Posted on: August 6th, 2019
With the continued expansion of the private debt market, loan structures continue to be borrower-friendly, providing nearly 5.0 to 5.5 times cash flow. Banks and private debt funds are increasingly providing the entire debt stack in a senior or unitranche facility, especially for companies with EBITDA greater than $10 million.
Debt multiples are more conservative in the lower end of the middle market with most senior multiples going from 3.0 to 3.5 times and all in debt multiples at 4.0 times. With the significant amount of dry powder in the market, it is a bit of a golden age for borrowers.
Banks are emboldened, determined to not lose too much share to upstart private debt funds. This dynamic contributes to a competitive credit environment with debt funds and banks battling to provide larger loans, with more flexible structures at lower pricing. As senior lenders stretch down the debt stack, the traditional mezzanine layer is frequently displaced, making it harder for mezzanine lenders to find investment opportunities with balanced risk/reward profiles.
The mezzanine business has always been a niche, whose function ebbs and flows according to the liquidity conditions of the markets. In the early 1990’s, during the S&L credit crunch, mezzanine funds were one of the only games in town, willing to lend into the 100 mile headwinds that buffeted most banks. Fast forward to the great recession in 2008, most banks ran for the hills as they dealt with toxic mortgages and increasingly stringent regulatory capital requirements. This was a strong time for mezzanine funds as banks took a while to return to the leveraged lending market. Most mezzanine funds have been adapting to the current competitive debt market environment by focusing on a number of specialized strategies that leverage their strengths and provide big value to borrowers.
Here are the Attract Capital top 4 New Uses for Mezzanine Financing in this current environment:
- Providing Junior Capital to Fundless Sponsor Deals – fundless sponsors are bee-like pollinators in the deal world. They sign up deals and bring growth credibility to a target, but lack equity capital to close. Many mezzanine funds are strategically seeking fundless sponsors, and providing 100% of the capital they need to fund, in a one stop facility.
- Providing Financing to Independently Sponsored Deals – Independent sponsors have either a company or a decent amount of their own capital to put in a deal. What they are not is a dyed in the wool private equity fund. Mezzanine funds are valuable financing partners to these established entrepreneurs and can help close acquisitions and fund accelerative growth.
- Providing Growth Capital to Fast Growing Companies – Organic growth has always been harder to debt finance due to the unpredictability of new revenue ramp up. Mezzanine lenders are skillful at providing valuable growth capital to companies that need to be evaluated on a futuristic growth basis.
- Providing Leveraged Dividends to Owners – For existing borrowers, mezzanine lenders can fund a non-dilutive liquidity event to the owners. This usually works when the company has built up some additional debt capacity that can be tapped.