What is Mezzanine Finance?
Mezzanine finance has long been a component in creating the optimal capital structure for companies, but its importance has increased dramatically within the last years. Because of inflexible bank criteria the demand for mezzanine finance has increased significantly. In fact, mezzanine finance is now often the difference between successfully bridging the gap between equity and senior loan funding or losing a transaction.
Structured Mezzanine Investments (Pty) Ltd (SMI) work in conjunction with banks in South Africa and clients to address their needs and to assist clients to fulfil the criteria laid down by the finance institutions in South Africa. At SMI we do not have specific products, but rather assist clients to structure transactions to obtain maximum growth.
Mezzanine finance occupies a location on the balance sheet of a company between senior debt and equity. Like the architectural feature from which it derives its name, it sits above the main floor of equity capital/ own contribution and below the upper floors consisting of senior debt. Like most mezzanine floors, it is smaller than the floors above and below it; thus, the rand value of mezzanine finance is generally less than either the equity base or senior debt of a company. Mezzanine finance can be viewed as a combination form of capital, combining elements of both debt and equity. It most commonly takes the form of subordinated debt coupled with a form of profit share or equity taken up in the company. Mezzanine finance is not a control investment and is normally not used to take an ownership position in a company.
The Debt Component
The mezzanine debt, has all the characteristics of other debt instruments, but is structurally junior in priority of payment and its claim on collateral to senior debt. Because of this subordinate position, sub debt presents a greater risk profile to the lender and, thus, warrants a higher rate of return. The sub debt would typically call for a modest interest rate over its term, and have a large balloon payment at maturity. The remainder of the expected return over and above the interest rate charged on the sub debt must come from the equity-linked aspect of the mezzanine investment, most often profit share.
The Equity Component
The company or project is valued at the inception of the transaction and the funding carry a price based upon this initial valuation. It is important to note that the intent of the equity or profit share is to enable the mezzanine investor to achieve its targeted return on the investment, not to take an ownership position in the company. The equity or profit share-related portion of the total return on the investment is realized by the investor upon an "exit event" or "put back" to the company at some agreed date based upon a formula established at the initial closing of the deal.
Application of Mezzanine Finance
A mezzanine loan / investment is typically made in a company that is facing some sort of growth, the establishment of a new product line or development or merely internal growth.
At Mezzanine Finance (Pty) Ltd we specialize in the following areas: