3 questions to smart minds
Photo: N. Waibel | INDIGO CAPITAL

What role does mezzanine play in times of economic crisis?

For this 3 questions to N. Waibel

Photo: N. Waibel | INDIGO CAPITAL
4. July 2012

Mezza­nine finan­cing can be very helpful in various situa­tions to bridge a finan­cing gap. Where banks do not offer loans and are too infle­xi­ble, Mezza­nia can prove its value. When is mezza­nine used? How should a company prepare for this and what role will mezza­nine play compared to other finan­cing opti­ons in the near future?

For this 3 ques­ti­ons to Part­ner at INDIGO CAPITAL in London (UK)

1. When can mezza­nine finan­cing be conside­red? What role does it play in times of crisis?

Mezza­nine is a flexi­ble form of corpo­rate finan­cing that is typi­cally subor­di­na­ted to bank finan­cing. Mezza­nine finance is used in parti­cu­lar to finance expan­sion projects or acqui­si­ti­ons, but also to refi­nance exis­ting loans.

The clas­sic mezza­nine finan­cings in Germany are hybrid instru­ments such as silent part­ner­ships or profit parti­ci­pa­tion rights. In addi­tion, there are the more Anglo-Saxon, indi­vi­dual mezza­nine vari­ants with an equity compo­nent, which have the advan­tage that only part of the remu­ne­ra­tion runs through fixed inte­rest and the remai­ning remu­ne­ra­tion is directly depen­dent on the increase in value of the company through a share in the equity. Mezza­nine is used when­ever suffi­ci­ent bank finan­cing cannot be obtai­ned. Howe­ver, exis­ting debt must be suffi­ci­ently low, usually less than 3–4 times histo­ri­cal EBITDA.

We expect a noti­ceable increase in demand for mezza­nine in 2012, as the equity requi­re­ments of banks will conti­nue to rise and thus the issu­ance of bank loans will decrease. We also expect a further round of down­gra­ding by banks, which will further reduce lending to companies.

2. What needs to be conside­red if mezza­nine finan­cing is to be reali­zed? What is the best way to prepare for this?

Normally, a due dili­gence is carried out by the mezza­nine provi­der. Due dili­gence includes checks on the areas of: Finan­cial, Market, Tax, Legal and Envi­ron­men­tal (for manu­fac­tu­ring compa­nies). For this purpose, the company should provide the neces­sary docu­ments or have them prepared by consul­tants. Very important is a detailed prepa­ra­tion of the histo­ri­cal figu­res and the busi­ness plan. Good prepa­ra­tion of the infor­ma­tion faci­li­ta­tes the work of poten­tial finan­ciers and also gives the company credi­ta­bi­lity with future finan­cing part­ners. Further­more, prepa­ring the infor­ma­tion can also be a good exer­cise for the company to review and improve its systems and also to set up and imple­ment the corpo­rate stra­tegy. The use of a debt advi­sor is highly recom­men­ded for larger finan­cings, as they have a good over­view of the market, the neces­sary process requi­re­ments and the conditions.

3. What are the advantages/disadvantages of choo­sing a mezza­nine partner?

The advan­tage is that the company brings on board a part­ner who, through his expe­ri­ence with other finan­cing, can advise the company compre­hen­si­vely. In parti­cu­lar, the Anglo-Saxon mezza­nine with an equity compo­nent rein­forces the part­ner­ship approach. Owners and manage­ment can thus bring in a part­ner without losing control of the company. In both good and diffi­cult times, provi­ders of angel mezza­nine such as Indigo are parti­cu­larly willing to support the company with addi­tio­nal capital.

The disad­van­tage is certainly the higher cost compared to bank finan­cing. Howe­ver, mezza­nine is normally only used if the banks cannot provide the entire financing.

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