Remington Capital – Brad Sweet

Here at Remington we recognize that the volatile and down economy has put many private companies into a tight spot.  They end up with too much bank debt as business volume and profits contract.  But lower earnings mean that company owners who would have been ready to sell their companies now can’t do it because they end up with too little equity after paying off their banks.

So a key question is, how can you reduce your bank debt and improve your cash flow while you wait for the outside economy and your earnings to recover?  One potential answer where Remington can help is with mezzanine debt.

Mezzanine debt gets its name from being halfway between senior bank debt and equity.  Because it’s kind of both, it can serve you well in certain situations.  Mezzanine is semi-permanent capital, like equity, so the company does not have to make monthly or quarterly payments of principal.  It usually has a 5 to 7 year term.

Senior lenders, like banks, look at mezzanine, or “mezz”, as equity because it is semi-permanent capital and because it is subordinated to the bank debt, which means that the bank gets paid first in the case of a problem.

For owners, mezz looks like debt,because it often does not dilute the ownership of the company like selling stock would do.

So a new investment of mezzanine debt can pay off some of the burdensome other bank debt with a more patient capital that doesn’t come with a reduction in ownership like selling equity brings.

Mezzanine lenders are very busy these days because their product is good for this market.  A well-structured mezz investment will reduce a company’s leverage, improve immediate cash flow, and preserve the equity of a business for a sale a couple years down the road.

So, what’s not to like?  It’s a little expensive.  Compared to a bank loan, mezz carries an interest rate in the range of 12% to 14% depending on the deal.  That’s more expensive than a bank, but the cash flow is often better because the principal does not need to be repaid until the end.  And those interest rates are less expensive than selling ownership shares in a company with depressed valuation.  Sometimes mezz deals include an “equity kicker” that give the lender options to buy stock at a fixed value so that there’s an extra return when you sell the company down the road.  That’s not a bad thing because it brings in an experienced investor who shares your goal of a good-paying exit event.

If your bank is making you nervous, or if you are making them nervous, or if you just want to strengthen your balance sheet as you wait for the market to recover, a mezzanine investment could be the answer.  Let me know if you have questions, and I’d enjoy speaking with you about whether a mezz is in your future.

Whatever type of mezzanine financing that may be needed, the professional advisory team at Remington has the know-how and experience to successfully structure any type of transaction and provide access to the best commercial financing available via its global network of private and public sources of capital.

Several types of mezzanine financing are available, including:

Mezzanine Loans: The most common type of mezzanine financing is straight debt. It is also the easiest to understand. With straight debt, the mezzanine lender is in a subordinate position, usually up to 85% LTV, with no equity participation in the cash flow and no management participation. Depending on the amount of leverage, the type of project, and owner history, yields will typically fall within the 9-13% range, with terms similar to the senior debt.

Participating Loans: If higher leverage is the objective, and borrowers are willing to give up some cash flow or equity for it, a hybrid form of participating debt instrument may be the way to go. With such debt, borrowers can usually boost LTV up to 90%, while lenders generally receive a slightly lower coupon rate on the note but may receive an exit fee when the property sells. Given the increased risk assumed by the lender from the amount of leverage involved, a higher overall yield is required from the combination of the coupon rate and the equity obtained in the transaction.

Preferred Equity: With preferred equity, the borrower and lender usually enter into a partnership or joint venture agreement. This typically results in the investor gaining some project control, a greater equity position, more risk and a greater return than that provided by a participating loan, and the ability to take over the project in case of default. The borrower, on the other hand, gives up some control in exchange for not having to commit substantial capital to the project.

Please call me at the office and let’s discuss.  Thank you, Brad Sweet – Remington