. In the 1980’s, the lending business was dominated by insurance companies and savings and loans. This changed in the 90’s when limited partnerships (LPs) entered the playing field. In today’s world, investors include hedge funds, pension funds, leveraged public funds, LPs, insurance companies as well as some banks, which have established their own stand-alone mezzanine funds. Traditional mezzanine lenders are usually book-and-hold investors who focus on cash-flow lending, while looking for a minimum term (call protection) and equity participation, to generate longer term results. In addition, unlike traded equity, high-yield debt, and interest rates that fluctuate with the current economic conditions, traditional mezzanine finance is considered to be a consistent and stable market. The coupon rates on mezzanine notes and the targeted returns of mezzanine investments have also remained relatively constant, over the last two decades.

Attract Capital, has a 25-year knowledge base of the private debt markets with a focus on the middle market mezzanine finance. Our team has been involved in over 125 transactions totaling over $1.2 billion.

We work with over 100 mezzanine debt providers and follow a disciplined workflow process that can provide quick sourcing solutions for your mezzanine debt needs. Contact us now to set up a free consultation with our expert advisors.

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