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.

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.

Overview of Mezzanine Debt Pricing