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Investment Banking: Exploring mezzanine financing, part 1

By Bob Hodgson, Investment Banker

You are the envy of most of the population in this great country by being a Branson business owner. This is your baby. You have your blood, sweat and tears in this business. You have probably sacrificed personal relationships and have worked fourteen-hour days. This is your livelihood and your business has defined who you are.

You now decide to take your Branson business to the next level and realize this will require creative financing. You determine that mezzanine financing may be a viable option for you to achieve your goals.

Bob Hodgson

Mezzanine capital is subordinated debt that resides between the senior debt and equity. Subordinated debt is debt that ranks after other debts should the company fall into liquidation or bankruptcy. The name mezzanine is a Latin word that evolved from “in the middle”.

Mezzanine financing combines senior debt with some type of equity component, such as warrants to purchase stock. It is used by growing middle market companies to raise capital for acquisitions, buyouts, expansions or liquidity events. The primary benefit of mezzanine securities is they fill the gap between what senior lenders are willing to provide and what equity the owners are willing to inject.

Like senior debt, mezzanine securities are loans that earn interest and like equity, they are unsecured. The overall cost of mezzanine securities is higher than senior debt. This is because they minimize the owner’s equity dilution. They are considered less expensive than straight equity financing.

An investment banker is able to combine financing with equity. There are other creative options depending on the needs and resources of the client.

It is recommended that mezzanine debt should not be more than double the cash flow of the company. Mezzanine loans have high interest rates and are risky. The lender may ask for warrants or options of ownership should the borrower default.

A company must demonstrate a track record with an established reputation and a history of profitability in order to attract a mezzanine lender.

This article will be continued next week with an example of mezzanine financing.

Amvest Financial Group is a leading international investment banking firm based in Kansas City representing clients with sales from $10 million to over $6 billion.

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