Mezzanine has characteristics of both equity and debt. It is subordinated to regular debt (including bank & secured debt), but ranks higher than common equity. The most common instruments are preferred equity or subordinated debt. Profit-sharing loans are less favourable, but may be attractive from an (international) tax structuring point of view.
Banks have partly withdrawn from this market segment, a trend which unfortunately may last for several years. The gap stemming from this development has not sufficiently been filled by other parties, at least not in continental Europe.
At interest rates of 15% per year, the tax deductability of a subordinated loan is quite appealing. However …, failure to pay the interest coupon or to redeem the principal results in default, or even cross default with other (bank) loans. Failure to pay dividend or to redeem the preferred equity may strongly hurt the equity holders, but will not result in default of the company. Thin capitalization regulations and restrictions to utilize the participation exemption may further complicate the picture. Attracting mezzanine is a balancing act on its own.
Beacon has access to various mezzanine providers which form part of our network. Unlike the “straight-forward” placement of equity, one of the key success factors for mezzanine lies in focussing on the downside of a company’s projections. Although utilization of the instrument only makes sense if the company believes that a strong upside is possible. Extremely expensive mezzanine is more readily available, but is quite “hostile” to the equity holder. Beacon’s expertise is centered around structuring the instrument in a cost efficient manner and sourcing the right mezzanine provider.