A greater amount of funding, back-end payments and longer terms are some of the benefits that mezzanine debts offer to the borrowers. Flexibility in payment makes these debts ideal financing option for small and mid-market enterprises that don’t have capacity for financing big growth moves themselves or through traditional lending arrangements or procedures.
Through greater flexible structures, the debt allows borrowers to have greater flexibility in payment. Mid-market or small companies are lender with customized lending solutions. Lender options such as structure coupons, amortization and covenants that accommodate cash flow needs and demands of the businesses are provided to the borrowers, when they opt for the different mezzanine debts.
This type of financing is ideal when there is specific need of additional capital for growth. In addition to this, it is ideal when acquisitions are just a part of the future growth plan of the company.
How greater flexibility is achieved through mezzanine debt structures
A mezzanine deal is typically made up of any one or a combination of the following given below, while the basic forms used in most financing options are additional return upside and subordinated notes.
Based on a percentage of the outstanding balance of the mezzanine financing, a periodic payment of cash is done. By doing so, the interest rate of this debt is usually fixed throughout the term of the loan.
Payable in Kind (PIK) Interest is periodic form of payment in that the interest payment is not paid in cash but rather by increasing the principle amount of the mezzanine loan in the amount of the interest. It is usually 2% and is paid in addition to the cash interest payment.
Additional return upside
A small return kicker, which is known as “warrant” is involved in mezzanine deals. Based on the performance of the company, it allows the lenders to receive a small additional return of lenders’ investment (in the form of mezzanine debts). In addition to this PIK interest and cash interest, the lender will receive the additional payment in the form of additional return upside.
Upfront fees for any mezzanine debt are usually in the range of 1 to 2% on the total amount of the loan. Moreover, it is payment of a closing fee to the mezzanine debt lenders.