The term, M&A, suggests one of two principles: either the merging of two companies into a separate, new company, or, the buying of one company by another. A good portion of the funding that is needed to complete a merger or acquisition comes from an outside source. Mezzanine debt can be extremely helpful to fulfill the capital requirements needed in a merger and acquisition. Mezzanine debt has recently assumed a more active role as a form of direct lending to companies. Instead of passively funding into private equity-backed buyouts, mezzanine debt providers are seeking companies that have M&A needs that they can fund. By funding a company based on cash flow, mezzanine lenders can meet the capital requirements of acquisitive, middle market companies.

Frequently, mezzanine loans can provide 100% of the funding needed for an acquisition or buyout. Mezzanine lenders assess creditworthiness through stability of the company’s cash flow over time. The loan is viewed as a multiple of the businesses EBITDA, or earnings before interest, taxes, depreciation, and amortization. For example, a multiple of 4 means that the total financing over the EBITDA is equal to 4. This is considered to be high. Market multiples usually range from 2.5 to 4.0 times EBITDA. Moreover, this loan can be used as a senior loan as well if a company wishes to have a one stop lender. Often, in middle market M&A, with smaller deal sizes, it is not worth it to bring in a senior lender for small tranche of debt. Better to have the mezzanine lender provide all of the financing, and have an easier path to the closing table.

A mezzanine lender charges an interest rate and participates in the upside of the company through a warrant. This approach effectively aligns the lender and the company to pursue additional growth and acquisitions, creative a win-win atmosphere.

Another benefit of a mezzanine loan to meet the huge capital requirements in M&A is that mezzanine lenders have a long-term focus. They are patient lenders and allow their borrowers to use the money to transition in a new direction be it an acquisition or new business development. A mezzanine loan is a great solution that assists in providing all-around growth, organic and inorganic, expansion, and prosperity for a company.

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.

Mezzanine Debt Can Help Meet Huge Capital Requirements In M&A

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