Mezzanine Financing

The Canadian lending market is becoming increasingly sophisticated and is demanding loan criteria that meet their higher expectations. Mezzanine financing options are becoming more popular as business and credit facilities get more imaginative about filling in the gaps on the financing puzzle.

Mezzanine financing is a loan that combines debt and equity. In most instances, it is essentially subordinated debt. It is called “mezzanine” because it comprises a layer in the firm’s capital structure below senior debt but ahead of common equity. It falls between conventional secured debt or pure equity financing in terms of the degree and security expected against the loan and in terms of cost.

This form of financing is money borrowed against projected cash flow instead of hard assets. It is most common when a company’s collateral cannot secure conventional financing, when the debt or equity ratio is too high, or when there are special needs, but cash flow is abundant.

Mezzanine financing is debt financing that is secondary to other existing long-term debt. It almost always involves a long-term commitment It has relatively higher interest rates and is often accompanied by an equity component or “equity kicker.” These could include alternatives such as convertibility, warrants, options, or equity purchased at a nominal cost.

The debt aspect of mezzanine financing provides the investor with the protection of a debt instrument. The relatively high interest motivates the firm to eliminate the debt as soon as possible.

Mezzanine financing has also been described as venture financing. Often, it follows institutional venture capital and precedes a buyout or an initial public offering. It usually accompanies a significant restructuring of a firm such as a change in share ownership, a management buyout, re-capitalization, expansion, an acquisition, or simply to improve liquidity.

Mezzanine financing can address the needs of specific clientele that cannot be served by debt or equity facilities alone. BFA can offer various mezzanine options that can help business meet their objectives.