Posted on: March 11th, 2020
Due to the effort it takes to close a mezzanine debt loan, people often think the hard part is done at closing. It’s true that closing a mezzanine loan takes a lot of work. The post-closing administration of the loan by the borrower and the lender also takes a bit of time and focus. The key to building a good post-closing relationship with your mezzanine debt lender is through establishing good communication practices with them. Because most mezzanine debt loans are provided by small middle market funds, there’s usually a good relationship that forms pre-closing that informs the people, requirements and processes post-closing.
Mezzanine debt lenders require a continual flow of financial information including monthly financial statements and a comparison to budget, to gauge the performance of the business relative to plan. They also like to get informal updates from the company periodically. Immediately after closing, the borrower needs to prioritize any post-closing requirements that were listed in the loan agreement. They then need to make sure that their financial statements are formatted in a way so that the lender can compare their actual results to the budgeted plan that the lender based their loan on.
It’s important for the borrower to make sure all pro forma adjustments that were presented as part of the financial projection are also allowed pursuant to the legal language of the loan document. It is also a smart idea for the borrower to create a monthly reporting format that will be used to present the budget to actual comparison. This automates the month end reporting process and provides an easy dashboard of results for the lender.
All mezzanine debt loan documents have financial covenants which measure various barometers of the financial health of the business. This reporting dashboard should include these financial covenants as well. Prior to closing, a mezzanine debt borrower should also comb through all loan documents and highlight all other disclosure requirements. There may be several documents to peruse in this step such as the credit agreement, security agreement and warrant agreement.
Some of requirements may require disclosure of supporting reports, and others may require notification of events such as the existence of a litigation matter or an insurance event. While you may view these items as relatively superfluous to measuring the financial health of the business, they provide an easy way to deepen your connection with your mezzanine debt lender. Don’t just disclose major events to the lender, but use the opportunity to disclose low information value content as a strategic way to build communication credibility with them.
Often, the lender will assign a junior portfolio manager to manage the loan after the closing. This doesn’t mean you cannot still preserve and expand your relationship with the senior people at the fund who closed your deal. Having relationships at multiple levels give you a stronger and more durable relationship which will come in handy down the road.
Mezzanine debt lenders thrive on doing repeat business with their best borrowers. If you build a partnership type relationship with them, they are more likely to support you with additional capital down the road. The key to having a fruitful relationship post-closing is to ensure you live by the timing parameters of disclosures. Make sure your financial information is high quality, timely and easily accessible.