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.
Some types of mezzanine financing more closely resemble debt; these might be structured as high-yield loans or subordinated loans with some form of added compensation or incentive, such as additional interest or an option to acquire shares at a nominal price. Other types of mezzanine financing place a greater emphasis on equity, for example by building in conversion rights that would trigger ownership interest in the company.
As with other types of financial solutions, IDB Invest looks for opportunities to use mezzanine financing to strengthen the capital structure of good companies and, ultimately, to make a positive impact on development. The expansion of risk capital to regional companies and projects also has the effect of indirectly introducing new financial products in the region which the market can incorporate and eventually replicate.
As a strategic lender in the region, we use our loans to open up new possibilities for companies to add value, take risks and test new business models.
Partial credit enhancements or risk-sharing guarantees can make a potential project more attractive to commercial investors.