IDB Invest is developing a suite of mezzanine products to expand the availability of capital for companies with a demonstrated track record, a history of profitability and a viable expansion plan.
The term “mezzanine” covers a range of financing solutions along the spectrum between debt and equity, with varying degrees of risk and return.
Broadly speaking, these quasi-debt and quasi-equity mezzanine products can offer financing that senior, secured lenders are unwilling to provide. Therefore, mezzanine finance is usually a solution in one or more of the following situations:
- Excess leverage. The most common role for mezzanine is providing leverage beyond the level that senior lenders are comfortable extending to fund a firm’s growth (whether that growth is through acquisitions or organic).
- Subordination. Mezzanine lenders are generally subordinated to senior lenders, either directly in the operating company (thus with a second lien on assets or first lien on shares, when applicable) or structurally subordinated (such as by lending to a holding company or by virtue of longer maturities).
- Take-out financing. These are situations where equity sponsors need capital to buy out a partner or to take out funds for themselves.
- Sponsor financing. In these situations, equity sponsors or management need funding to acquire or consolidate equity (as in a management buy-out);
- Refinancing. Here, mezzanine is used to refinance maturing or poorly structured or short-term debt. This is often used to provide permanent working capital for poorly funded companies, particularly in environments with high interest rates.
- Absence of asset coverage. Asset-light companies, such as service companies, often have trouble securing senior debt financing, which creates opportunities for mezzanine lenders.
- Equity substitute. These are situations in which the company needs equity but is unwilling to suffer the dilution and shared governance associated with normal private equity investments.
- Higher sovereign risk. Solid companies in challenging countries offer the possibility of negotiating more senior/secured structures with mezzanine-like pricing, including elements such as equity kickers.
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Partial credit enhancements or risk-sharing guarantees can make a potential project more attractive to commercial investors.Read more