When sitting in a stadium or at the theater, what do you think of when hear the word Mezzanine?
You probably think of a section of good seats that are in the middle somewhere. That’s exactly what Mezzanine Financing is. Mezzanine financing is in the middle. The middle of what? It’s in the middle of debt and equity. It sits below Bank debt and other debt obligations but sits above (in the pecking order) Preferred or Common Equity. Mezzanine always gets paid off first prior to the stockholders.
Order of Payoff:
Bank borrowing, bonds
Mezzanine Financing
Stockholders
What form does it take?
Mezzanine can be in the form of all debt, known as subordinated debt since it’s a lower class of debt (subordinates) to bank debt. This is the most common. Mezzanine can also take the form of a hybrid of some debt and some equity investment in the business or it can take the form of all preferred equity, which would make them just ahead of the common equity stockholders in terms of payoff.
What does it take to qualify?
Mezzanine works best for companies that are growing and running a positively cash flowing business. This is usually measured by EBITDA, the acronym that stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This is often used as a proxy for Operating Cash Flow for the business of the Cash Flow from Operations section of the Cash Flow Statement from the Business Financials.
EBITDA+ $1million or more preferred, $500,000 minimum
Special Cases where there is clear Enterprise Value and Equity in the Company like a Young Company with Patent Protected technology
Financing needs of at least 1 million USD
What’s it used for?
Growth or Project Related Financing
Acquisition Financing
Entering New Markets
Bridge Financing
Working Capital
Management Buyout
Turnaround Financing
Any reasonable use the company decides
Rates for Mezzanine are higher than bank borrowing but often much cheaper than the amount of equity that would have to be given away in a private placement. Terms can vary from short to intermediate term (1-3, 3-10 yrs) and payment structures can be customized for things like seasonality or backloaded so more is payable during the time when the cash is the most productive.
Southern Lending Solutions
Comments (0)