Mezzanine capital

Question 1

what is mezzanine capital

Answer 1

Mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company’s assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.

Question 2

cost of Mezzanine capital

Answer 2

Mezzanine capital is often a more expensive financing source for a company than secured debt or senior debt. The higher cost of capital associated with mezzanine financings is the result of its being an unsecured, subordinated (or junior) obligation in a company’s capital structure (i.e., in the event of default, the mezzanine financing is only repaid after all senior obligations have been satisfied).

Question 3

form of mezzanine capital

Answer 3

Mezzanine finance is a hybrid form of financing that combines debt financing with equity financing.

Question 4

the nature of mezzanine capital

Answer 4

In economic terms this is mezzanine capital, but in a legal sense becomes debt, where acceptable to the investor’s risk is defined as medium or high

Question 5

when the payment made?

Answer 5

The specificity of a bullet payment—payment obligations only after the expiry of the contract.

Question 6

type of mezzanine capital

Answer 6

Mezzanine is divided into two types, for instance mezzanine debt
and equity mezzanine.

Debt mezzanine can be carried out on the
basis of: a subordinated loan, loans from shareholders or unsecured
loan.
Equity mezzanine, in turn, may constitute preferred stock and
dormant holdings in the company, such shares are in some
countries prohibited by law.

Question 7

the ordinate and collateral of mezzanine capital

Answer 7

In all cases, the mezzanine instrument is subordinate to the senior debt, and in virtually all cases, the mezzanine instrument is not secured by the property, but rather by the equity in the entity that owns the equity in the property.

Question 8

relationship between senior debt, mezzanine and equity

Answer 8

economic perspective; senior debt is debt, mezzanine is equity, equity is equity.
in legal perspective: debt is debt, mezzanine is debt, equity is equity
ranking: debt>mezzanine >equity
covenants: debt:comprehensive restriction, mezzanine: track senior but looser.
taxation: debt:tax deductible, mezzanine: tax deductible, equity: tax in capital.
repayment: debt: amortising from cash flow. mezzanine : pay at maturity. equity: none

Question 9

Mezzanine lenders rate of return

Answer 9

Cash interest
PIK interest实物支付
Ownership

Question 10

mezzanine lender warranty

Answer 10

mezzanine lender typically has a warrant (meaning a legal right fixed in writing) enabling him or her to convert the security into equity at a predetermined price per share if the loan is not paid on time or in full.
Mezzanine financing is typically used in acquisitions based on leveraged buyouts in which all of the investors, cashing out by taking the business public again and refinancing it after the acquisition. Thus the equity can be turned into cash with a substantial gain on the capital.
In the event of a failure, the mezzanine lender has little recourse except to influence the company’s turnaround by using its stock acquired by means of the warrant

Question 11

situation that mezzanine capital used.

Answer 11

1. Financing and reorganization of the company out of the crisis,
2. Funding for innovation,
3. Financing of changes in the composition of shareholders,
4. Financing the company during the preparations for the IPO,
5. The financing of mergers and acquisitions (M & A) businesses

Question 12

how was mezzanine capital in economic downturn

Answer 12

Mezzanine financing is a good instrument for recapitalization in times of economic downturn, it is prepared for risky projects, is a good complement to or a substitute for bank credit, and can be cheaper than the issue of shares.

Question 13

advantage of mezzanine capital

Answer 13

1. The owner rarely loses outright control of the company or its direction. Provided the company continues to grow and prosper, its owners are unlikely to encounter any interference from the mezzanine lender.
2. The method offers a lot of flexibility in shaping amortization schedules and the rules of the borrowing itself, not least specifying special conditions for repayment.
3. Lenders willing to enter into the world of mezzanine financing tend to be long-term investors rather than people looking to make a quick killing.
4. Mezzanine lenders can provide valuable strategic assistance.
5. Mezzanine financing increases the value of stock held by existing shareholders although mezzanine equity will dilute the value of the stock.
6. Most importantly, mezzanine financing provides business owners with the capital they need to acquire another business or expand into another production or market area

Question 14

disadvantage of mezzanine capital

Answer 14

Mezzanine financing may involve loss of control over the business particularly if projections do not work out as envision or if the equity portion of the borrowing is high enough to give the mezzanine lender a larger share.

