Mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company’s assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.
Mezzanine financing (mezzanine debt) is an integrated financial product, whose dissemination is strongly linked to the market performance relating to business acquisition and restructuring operations.
It is so defined for its hybrid nature: it does not indicate a single financing instrument, but it turns out to be an articulated financial structure, which makes use at the same time of the financial instruments having different characteristics.
In particular, it is a loan that is in an intermediate position – interms of risk and consequently of cost – between debt capital (senior debt)and risk capital (equity):
- debt capital denotes the debt that is subordinated in the repayment with respect to the primary debt. It generally has a longer term, provides a minimum defined remuneration and must be repaid;
- risk capital attributes a deferred property right and a remuneration linked to the company’s income and financial performance;
- the “equity kicker” – quantity of shares or units subscribed by the financing institution – gives the latter the possibility of acquiring shares of the venture capital of the investe company, offsetting the high risk incurred by financing a company under of subordinated debt.
WHO HAS TO DELIVER AND UNDERWHICH CONDITIONS
Mezzanine financings can be completed through a variety of different structures based on the specific objectives of the transaction and the existing capital structure in place at the company. The basic forms used in most mezzanine financings are subordinated notes and preferred stock. Mezzanine lenders, typically specialist mezzanine investment funds, look for a certain rate of return which can come from:
The mezzanine debt providers are venture capitalists of specialized investment funds or financial intermediaries, who prefer the high return potential that this form of debt can offer, unlike the primary debt that is usually granted by the banks.
Nevertheless, being a form of subordinated debt with no guarantees, theassessments to access this type of financing are strongly based on the abilitythat the company has to generate cash flows able to remunerate and repay theloan, having a forecast of increasing its economic value.
For these reasons, it is aimed exclusively at companies in possession of optimal economic-financial parameters, with prospects of sufficient solidity for the purpose of compatibility with risk.
In particular, it can be a source of complementary funding for thosecompanies that undertake an international growth path and/or expandcommercially abroad.
Mezzanine financing is a financial structure with many advantages, firstof all its high degree of flexibility, which allows it toadapt in the best way to the needs of the funded company.
- it is a financing form that is less harmful to corporate balances
- does not affect the company’s ability to borrow from banks, contributing to improving its rating and increasing its negotiating power
- allows for diversifying the financing sources in cost terms, and increasing the total amount of contracted debt, without modifying the financial risk level perceived by the financing banks.