Everything On Mezzanine Capital

Understanding Mezzanine Capital

There are many options for companies looking to raise capital from the market. One such option is mezzanine capital. Mezzanine capital can be described as a mix of equity and debt capital that is used to finance a company's capital structure. Investors have the option to convert their equity interest into equity interest in the event of default by the company.Some experts refer to it as "cheap equity".

Mezzanine capital is a solution for companies that have exhausted their borrowing capacity and want to keep their ability to borrow in the future. Companies still have options for mezzanine capital if they need immediate capital. Because companies have to pay a higher interest rate than they would with bank funds, this type of funding can be perceived as expensive. This type of debt is more expensive and less dilutive.

It will look like the below if you add mezzanine finance to a capital structure pyramid.

Companies can raise capital for specific projects like acquisitions or expansion through mezzanine capital. This type of funding is more common in mature companies than it is among startups or young corporations.

Because it allows companies to prioritize new owners over existing bondholders, it is common to associate mezzanine money with buyouts and acquisitions. It has attached equity instruments called "warrants" as one of its many features. It allows bondholders to have more control and increases the value subordinated debt.

The Truth Behind Mezzanine Capital

Mezzanine capital increases a company's ability borrow from the market. This is a junior debt with more flexibility. It can be either "subordinated" or "preferred equity", with the promise of a fixed dividend or coupon payment, and participation rights in the company's common equity. It is not dilutive as equities.

Things To Remember

- Provides quick access to capital for companies that need it, particularly when they are looking for financing for an acquisition or project for a short-to medium-term period.

Mezzanine funding bridges gap between equity capital and debt funds

- This is the most risky debt and often more costly than senior debt.

- The mezzanine capital is more patient and has a longer maturity period, usually 7 to 8 years.

- This type of investment typically offers a higher rate return (between 15 and 20 percent), but no amortisation benefits before maturity

Companies often consider mezzanine funding as a short-term financial solution. Companies eventually replace high-cost borrowing with lower-interest senior debt because of its high cost.

Mezzanine Funding And Rate Of Return

The main reason mezzanine funding has such high interest is the higher rate of return. It's typically between 15 and 20 percent. It is an unsecured type of borrowing that is subordinate to all forms of debt and is therefore considered more risky. Five sources provide the mezzanine fund's return.

• Cash Interest: The periodic cash interest payment on mezzanine money can be either secured or unsecured linked to a base rate such as LIBOR, CRR or CRR.
• The payable type of interest is The interest is added to the principal and then paid at maturity. Cash interest is not paid.
• Ownership It allows mezzanine lenders the ability to convert their debt to equity or ownership in the event of default.
• Participation payment: The lender has the option to purchase a stake in the company’s performance.
• Arrangement Fee: The arrangement fee is paid to the lenders upfront as a processing fee.

Advantages And Disadvantages Of Mezzanine Funding

Both sides have quite a few.

The flip side is that mezzanine capital can be more expensive than senior debt. The mezzanine fund owner pays more interest if it is not used for a longer period. The risk to lenders is greater. The risk to lenders is higher for mezzanine debt. This subordinate debt means that in the event of liquidation, senior investors will be able to take over from mezzanine creditors. Mezzanine investors lose out if there is no asset after paying senior lenders.

Why does a company raise mezzanine money? There are many benefits. It's more flexible, allowing owners to keep majority control of the company. Direct equity is also less costly.

To finance long-term growth, companies can use mezzanine funds with an average tenor of seven to 8 years.

Conclusion

Both the lender and the borrower are at risk when mezzanine financing is used. Companies may show mezzanine funds in the equity section of their balance sheets. To raise mezzanine money, a firm must have a track record of debt repayment and a plan for expansion through IPO. Companies that make a profit in their industry often use mezzanine funds.