Subordinated debt agreements may include restrictive covenants. Mezzanine lenders frequently insist on restrictive covenants; these may include requirements that the borrower is not to borrow more money, refinance senior debt from traditional loans, or create additional security interests in the company’s assets; covenants may also force the borrower to meet certain financial ratios—e.g., cash flow to equity.

Similarly, business owners who agree to mezzanine financing may be forced to accept restrictions in how they spend their money in certain areas, such as compensation of important personnel (in such instances, a business owner may not be able to offer above-market packages to current or prospective employees). In some cases, business owners have even been asked to take pay cuts themselves and/or limit dividend payouts.

Mezzanine financing is more expensive than traditional or senior debt arrangements.

Arranging for mezzanine financing can be an arduous, lengthy process. Most mezzanine deals will take at least three months to arrange, and many will take twice that long to complete.

Question 15

Mezzanine and the IPO goal

Answer 15

Typically, mezzanine investors want to realize value by exiting the later stages of the investment.Most commercial mezzanine investments are taken out either through a change-of-control sale or recapitalisation of the company.
Mezzanine investors generally do not wish to acquire more than 3-5% of the equity of any company in their portfolio and do not seek to participate in its management

Question 16

In real estate, mezzanine finance is used in three distinct categories:

Answer 16

Property Development: where the mezzanine debt is secured by a second ranking registered mortgage over the project site and where a general security interest is taken over the secured property of the developing entity 2. Both forms of security are subordinated to the senior lender’s security;

Investment Properties: these assets are fully leased properties that generate cash flows to service a mortgage. In this case, the mezzanine lender takes a second mortgage over the investment property and a second general security interest over the borrower’s assets.

Value Add Properties: these are generally non-stabilised properties with low rental income where the investor has identified a value add opportunity to increase net operating income and improve the yield on the asset. The value add proposition may involve significant capital expenditure to reposition the property. The mezzanine finance will be used to fund the reposition strategy
房地产开发：夹层债务由项目所在地的第二级登记抵押担保，并且对发展中实体的担保财产具有一般担保权益.2。两种形式的担保都从属于高级贷款人的担保;

投资物业：这些资产是完全租赁的物业，产生现金流以偿还抵押贷款。 在这种情况下，夹层贷方对投资房产进行第二次抵押，并对借款人的资产采取第二种一般担保权益。

增值物业：这些物业一般为非稳定物业，租金收入较低，投资者已确定增值机会，以增加净营业收入及提高资产收益率。 增值命题可能涉及重新定位财产的重大资本支出。 夹层融资将用于资助重新定位策略

Question 17

the impact of having mezzanine capital in investment with increase the leverage.

Answer 17

This arises because of the subordination of returns from the equity. The mezzanine borrower is prioritized and grabs much of the cash flow in the early years of the investment. Where the borrower is not successful in raising the net operating income of the asset, the returns or cash flow to the equity holder could remain low and may even result in default in situations where vacancy in the investment asset increases as a result of a dip in the economic cycle. Increasing leverage always brings additional risk and complications into deal structures as well as greater rewards in the form of higher expected equity returns.

Question 18

what if the mezzanine investment default

Answer 18

The Priority Deed is an important document governing the relationship between the mezzanine lender and the senior financier.
In the event of a default, a mezzanine lender is restricted by those limitations set out in the priority deed. Unlike the senior lender, a mezzanine lender will not be permitted to enforce their security. Most commonly, the mezzanine lender’s only commercial alternative is to cure the default by refinancing the secured property or taking out the senior lender at par value (subject to all the prepayment penalties). A mezzanine lender will only exercise its right to cure defaults or its right to purchase the senior debt when the subordinated lender believes they can take control of the secured property and increase its value or where the secured property’s value is greater than the sum of all outstanding security.