An Offering At His Lotus Feet

Mezzanine Financing
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What Is Mezzanine Debt?

Mezzanine debt capital generally refers to that layer of financing between a company's senior debt and equity, filling the gap between the two. Structurally, it is subordinate in priority of payment to senior debt, but senior in rank to common stock or equity. ezzanine debt may take the form of convertible debt, senior subordinated debt or private "mezzanine" securities (debt with warrants or preferred equity). Also known as a "subordinated loan" or "junior loan".
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Characteristics of mezzanine capital

Long term investment horizon- mezzanine capital is repayable after a long term, typically 7 to 10 years; Security- mezzanine capital is in principle unsecured; mezzanine finance is subordinated to senior loans but senior ranking compared with the true equity capital

Characteristics of mezzanine capital

Tax status- interest payments on some types of mezzanine finance are tax deductible; Flexibility and versatility as regards the arrangement of the terms of the Contract Return- mezzanine finance pays higher interest rates than other debt (20 - 30 %), this rate is fixed;

Characteristics of mezzanine capital

Voting or management rights- the level of control by the provider of mezzanine capital is dependent on the type of mezzanine finance; some types of mezzanine capital include contractual rights of approval and control

Image of the company- the confidence of a mezzanine capital provider increases the image of the company.

Forms Of Mezzanine Capital

Mezzanine capital with more Equity orientation
Partners loans

Mezzanine capital with more Debt orientation

Subordinated loans Convertible bonds Warrant bonds

Pros and cons of mezzanine capital

Advantages Equity equivalence No or little capital dilution Reduction of the regular finance costs High flexibility Tax optimization Easy to combine with other finance products Can help avoid Dividend trap Disadvantages High capital growth potential Limited in time Higher financing costs than for conventional debt capital Diverging interests

Forms of return from Mezzanine financing

Cash interest PIK interest Ownership Participation payout Arrangement fee

Who Provides
Lenders who are more open to risk but have investing constraints By sponsors themselves to reduce equity commitment partially to escape dividend trap

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REFERENCES
BOOKS Project Finance in theory and practice By Stefano Gatti ARTICLES Mezzanine Finance by Corry Silbernagel & Davis Vaitkunas Mezzanine Method of Financing by Dr. Ingo Natusch Financing Infrastructure in Asia: Mezzanine Capital by David Bussmann Financing Infrastructure :Addressing Constraints and Challenges a world bank article MEZZANINE FINANCE AND CORPORATE BONDS by Assoc. Prof. Libena TETREVOVA