The Size and the Scope of the Mezzanine Debt Market

Mezzanine Debt Financing has considerably expanded in proportion and the types of investment opportunities that it offers to both lenders and borrowers. Here is why experts think it is here to stay:

Breadth

The minimal high yielding bond that is issued to a company is upwards of $200 million. That makes getting a high yielding bond to cover financing needs out of reach for most middle-market businesses.

Mezzanine financing fills the vacuum that is created by such high-yielding bonds and bank loans. It allows middle-market companies an opportunity to get increased revenues by leveraging their equity capital and cash flow strength.

In the United States, the lion’s share of businesses fall in the middle-market category. Moreover, they also account for a huge GDP chunk and employ millions of Americans.

The middle market has seen a credit squeeze since 2008, as banks and mezzanine funds have gone upmarket to lend to larger companies.

Scope

Notwithstanding the movement upmarket, there is a deep pool of middle market mezzanine lenders consisting of nearly 1,000 firms. There are also public funds, known as Business Development Corporations (“BDC’s”), which focus on extending loans to middle market companies.

As the interest rate environment has declined to near zero, middle market credit spreads are attractive for large asset managers and investors. This has helped spur mezzanine fund formation and the number of BDC’s in the market.

Many pension funds and large asset managers have noticed the consistency and durability of the returns available from investing in the mezzanine loan asset class. On a risk adjusted basis, mezzanine debt offers a limited partner strong risk adjusted returns, with less volatility than private equity returns.

Best Uses

Mezzanine can be used in innumerable ways. It best fits for companies doing acquisitions when they cannot bring in all the money from a bank.

It also works well for buy-outs, expansion, loan refinancing, or working capital.  Often, mezzanine addresses two or more of these uses simultaneously.

It is best suited for companies that are doing multiple acquisitions and do not want to suffer massive dilution from an investor. Because a mezzanine lender uses a Cash Flow multiple to calculate your loan size, they can provide meaningful sums of money when you need it, without massive dilution.