As a hybrid form of equity and debt capital, mezzanine (also called hybrid financing or hybrid capital) allows capital to be injected even when traditional borrowing capacity is already exhausted. Mezzanine allows you to take advantage of the benefits of equity without having to share voting rights – provided that this flexible financing option has been structured accordingly. Mezzanine is particularly attractive for growth financing of medium-sized companies.
Fresh liquidity without collateral
High flexibility in repayment, interest rates, etc.
Balance sheet advantages of equity capital without having to share voting rights
Mezzanine can be structured in many different ways – ranging from the silent partnership to convertible bonds. Sometimes the devil is in the detail when determining whether mezzanine is treated as debt or equity capital for accounting and tax purposes. Let us advise you on what suits you best and which mezzanine financier offers the best conditions.
Mezzanine: The best of both worlds
Profit participation certificates, hybrid and option loans, silent equity capital, subordinated loans, shareholder loans – mezzanine capital comes in many forms. The most important characteristic of mezzanine capital is its ranking position in between voting equity and senior debt. Mezzanine has copied the subordination feature from equity: In an insolvency, secured creditors are satisfied first, who also usually have access to hard collateral. A debt feature in turn are the restrictions of no or only very limited rights of say – and that the mezzanine capital must be repaid at the end of an agreed term.
Mezzanine providing access to other traditional loans
The equity character extends the financing scope beyond direct mezzanine. This is because mezzanine changes the ratio of equity to debt on the balance sheet and thus can also allow bank lenders to provide fresh capital. Prior to including mezzanine, this may no thave been possible for the banks for regulatory reasons. For example, for every 1 euro of mezzanine could allow for 2 more euros of new loans to be raised.
Although mezzanine is standard practice in buy-outs of larger companies, in particular in the private equity sector, younger and dynamic medium-sized companies also use this form of financing to finance larger investments and rapid growth. Minimum amounts usually start at 5 million euros per mezzanine financing. Mezzanine providers are usually specialised Private Debt funds [more here: Private Debt] or institutional investors such as insurance companies – and last but not least the respective departments of some banks.
However, the higher risk for the creditors comes at a price increase compared to senior debt. Typical interest rates are higher than those for “standard” loans, and flexible profit-sharing mechanisms are often added to this.
- comparatively long tenors of usually seven to ten years,
- the flexibility in the structuring and above all
- the possibility of still raising new funds, if bank capital is exhausted
- without further collateral and concessions on rights of co-determination / shareholder rights
are good reasons for mezzanine.