Mezzanine Financing for Smart Guys

Posted on August 5, 2013

No Dummies here — our clients and friends tend to be very bright people.  Because they also tend to be very busy, we thought it might be helpful to use our most recent closing to provide a brief primer about middle market mezzanine financing.

You can click on the tombstone image to the left to get the full details of the $5 million mezzanine debt placement we arranged for our fast growing, innovative client, Paramount Merchant Funding LLC.

Mezzanine debt is a key component of leveraged private equity financial structures, but it also serves an important role for companies operating in the middle market.  As companies grow rapidly, their capital needs frequently outstrip the capital available to them.

Typically new enterprises are funded with the founders’ personal capital and loans supported by their personal assets or credit.  Often they reach out to friends and family to provide additional support. Additional working capital may be provided by a factor or an asset based lender; however, if growth is rapid, the business will eventually outstrip the limits of these resources and the founder’s personal financial resources will not  support continued growth.

For a step-by-step video how-to guide for obtaining mezzanine financing, click on the image below and view the tutorial.

To download the associated PowerPoint Slides click here.

In the past the needed capital was frequently provided by banks which relied upon the borrower’s character in addition to the liquidateable value of its assets. That is a thing of the past. Today, banks without clear collateral  support to back their loans will soon invite the ire of regulators. With this regulatory threat hovering over them, most bankers have effectively abandoned the small business community in its time of need.

This has created a financing gap increasingly filled by mezzanine lenders. These firms are often structured … read the rest

Gear Up for the Refinancing Wall

Posted on November 14, 2011

Remember the fall of 2009? We had just survived the worst financial crisis since the Great Depression and the stock market was enjoying the early stages of a very powerful bear market rally. We could all breathe a great sigh of relief. Of course a few party poopers were still around to remind us in articles like this one published by the Wharton School that a mountain of debt built up during the bubble years of 2006 and 2007 would need to be refinanced by the middle of the next decade. This debt, measured in the trillions of dollars, encompassed both commercial loans–many generated to support highly leveraged buyout financings–and commercial real estate funding.
Chart: Distribution of leverage loan maturities, 2010-2018
Source: Ancala.com

No need to worry, 2012 was a long way in the future. Well that future is now and Wall Street is again teetering on the brink of panic. Many firms that survived the crash have seen their profits–if not their revenues–return to past highs. Large profitable corporations have successfully refinanced much of their debt with very low cost long term bonds. For much of 2010 and the first half of 2011, strong high yield and leveraged loan markets enabled even middle market firms to stabilize their debt with relatively low cost funding as well. So the question is, “Have we dodged the bullet?”

Unfortunately, two recent reports answer the question with a resounding NO. The Financial Times, in an article entitled “Door Slams Shut for Corporate Have-Nots,” describes a two tier world in which a few very strong companies like Apple Inc. have taken advantage of the recovery to build up tremendous hordes of cash. On the other hand, weaker firms remain overleveraged and at extreme risk in the event of another financial crisis or a material rise in interest rates.

To accentuate the depth of … read the rest