Essay on Mezzanine Finance Explained - 1794 Words

Mezzanine Finance by Corry Silbernagel Davis Vaitkunas Bond Capital With a supplement by Ian Giddy Mezzanine Debt--Another Level To Consider Mezzanine debt is used by companies that are cash flow positive to fund: further growth through expansion projects; acquisitions; recapitalizations; and, management and leveraged buyouts. When mezzanine debt is used in conjunction with senior debt it reduces the amount of equity required in the business. As equity is the most expensive form of capital, it is most cost effective to create a capital structure that secures the most funding, offers the lowest cost of capital, and maximizes return on equity. Mezzanine debt has been around for over 30 years, however its use in Western Canada and the†¦show more content†¦Although it makes up a portion of a companys total available capital, mezzanine financing is critical to growing companies and in succession planning in recent years. The gap in funding between senior debt and equity is common for the following reasons: 1) accounts receivable, inventories and fixed assets are being discounted at greater rates than in the past for f ear that their values will not be realized in the future; 2) many balance sheets now contain significant intangible assets, and, 3) as a result of defaults and regulatory pressure, banks have placed ceilings on the amount of total debt a company can obtain. While additional liquidity can be obtained from equity investors, equity is the most expensive source of capital. Further, equity capital, by its nature, dilutes existing shareholders. As a result, mezzanine debt can be an attractive alternative way to obtain much needed capital. Capital Structures While there are no hard and fast rules for optimizing a company’s capital structure, companies that are ahead of the curve use an efficient combination of senior debt, mezzanine debt, and equity capital to minimize their true cost of capital. COMPANIES WITH EFFICIENT CAPITAL STRUCTURES EMPLOY A NUMBER OF CAPITAL SOURCES Expected Returns (%) Typical Private Equity Structure (% of total Assets) Senior Debt and Asset Backed (Stretch) Lending 30% - 60% 5% - 12% Mezzanine 20% - 30%Show MoreRelatedThe Debt And Credit Crisis2495 Words   |  10 Pagesback to the industrialization period in the United States where business and finance developed together (Cioffi, Lecture 10/21/14). Finance and industry cooperated with each other, as banks invested in business and provided the capital needed for the industrial sector to develop (Cioffi, Lecture 10/21/14). Finance and industry became codependent on each other to thrive and progress. Consequently, a system grew where finance became the major player behind every aspect of American political economy.Read MoreFinancial Crisis Of The Brc Economies2217 Words   |  9 Pages(from the MBS) were known as Collateralized Debt Obligation (CDO), and were offered by the SPE. The CDO would be split into 3 tranches (equity, mezzanine, and senior), and assigned a rating by rating agencies based on the creditworthiness of the borrower. If the SPE collapsed, the senior tranche would have precedence of their recove ry of assets over the mezzanine and equity tranche. 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