Telltale Signs of a Bad Mezzanine Debt Lender

Posted on: July 30th, 2024

telltale-signs-of-a-bad-mezzanine-debt-lender

With the private credit industry growing in leaps in bounds, it is instructive to think about mezzanine debt lender quality. While your mezzanine debt term sheets may look similar, the key differentiator is how the lender manages your loan post-closing. There is a vast difference in the management styles of mezzanine debt lenders, which far surpasses any differences in proposed terms. How the mezzanine debt lender treats you is more dispositive to your ultimate growth journey than pricing, structure or capital availability.

Bad mezzanine debt lenders exhibit a number of traits that prospective borrowers should take heed of. They are overly theoretical and not strong at understanding what makes a business unique. Often, the lead transaction is a young person with no practical operating business experience who does not know the right questions to ask to begin to understand the important parts of the business. They fail to grasp particulars which weaken their ability to build a foundational knowledge base so important to the success of a mezzanine debt deal. Once the deal closes, they no longer seek to relationship build with the management team outside of quarterly board meetings. Rather than have a celebratory closing dinner or other type of social event, they confine their interaction solely to review of the numbers. Financial reviews are certainly important to ensure the soundness of all mezzanine debt loans.

Signs of Good Mezzanine Debt Lenders

Good mezzanine debt lenders continue to find ways to connect with their borrowers in ways that engender trust and goodwill. Finally, bad mezzanine debt lenders are overly aggressive when bad news emerges. Rather than take the time to understand the cause of the bad news, they point fingers at management which forecloses constructive discussion on the matter. Due to the opaqueness of the mezzanine debt market, it is difficult for borrowers to easily ascertain these signs up front. All companies looking for mezzanine debt to fund their growth should bring on advisors who can give them this critical market insight. While an advisor may cost more, it will increase your odds of bringing in the right lender and prevent the disruption and opportunity cost of having to replace lenders in the middle of your growth journey.

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.