Four Tips to Help Raise Mezzanine Debt as a Covid-19 Bridge

Posted on: June 3rd, 2020

mezzanine debt as covid bridge

All companies are caught in an uncertain state of economic limbo. Companies have adjusted to the covid-19 crisis by cutting costs and restructuring. They are plotting their return to the pre-Covid-19 days but lack assumptions to forecast with precision. When will their market get back to normal? When will consumer spending return in full force? When will optimism and confidence return? These are a few of the questions senior management teams are currently wrestling with. This period of uncertainty is a classic transition period for businesses. While you have a business with strong fundamentals, the current period is a creating a fog like haze that’s hard to cut through. The key is climbing out of this valley and this requires a capital bridge, which mezzanine debt can provide.

Mezzanine debt lenders are experts at determining debt capacity of a business through a number of creative and unique ways. For example, they can give you credit for things that banks cannot such as restructuring charges. This gives you the flexibility to show your business on a pro forma basis, and to articulate why this is a credible way for a mezzanine debt lender to view it. If you are busting covenants with your bank, a refinancing into a mezzanine debt structure can help stabilize your finances and give you valuable time for your recovery to unfold. Given the lack of a crystal ball around time factors, extra time for your recovery is essential to ride out this tough period.

Mezzanine debt lenders operate on more extended time frames than banks, and are perfectly happy to wait until the end of the loan term for principal repayment. Due to their focus on cash flow analysis and enterprise level underwriting, they bring a holistic, long term view to a company’s capital needs. Even though your business is down, as long as it is stable and has a well-articulated growth plan, the mezzanine debt channel is available to you.

How to Generate Mezzanine Debt Interest for Funding Your Company

Here are four tips to increase your chances of generating mezzanine debt interest in funding your company:

Use a balanced presentation of financials – all lenders today are geared toward current trading information, and how March and April performance has been affected. The key is showing historical context to this current period including the most recent fiscal years as well as the prior recessionary period. Using a creative framework to show these numbers can help build credibility as to your recovery period with the mezzanine debt lender.
Highlight your enterprise value – while your actual EBITDA may have taken a hit, your pro forma EBITDA may look substantially better. Develop your own proprietary views of what multiple should be used to apply to pro forma EBITDA for valuation purposes. Mezzanine debt lender’s comfort is related to the level of equity cushion in a deal.
Highlight your operating moves – mezzanine debt lenders are very management focused and want to believe they are backing a good team. Get them to see all of the changes you’ve made to adjust to the crisis, and your thought process behind the changes. This will gain their comfort as trustworthy stewards of their capital.
Write a Great CIM – most companies have lackluster CIM’s that are mere statements of the obvious. Spend time crafting a strategic and analytical CIM that explains the how and the why.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.