Your Guide To Understanding Mezzanine Debt

What does mezzanine debt stand for?

Mezzanine debt refers to a hybrid debt issue subordinated to another debt issue from the same issuer. It comes with equity instruments that are called warrants. These warrants increase the value of the subordinated debt, thereby allowing flexibility while dealing with bondholders. Mezzanine debt is used by rank new owners ahead of the existing owners in case of bankruptcy during the events of acquisitions and buyouts.

Mezzanine debt is used to bridge the gap between debt and equity financing. However, it is one of the highest-risk forms of debt, is considered one of the highest return providing debts, that usually range from 12% to 20%.

Here are some examples of Mezzanine Debt to give you an insight into the subject.

As mentioned above, mezzanine debt comes with different equity instruments that may include stock call options, rights and warrants. The debt is considered more of a stock than debt because the embedded options make the conversion of the debt into stock impressive.

For example, a private equity firm wants to purchase of company for $50 million, but the lender is able to provide only 50% of the value. In this case, the private equity firm needs to put up the rest of its own capital to meet the requirement. If the company does not want to do so, it can look out for a mezzanine investor to finance 45% of the amount and it will invest only $5 million to buy the company.

When it is used?

Mezzanine debt is generally used to meet capital requirements in mergers and acquisitions (M&A). Further it is used in leveraged buyouts and real estate finance.

If you are looking for mezzanine debt, you should approach an alternative lender to get the best deal.

If we have missed out on any point about Mezzanine Debt, please reply in the comment’s section below.

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What makes Challis Capital the choicest corporate advisor today?

At Challis Capital, our focus remains on providing the finest corporate advisory services to small- and medium-sized enterprises regardless of their industrial backdrops. With us, businesses get the direct access to high-calibre strategic pieces of advice and other allied financial solutions. This access enables an enterprise to realise different business objectives seamlessly and quickly. So here’s what all we do when clients associate with us if they wish leveraging different corporate advisory solutions.

Creation and execution are easier said and done

We don’t create bespoke corporate advisory solutions — rather, we work alongside clients to ensure that these advisory solutions are implemented and executed perfectly well and on time. Just for the partnership, our experienced advisory team guides enterprises throughout the entire project life cycle to ensure that the success is met at every corner of the implementation process.

Understanding becomes simpler when there’s enough experience

We have a corporate advisory team that has the skill set and experience to execute even the most complex corporate advisory solutions. Every team member of the corporate advisory squad has in-depth understanding of different industries — this understanding is the key catalyst in executing corporate advisory solutions for:

Capital structuring
Capital raising
Divestment and acquisition strategy
Project finance and advisory
Credit enhancement strategies
Management buyout
Mergers and acquisitions
Restructuring solutions
Turnaround solutions

Critical decisions are simple to take when there’s experience by a company’s side

Thanks to our experienced team, it’s become even simpler than ever to dispense high-end corporate advice to complete even the most complex and demanding project cycles quickly. We have the know-how to work with different financial instruments at critical periods of business life cycle.

So if you’re a business owner who wants a corporate advisory team to execute one part or the entire project life cycle, then connect with us. Our team will understand your project requirements and offer consultancy accordingly.

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Mezzanine Debt: Flexible Financing Options

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.

  1. Cash interest

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.

  1. PIK interest

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.

  1. 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.

  1. Upfront fees

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.

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An Introductory Guide to Preferred Equity

If you are going to commercial property like multi-tenant office buildings and strip centres- preferred equity is something that enables you to buy the property with a smaller down payment.

It enables you to close commercial real estate deals much easier. It sounds good, right. Let’s understand what exactly preferred equity is.

A definition

Preferred equity is a measure of equity that only takes into account the preferred stockholders, and disregards the common stockholders. It is basically equal to shareholders’ equity minus common equity.

In other words

Preferred equity is an equity investment that is considered better option when it comes to interest to common equity but subordinate to debt. It is basically secured by a direct holding of equity interest in the property owning entity.

This has a risk and return profile similar to mezzanine financing, but differs in its mechanics and enforcement. It is a direct holding of an equity interest in a property owning entity and receives payments as a preferred return in a in the same way as debt receives payments and has a redemption date like a maturity date of a loan.

This also often contains an “equity kicker” provision that allows the preferred equity holders to participate in some of the upside of an investment. The rights and controls that preferred equity investor holds are addressed in the owning operating agreement of the entity or other governing document.

In the case of a breach or default, the preferred equity holder may take over management of the property owning entity and may force to sell the underlying asset.

For a real estate investor, preferred equity is a great method to access permanent financing without diluting shareholders. As mentioned earlier, it is quite similar to debt, thus organizations need to make coupon payments on preferred equity.

Unlike debt, the principal amount never requires to be paid. Plus, holders of such equity have no claim on assets, thus the organization cannot default.

