Mezzanine financing: the bridge between bank credit and venture capital The term is borrowed from the mezzanine of the building and its closest equivalent is the word "mezzanine". If we subdivide the financing of a company into several levels, mezzanine financing is at the "mezzanine": it is capital that serves as a gateway between bank credit and capital (to risk).
Mezzanine finance exists mainly in two forms
First, mezzanine financing can serve as welding, for example during the steps leading to an IPO. The loan then also present the characteristics of bridging loan: a short duration and because of the higher risk, an interest rate higher than in the case of a normal credit.
same time, the mezzanine loan is a form increasingly used for acquisition financing. This involves long-term financing, lasting five to ten years, which are subordinate relative to traditional bank credit, both in terms of the rebate in terms of guarantees. This subordination and compensation are the main characteristics of mezzanine financing. This type of financing has some important advantages. For example, reimbursement "final" occurs after the return of traditional bank loans. And therefore nothing should be reimbursed for the duration of the loan, so the impact on cash flow the company is limited to interest payments.
Cher?
is mainly for operations buyout that mezzanine financing is a great solution. In most cases, the buyer has insufficient funds to finance the buyout transaction, despite injected equity and loans are available to him. The fund balance may represent from 10% to 20% of the total funding needs. In this case, mezzanine financing is an excellent alternative to other forms of risk capital. If
mezzanine financing may seem costly in terms of interest charges compared to a traditional bank loan, it is not when compared to capital provided by the "angels" or holding companies, for example.
Donors often demand yields ranging from 20% to 30%. In addition, they have exigernt their say and therefore, willing and able to influence the management of the company. In
mezzanine financing, interest charges are generally between 10% and 16% for the duration of the loan. They are divided between a cash component should generally pay quarterly interest and a portion added to the principal and are repayable at maturity.
Poor mobilization of cash flow in this type of funding allows the company to continue its expansion.
addition to interest, the "mezzanine financing" wish to obtain compensation for allowing donors to maintain their return on equity, or even increase it. This compensation often takes the form of a "warrant". The warrant gives the right to "mezzanine financing", in an IPO or a sale by example, to obtain a percentage of shares, previously agreed, at a price fixed beforehand. In this way, the "mezzanine lender" can also take advantage of growth that has made possible financemlent.
Costs the mezzanine transaction are related. The "mezzanine financing" fills a need that is too important for providers of venture capital and credit that donors do not want to meet because there are insufficient guarantees. The "mezzanine lender" usually sits in a board of commissioners acting as "observer" and, unlike venture capital providers, it has no say and no influence on the affairs of the company.
Confidence in management
Mezzanine financing is an excellent alternative for parties who are about to undertake operation buyout or acquisition. However, funding will certainly not be granted in all cases. While a traditional bank loan, the lender believes that the buildings or machinery are important safeguards, these safeguards are appreciated to a much lesser extent in the case of mezzanine financing (such guarantees can be considered already "consumed").
Since the loan is repayable in one installment at maturity, it is important for the "mezzanine financing", so that the company has sufficient liquidity to make the refund. The company's capabilities to "generate cash" are therefore an important factor that will weigh in the decision to grant a mezzanine financing. To gauge these abilities, the "track record" of the company is obviously a good indicator, but it will above all that the funder has great confidence in management. Therefore
mezzanine financing is mainly an instrument frequently used in operations of buy-outs, where the incumbent management, supported or not by investors, acquires ownership of the company.
In the case of a (management) buy-in also, mezzanine financing can bridge the gap between bank credit and equity, although the requirements for quality management to outside managers in this case are even higher.
Generally, during an operation to buy in or buy-out, managers must themselves have a solid financial basis and must be supported by financial parties such as, for example, holding companies. This is mainly due to the fact that in a mezzanine financing, the risk is not declining to the lender since there are no periodic payments, the lender incurs a capital important in the business until maturity. To reduce somewhat the risk to the lender will require that shareholders have credited a solid financial base.
Are there alternatives to mezzanine financing?
There are other options, including issuing bonds, a formula that can also be used by unlisted companies. This is a more advantageous than the mezzanine loan in terms of interest charges, but it is not easy to achieve in practice, especially for amounts well below one hundred million euros. This is due the importance of offering costs of bonds, but also by the fact that the European bond market is not always liquid enough for such operations. Although
n 'there is officially no minimum amounts, financing mezzzanine is generally good when it comes to amounts in excess of five million or transactions (such as operation buy-out) of about fifty million or more.
