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
Mezzanine debt has been around for over 30 years, however its use in Western Canada and the Pacific
Northwest is relatively new and growing. Leading companies in this region are starting to use
mezzanine debt to fund the growth today that the chartered banks will not fund until tomorrow.
What Is Mezzanine Debt?
Mezzanine debt capital generally refers to that layer of financing between a company's senior debt and
equity, filling the gap between the two. Structurally, it is subordinate in priority of payment to senior
debt, but senior in rank to common stock or equity (Exhibit #1). In a broader sense, mezzanine debt
may take the form of convertible debt, senior subordinated debt or private "mezzanine" securities (debt
with warrants or preferred equity).
Mezzanine capital is typically used to fund a growth opportunity, such as an acquisition, new product
line, new distribution channel or plant expansion, or in private business’ for the company owners to
take money out of the company for other uses or to enable management to buyout company owners for
succession purposes. Although it makes up a portion of a company's 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...