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Finance, which has some of the characteristics of both senior bank debt and equity, is called mezzanine finance. Mezzanine finance by implication ranks between senior debt and equity for repayment and this is reflected in the pricing. In funding structures mezzanine finance fills the gap which may arise particularly in buyout situations where the cash flows of the business can support a higher level of debt finance than a traditional senior lender is prepared to fund. Many lenders will only lend against security while the amount of equity can be limited by its high return requirement. Mezzanine finance can take many forms but it is most commonly seen as junior or subordinated debt. Mezzanine finance is most widely used for financing buyouts. However, the flexible nature of mezzanine finance makes it very useful in a variety of financing situations.
Mezzanine finance is an effective method for financing expansion. It increases the
long-term capital base of an investee company without significantly diluting shareholders'
control. While it may strengthen the balance sheet and enable increased senior borrowing
on more attractive terms, it can also enhance equity returns and can be particularly
useful for private companies planning an IPO in the short term. |
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