mezzanine financing refers to the risks and rewards between whether to determine the form of a financing between senior debt and equity financing . For companies and stock recommendations, mezzanine investments are usually in the form a very flexible long-term financing , the degree of dilution of this financing to be less than the stock market, and can be adjusted based on special needs. mezzanine financing payment , can also be determined according to the company’s cash flow situation.
Mezzanine debt is a non-guaranteed long-term debt , this debt with investors in the interests of the financiers of the subscription rights. mezzanine financing is only subordinate to a debt ( subordinate debt ), but it is often used as a synonym for subordinated debt. mezzanine financing interest rates are generally between 10% and 15%, investors target rate of return is 20% to 30%. In general, the lower mezzanine interest rate, the more equity subscription rights.
The applicable conditions of mezzanine financing
Accepted under the following circumstances mezzanine financing consider lending more than the general current loan company
A lack of sufficient cash for expansion and acquisitions;
Two existing bank line of credit is insufficient to support the development of enterprises.
Many years of having three companies.;
4 at least for one year (the past twelve months) has a positive cash flow and EBITDA ( did not lose interest, income taxes, depreciation and assessed prior to operating income );
(5) business is a growth industry or account for a large market share ;
Management firmly believes that enterprises will be a great development in the coming years;
7 it is estimated that within two years can be listed and to achieve a higher stock price, but now the poor IPO market conditions or company performance is not sufficient to achieve the desired IPO , so first-come a mezzanine financing to total financing cost reduction .
The return of mezzanine financing is usually obtained from one or several sources:
A cash coupon, usually a floating rate higher than the relevant inter-bank interest rates ;
The advantages of mezzanine financing
(A) the borrower and its shareholders the benefits arising from
mezzanine financing is a very flexible way of financing, such financing can be adjusted according to the special requirements of the funds raised. Borrower and its shareholders, mezzanine financing with the attractiveness of the following aspects:
Long-term financing. The many medium-sized enterprises in Asia found that, from the banks to obtain loans for more than three years is still difficult. mezzanine financing is usually provided to the funds of the repayment period of 5-7 years.
Adjustable structure. mezzanine financing provider can adjust the repayment, so that compliance with the borrower’s cash flow requirements and other features. Compared with the public stock and bond financing, mezzanine financing can be relatively cautious, smaller financing. mezzanine financing, equity characteristics also enable companies to benefit from lower cash coupon, and in some cases, businesses can enjoy the extension of interest, payment in kind or remove the coupon option.
Less restrictive. Compared with bank loans , mezzanine financing is less restrictive in respect of corporate control and financial contracts . The mezzanine financing will require the right to own observers, but they rarely participate in the daily operations of borrowers, have no voting rights in the board of directors.
Lower than the cost of equity financing. People generally believe that mezzanine financing costs less than equity financing , because the funding is not usually required to obtain a large number of the company’s share capital. In some cases, payment in kind features can reduce the degree of dilution of equity.
(B) the mezzanine finance provider of the benefit of the
The benefit of mezzanine finance provider is to distinguish between the main features of mezzanine investments and private equity investments:
Smaller investment than equity risk . Mezzanine level of investment is usually higher than the equity investment , while the risk is relatively low. In some cases, the mezzanine finance provider may get a favorable position in the following areas, such as senior debt the borrower defaults caused by cross-default clause, a lien on the assets of the company and / or shares of the first or second priority. Equity incentive return on equity can also be very considerable, and can improve the rate of return to a comparable extent with equity investments.
Exit uncertainty. Mezzanine investments of debt composition will usually contain a predetermined good repayment schedule, amortization of debt in a period of time can also be time to pay off. The repayment pattern will depend on the mezzanine investment in the target company ‘s cash flow position. Therefore, the exit channels for mezzanine investments more clearly than the private equity investment (the latter is generally dependent on the liquidation larger uncertainty).
The current rate of return . Compared with most private equity funds, mezzanine investments return a large part of the front-end fees and regular coupon or interest income . This feature makes mezzanine investments are more liquid than traditional private equity investments.
mezzanine financing and financing development
Part of the mezzanine financing as financing the development of an overall strategy
mezzanine financing should be considered as part of the overall strategy of financing the development of mezzanine financing costs are relatively not cheap, but sometimes it is the most appropriate means of financing . mezzanine financing is best in of MBO , M & A plan to grow rapidly and will soon be stock-listed enterprises.
The majority of U.S. investment bankers believe that companies must issue the outstanding shares of more than 50 million to 100 million shares , in order to ensure that active stock trading volume and support a higher stock price. Must be more than $ 10 – $ 20 stock price, in order to attract large institutional investors , and less than $ 5 stock is generally not attractive. The number of shares it is easy to split or shrink ( the split and the reverse the split ) to change the price of the stock depends on the market value of the enterprise.
The market value depends on the size of the business, which is the company’s historical performance and expected performance, mezzanine financing within a year the business turnover increased significantly, but also to give the public confidence in the profitability of the business. that will allow businesses to the IPO at a more favorable position. Under these conditions, the choice of mezzanine financing to complete the transition until and prove their market value, rather than underestimate the value of an IPO or private equity. If the enterprise to a higher stock price in the future IPO, it would reduce the financing costs of the enterprise overall , which is why companies are willing to pay higher interest rates to a first pre-IPO mezzanine financing.