What role does mezzanine play in times of economic 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.
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.
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.