An Offering At His Lotus Feet

Mezzanine Financing

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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. ezzanine debt may take the form of convertible debt, senior subordinated debt or private "mezzanine" securities (debt with warrants or preferred equity).

Also known as a "subordinated loan" or "junior loan".

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• Long term investment horizon- mezzanine capital is repayable after a long term, typically 7 to 10 years;

• Security- mezzanine capital is in principle unsecured; mezzanine finance is subordinated to senior loans but senior ranking compared with the “true“ equity capital

Characteristics of mezzanine capital

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•Tax status- interest payments on some types of mezzanine finance are tax deductible;

•Flexibility and versatility as regards the arrangement of the terms of the Contract

• Return- mezzanine finance pays higher interest rates than other debt (20 - 30 %), this rate is fixed;

Characteristics of mezzanine capital

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• Voting or management rights- the level of control by the provider of mezzanine capital is dependent on the type of mezzanine finance; some types of mezzanine capital include contractual rights of approval and control

• Image of the company- the confidence of a mezzanine capital provider increases the image of the company.

Characteristics of mezzanine capital

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Mezzanine capital with more Equity orientation • Partner‘s loans

Mezzanine capital with more Debt orientation • Subordinated loans• Convertible bonds• Warrant bonds

Forms Of Mezzanine Capital

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Pros and cons of mezzanine capital

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Cash interest

PIK interest

Ownership

Participation payout

Arrangement fee

Forms of return from Mezzanine financing

Who Provides

• Lenders who are more open to risk but have investing constraints

• By sponsors themselves

to reduce equity commitment partially

to escape dividend trap

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REFERENCESBOOKS

Project Finance in theory and practice By Stefano Gatti

ARTICLES

Mezzanine Finance by Corry Silbernagel & Davis Vaitkunas

Mezzanine Method of Financing by Dr. Ingo Natusch

Financing Infrastructure in Asia: Mezzanine Capital

by David Bussmann

Financing Infrastructure :Addressing Constraints and Challenges

a world bank article

MEZZANINE FINANCE AND CORPORATE BONDS

by Assoc. Prof. Libena TETREVOVA