Posted on: August 2nd, 2022

mezzanine-debt

Due to the uniqueness of the companies mezzanine debt lenders deal with, the pricing is targeted to each company with a starting framework. This means the structure built around mezzanine lending is set in place, but no two term sheets should look the same. Growing businesses with revenue anywhere from $10 to $100 million and EBITDA over $2 million are prime targets.

A mezzanine loan will be based on an EBITDA multiple usually around 4-4.5x but can be stretched depending on an individual basis. Mezzanine debt is used for flexible, long-term growth with pricing that reflects the business model. With only interest payments and no principal payments in the first 3-4 years, mezzanine debt loans mature in 5-7 years. Because of the extended time frame and value of mezzanine debt, providers charge 10% current pay interest, 2% deferred interest and 1-2% yield enhancement. This equals an interest rate of 12% and total return of 13-15%. Mezzanine debt lenders take a special interest in the companies they lend to due to a standard 5-20% equity warrant in the deal to show a seriousness in the belief of the company.

The lenders are also payed-back by the increased cash flow by either the acquisition or growth the mezzanine debt was used to kick start. With the set structure around mezzanine debt lending, there is still a multitude of variability left in the deal. Borrowing bases, borrower financial covenants, closing fees, and ongoing fees, along with many other factors, create an individuality to each deal. A good mezzanine lender will have created a lending deal that allows your business to grow at a rate equal to your own scale-up plan. Attract Capital specializes in choosing the correct mezzanine debt lender and term sheet for you by conducting extensive research into each of our clients’ markets and determining the ideal parameters around each term sheet.

Born from the idea of creating a lending plan designed to help middle market companies grow, mezzanine debt lenders offer more capital, more time to repay, and more flexibility in covenants than bank loans. Mezzanine debt loans provide growing companies with an excess of capital that not only supports growth but mitigates the damage of unforeseen complications due to the growth and/or economic downturn.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.

Overview of Mezzanine Debt Pricing