The term mezzanine comes from Italy and means “mezzanine floor”. Transferred to the financial structure of a company, mezzanine financing is a mixed form of equity and debt capital. In balance sheet terms, mezzanine capital is located between equity and debt and cannot be clearly assigned to either of these two forms of financing, as it is a hybrid, i.e. crossed or mixed, financing instrument.
A distinction is made between these forms of financing
A distinction is commonly made between equity-like (equity mezzanine) and debt-like (debt mezzanine) financing. The category of equity mezzanine includes profit participation rights, profit participation certificates evidenced by securities, convertible bonds, bonds with warrants and preferred shares. Debt mezzanine, on the other hand, includes dormant equity holdings, subordinated loans, and also participating loans.
Advantages of mezzanines
Mezzanine financing has been around for a very long time, but it has come into the focus of companies and investors in particular in the years following the global financial crisis of 2008/2009, since
Characteristics of mezzanine capital
Mezzanine financing is characterized by various features. For example, the subordination of debt mezzanine, which means that in the event of insolvency, the lender’s claim is serviced only after all other creditors have been satisfied. Or the equity kicker; with an equity kicker, the mezzanine investor is given the option of acquiring a stake in the company or converting a debt security into a stake in the company at the nominal value of the receivable, often at the end of the financing term.
The structuring options for mezzanine capital are so variable that very flexible financing solutions are possible with regard to terms (usually between three and ten years), termination options, interest, profit and loss regulations or repayment modalities. The specific structure defines whether the invested capital is regarded as equity or debt for liability and tax purposes.
In such cases Mezzanine financing makes sense
This type of financing is suitable for companies that have high growth potential and a solid starting position. After all, the providers of capital must have incentives to invest in the company, as they bear the risk of losing the money they put in. Mezzanine financing thus comes into its own in connection with corporate acquisitions or to finance growth projects.
Improving balance sheet structure and credit rating
Depending on the specific structure, mezzanine capital improves the balance sheet structure and thus the creditworthiness and company rating of your company, strengthens the equity capital without diluting you as a shareholder and restricting your entrepreneurial freedom. However, the costs of mezzanine capital are higher than those of classic bank financing and, unlike equity, mezzanine capital is only available to you for a limited period. In addition, mezzanine capital providers regularly have higher transparency and reporting requirements than banks.
Conclusion: this is when mezzanine financing makes sense
In view of the more difficult access to bank financing and the growth of the private debt market, alternative forms of financing, including mezzanine capital, are increasingly becoming available. In particular, the high flexibility in structuring mezzanine capital makes it very interesting in the context of financing growth strategies and projects as well as corporate acquisitions.