To know more about preferred equity, approach Challis Capital right away.

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Alternative Lenders redefining development finance

It goes without saying that property development finance is never straightforward. But it becomes easy to get funding solutions with alternative lenders in Australia.

When ti comes to financial landscape, small-scale developers are increasingly opting for alternative finance providers over traditional banks.

Let’s first understand what alternative financing is all about

The process of obtaining funds from a traditional bank involves a lot of paperwork that becomes annoying over time. And the process may result into rejection of the application.

So if you are a small-scale developer with bad credit, alternative financing is the route you can to take to get your project financed. Alternative financing does not involve hefty rules and regulations, usually laid out by financial institutions and regulatory bodies.

So if you are looking for the best development finance solutions, approach an alternative lender immediately.

Advantages of alternative lending are mentioned below:

Less stringent process

Obtaining funds through alternative means is way too easier than that from traditional banks. All you, the developer, need to prove your ability to pay off the debts and produce some essential documents.

Solicit an alternative lender to know the process at length.

Lower interest rate

The alternative lending market is highly competitive, which ultimately drives interest rates down. Further, alternative lenders have access to an extensive network of borrowers that makes them provide financing solutions at lower rates compared to traditional banks.

Easy and fast approval process

As mentioned above, alternative lending process does not involve paperwork as strenuous as what traditional banks have, which makes the process easy to cascade through.

Here is what an alternative lender may provide you:

An alternative lender may provide following benefits:

  • Stretched senior construction finance to 75% GRV and 90% of TDC
  • Development finance with no pre-sale requirements
  • Solutions for offshore developers
  • Mezzanine finance funding the equity gap
  • Joint Venture & equity funding
  • Development management
  • Preferred Equity solutions
  • Workout solutions for incomplete property developments
  • Unsecured corporate facility for property developers
  • Credit Enhancement Strategies

So approach a reputed alternative lender to get your development finance approved.

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Approach the Experts of Challis Capital for Private Equity Funds

Private equity refers to funds which are directly used for investment in private companies.

Categories of private equity

There many types of investments that come under private equity category. These include angel investing, leveraged buyout, venture capital and growth capital

Uses of Private Equity

  • These funds are mainly used in industries for the development of innovative products
  • It can generate large amount of money
  • These funds are extensively used for expanding the working capital
  • Private equity funds come handy for facilitating mergers and acquisitions
  • It helps in developing and making a company’s balance sheet stronger
  • It is best option for startup and small businesses to raise funds who are not able to get grants and loans.

If you are also looking for private equity funds then approach Challis Capital which has extensive experience and knowledge in raising funds from different channels. They are capable in funding capital even in complex funding situations. The company has wide network with leading industry players that allow them to directly access the capital for you.

Availing private equity in Australia

Today, in this fast paced market it becomes a necessity to hire the knowledgeable company expert who can help you in accessing the debt and equity capital directly. If you are also in similar situation then Challis Capital is your one-stop destination to accomplish your needs. They have good relationship with the professionals of leading private equity investment groups of Australia. As such, you can easily enhance your private equity funds through them.

Challis Capita has expertise in property related transactions. They are capable in offering optimal solution for any kind project with their strategic partnership with leading industry professionals. Challis Capital has earned reputation and credibility among clients for their expertise and best customer care.


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Mezzanine Debt – A Thing or Two

In this blog, we are discussing Mezzanine Debt in detail. Get to know what it is exactly and why it is preferred to finance anything from a property to a leveraged buyout, and everything in between.

Mezzanine Debt – An Insight

Mezzanine debt occurs when a hybrid debt issue (a type of debt with some features of equity) is subordinated to another debt issue from the same issuer.

Mezzanine debt comes with equity instruments attached – known as warrants – which enhances the value of the subordinated debt and allows greater flexibility while dealing with bondholders. It is greatly associated with acquisitions and buyouts, where it is used to prioritize new owners rather than the existing owners in the case of bankruptcy.

In other words, Mezzanine debt blurs the lines between everything that constitutes debt and equity. Although, this type of debt involves the highest-risk, it offers some of the highest returns (rate ranges between 12% – 20% per year).

A mezzanine lender is brought into a buyout in order to displace some part of the capital that is invested by an equity investor.

General Examples of Mezzanine Debt

Some examples of embedded options may include rights, stock call options, and warrants. Generally, mezzanine debt acts more like a stock than debt as the embedded options make the conversion of the debt into stock.

Let’s understand it by an example.

Let’s say, a private equity firm desires to buy a company worth $100 million with debt. But the senior lender only wants to invest 80 % of the value, and the private equity could not invest more than 10% of the remaining capital. In this case, the private lender would look out for a mezzanine investor to finance another $5 million, then, the firm only has to invest $5 million to meet up the $100 million.

The investor here used the mezzanine debt. That means, he will be able to convert the debt to equity when certain requirements are satisfied.

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