The Power Of A Sculpted Mezzanine Debt Solution

Posted on: April 10th, 2022

mezzanine debt

Sculpture is not commonly associated with mezzanine debt. Rarely do I hear of someone having a Rodin-like command at developing a debt structure. But alas, sculpture does provide some interesting ways to think about mezzanine debt structuring. The sculptor has a large-scale vision and has to work with rigid materials to create the end product. It takes iterative steps, as the artist is constantly tailoring the materials to a desired effect.

The final product is a blend of traditional principles related to metallurgy and symmetry combined with unique artistic touches. The best mezzanine debt structures are developed in much the same way, as a combination of traditional structuring techniques with a level of creative customization. Unlike bank loans, mezzanine debt structures are not pre-figured according to collateral but can be built in a bespoke manner, highly tailored to their end use. Their value to a borrower lies in their ability to flex to the specific need. Every deal needs to have a sculpted perspective at inception that allows for tailoring of the debt structure.

Mezzanine Debt as a Sculpted Solution

For example, many companies today are acquiring and need financing for the purchase as well as growth capital to invest in the acquisition. Other companies are growing rapidly and need more working capital and investment capital to spend on new staffing. Yet others are simultaneously growing via acquisition and organic measures, which requires significant funding. Mezzanine debt is the answer for all of these situations if conceived as a sculpted solution. This requires analyzing rigid loan elements, such as repayment terms and funding amounts, in the context of the long-term growth vision.

Each of these can be customized to construct a solution with flexibility. Funding amounts can be staged to meet the timing of the specific capital requirements. Principal repayment can be deferred until the investment has been paid off and cashflow is abundant. Maturity dates can be adjusted to allow for early or later repayment. The total amount borrowed can be scaled up via a delayed draw or accordion facility to give you more dry powder. By taking standard structuring principles and applying your own creative overlay, you construct a sculpted mezzanine debt solution with significant growth power.

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.