The Essential Communication Rules of dealing with Mezzanine Debt Lenders

Posted on: September 2nd, 2024

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In middle market finance, mezzanine debt lenders have their own unique communication style. Due to their position in the market and their hybrid debt-equity sensibility, their perspective straddles both the debt and equity world. While mezzanine debt lenders issue loans, they think more expansively about value like the way equity investors do. Their capital is used to accelerate growth resulting in increased levels of cashflow sufficient to repay the initial loan amount. As such, mezzanine debt lenders are very attuned to a company’s execution ability and the obstacles that could add cost or delays to the business growth plan. As a borrower, the key is not only getting the right mezzanine debt lender to fund your growth but to carefully understand the essential communication rules.

Rules for Dealing with Mezzanine Debt Lenders

Rule # 1 – Good news fast, bad news faster – most mezzanine debt lenders assume that management has things under control. When that is not the case, and a very unexpected event happens, they want to be notified immediately. In most instances they will understand and continue to support management. When a material event occurs, and they are not told promptly, it can strain trust.

Rule #2 – Present the Problem with a Solution – mezzanine debt lenders want to believe that management can handle any problems as long as they have thought through a good solution. It is not advisable to present the problem to the lender without having a solution in hand.

Rule #3 – Do not be late with Financial Statements – it is dangerous for companies to be lax in their financial statement reporting obligations to their mezzanine debt lender. Regardless of how bad the numbers are relative to budget; they must be reported on time to the lender. Lenders react very aggressively when the numbers are not provided on time.

Rule #4 – Build a relationship based on frequent business updates – go out of your way to make your mezzanine debt lender feel part of your business and give them a steady stream of benign updates. The more you extend yourself to them, the more they will think of you as a businessperson.

Rule #5 – Focus on Reinforcing the Core Business Story – given the demands on their time, many mezzanine debt lenders move on to their next deal and can at times lose focus on your growth plan. Ensure that you are constantly reinforcing the core business growth story to them either in written or oral communication.

Rule #6 – Be Artful in presenting bad news by balancing it with good news. Things are neither 100% bad nor 100% good but somewhere in between. Soften the blow of bad news delivery by providing some good morsels of unexpected upside.

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.