Mezzanine Financing Reporting and Information Requirements

Posted on: August 29th, 2014

reporting and information rights

Mezzanine lenders often focus on receiving extensive reporting and information rights. Most deals require the issuer to provide annual audited and quarterly or monthly internal financial statements.

In some mezzanine deals, the reporting covenant originates from the borrower’s credit agreement, and requires the borrowers to provide an annual budget to the mezzanine lenders or even to provide certain key operating information more frequently than on a quarterly basis.

In addition to receiving the issuer’s information in accordance with the reporting covenant in the applicable debt instrument, mezzanine lenders commonly negotiate for the rights to receive all board materials and to appoint a board observer (or in some cases, a director).

Most mezzanine lenders require monthly financial statements as well as monthly or quarterly financial covenant calculations. The financial covenants are defined and the required levels are set in the borrower’s credit agreement and are usually subject to a fair amount of negotiation.

In general, as long as the company is performing in line with its projections and the mezzanine loan interest is continually paid, the mezzanine lenders are fine.

Even if there is a technical covenant default, the mezzanine lenders are usually comfortable with the loan as long as they believe in the management team and the ability to get the company back on track.

Having information and reporting rights is an important element for the lender because their loan is usually under collateralized and not asset backed or personally guaranteed.

The best way for a company to deal with the reporting and information requirements is to ensure they have a good accounting department and produce timely and accurate financial statements.

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.