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Mezzanine finance is a hybrid form of capital, combining elements of both debt and equity. It comprises a long-term loan - between five and ten years - coupled with warrants.
The loan must be redeemed at the end of the term in one go. No interim repayments are required on the loan, but the company’s cash-generating capacity must be sufficient to meet the interest charges.
Warrants give the mezzanine financing provider the right to buy a previously agreed percentage of the share capital at a predetermined price, in the event of a stock-market listing, for instance, or the sale of the company.
Mezzanine finance is subordinated to regular bank credits, in terms of both redemption and security. It is the least expensive form of junior capital, the least intrusive for management and the least dilutive.
Mezzanine finance is a frequently used instrument in buyouts, where the current management takes over the company. It can also bridge the gap between bank credits and shareholders’ equity in the case of a management buy-in, the establishment of a new product line or distribution channel or even internal growth.