Mezzanine financing rates

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May 16, 2024

by a searcher in Chicago, IL, USA

What are some general terms from mezzanine lenders in today's current market? Both on interest rates and amortization schedules? I understand that there is a lot of flexibility; however, what figures and terms could I plug in to a financial model to get a good understanding of leverage and debt payments?

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Reply by a searcher
from Bowling Green State University in Surrey, BC, Canada
If I'm you, model the cash flow that makes sense given typical senior debt leverage and terms, then see what's left. That's a great starting point in determining if subdebt/mezz may have a role.
Then, your subdebt/mezz negotiations around structure, pricing, and terms center around the residual cashflows - what structure does the business need? - what will be the return needed by the lender who is agreeing to the risk?
Generally, price of debt will go down as solid forecast debt-service goes up. For example, if cash flow allows for amortization of principal, well, that's derisking the lender so you would argue for a skinnier rate. If you need full interest-only over 5 years with a balloon of principal at maturity - going to cost more, it's riskier for the lender.
Other bells and whistles may include:
- cash flow sweeps of principal, if business performance allows; for example, up to 50% of free cash flow (consent of senior lender typically required - onsite covenants pre/post)
- principal repayment can take almost any form; ie. straightline amort of principal, stepped payments, seasonal payments, annual lump sums, etc.
- deferring interest via PIK (mentioned already above)
- royalties while the debt is outstanding
- bonus at maturity (as a percentage of forecast EV)
- warrants
- limited guarantees

The sub/mezz lender typically thinks of returns in terms of total IRR, so these variable return elements are greatly impacted by the forecast for performance. Expect the lender to step down your forecast by factor.

Again, the more conservative the structure, the lower the cost. The more aggressive the structure, the higher the cost.

It's all pretty much negotiable but pick your partners carefully.
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Reply by a searcher
in Boston, MA, USA
In some states there are state sponsored programs that are much "cheaper" than traditional mezz debt. In MA for example there's Massachusetts Growth Capital Corporation which is a pseudo state agency who's charter is to loan to small businesses in MA. They offer a 10-year, 10% (with option to do 11 years and first year is interest only) mezz product.

https://www.empoweringsmallbusiness.org/what-we-offer/small-business-lending
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