Mezzanine financing is used by various companies and stakeholders in different scenarios. Whether it's for recapitalization, leveraged buyouts, management buyouts, growth capital needs, acquisitions, shareholder buyouts, refinancings, or balance sheet restructurings, mezzanine financing provides a flexible and valuable capital solution. Its unique position between debt and equity allows companies to access funds beyond senior debt while preserving control and achieving strategic objectives.
Introduction
Mezzanine financing serves as a versatile tool for companies seeking capital solutions. While not typically used as permanent capital, mezzanine financing offers a specific purpose and can later be replaced with a more conservative type of financing. Positioned between senior debt financing and equity, mezzanine financing is a valuable source of capital that allows companies to access funds beyond what they can achieve on a senior basis. It may be more expensive than senior debt but cheaper than equity, making it an attractive option for raising substantial liquidity without selling a large stake in the company.
Who uses mezzanine finance? Common use cases.
Companies across various sectors and stages can benefit from mezzanine financing to achieve their goals and overcome financial challenges. Here are eight common use cases for mezzanine financing:
Recapitalization
Recapitalizations involve raising new capital to restructure the debt and equity mixture on a company’s balance sheet. Mezzanine financing is well-suited for such situations, especially when owners want to achieve partial liquidity while maintaining control of their business. It allows shareholders seeking liquidity to sell a portion of their stake while keeping other shareholders actively involved.
For example, HH Global pursued a minority recapitalization to provide partial shareholder liquidity, fuel organic growth opportunities, and fund potential acquisitions. Prudential Private Capital provided mezzanine financing, senior debt, and senior accordion notes, allowing the current leadership team to increase their ownership stake and position the company for continued growth.
Leveraged Buyout
Mezzanine financing is often used in leveraged buyouts by purchasing shareholders, such as private equity funds, to maximize borrowing capacity at the time of the purchase. Leveraged buyouts involve raising substantial capital to support an ownership transition or significant growth event.
Huntington Foam, for instance, sought a financial partner to support its growth phase and executed a leveraged buyout. Mezzanine financing and senior debt from Prudential Private Capital, combined with equity from Mill Point Capital, provided the necessary capital for Huntington Foam to pursue its long-term growth objectives.
Management Buyout
In management buyouts, mezzanine financing is typically used by the current management team to buy out current owners, such as private equity or other investors. This allows the management team to gain control of the business, determine its direction, and benefit from future equity value creation.
Comm-Works, for example, negotiated a management-led buyout after an institutional investor decided to sell its majority ownership. The management team obtained various forms of financing, including mezzanine financing, senior subordinated notes, and preferred equity, to support the acquisition and establish majority control of the company.
Growth Capital
Mezzanine financing is an excellent option for companies seeking growth capital to achieve their organic growth goals. This can involve significant capital expenditures, construction of facilities, or entering new markets through product development or establishing subsidiaries.
Interface, a company focused on strategic organic growth and expansion, received mezzanine financing, preferred equity, and a syndicated bank facility. With the necessary capital in hand, Interface can continue delivering industry-leading organic growth.
Acquisition
Mezzanine financing can serve as a financing solution for acquisitions, allowing companies to purchase other businesses and respond to customer needs more quickly. Acquisitions can also help companies access adjacent markets and diversify their customer base.
KeHE Distributors, LLC, for instance, utilized mezzanine financing and other capital sources to acquire one of its largest competitors in the natural and organic food space. This successful acquisition allowed KeHE to expand its market presence and enhance its competitive position.
Shareholder Buyout
Shareholder buyouts are attractive to family-owned businesses seeking to repurchase shares and increase their ownership stake. Mezzanine financing plays a crucial role in facilitating such transactions.
Polar Corp., a fourth-generation family-owned business, recapitalized its balance sheet to buy out a minority shareholder and subordinated debt lender. Mezzanine financing and preferred equity enabled Polar to increase its ownership stake and maintain family control.
Refinancing
Companies often use mezzanine financing for refinancings to pay off or replace existing debt, taking advantage of lower interest rates and better terms. Refinancings with mezzanine financing add flexibility to a company’s debt capital structure, better positioning it for opportunities like acquisitions and shareholder buyouts.
Century Gaming, for example, chose to refinance its existing debt and obtained mezzanine financing in combination with a senior credit facility. This financing package supports the company’s long-term growth plans and ensures its capital needs are met.
Balance Sheet Restructuring
Mezzanine financing’s patient nature makes it ideal for balance sheet restructurings. By optimizing a company’s debt capital structure, mezzanine financing helps fulfill debt requirements for transactions like acquisitions and management buyouts while giving the company time to recover. It can also meet a senior lender’s requirement for junior capital or create additional senior debt capacity.
ARCA faced challenges in securing cross-border financing for its acquisition of CTS Group. Mezzanine financing, combined with senior debt and a revolving credit facility, allowed ARCA to fulfill the requirements of the Italian sellers and complete the acquisition, positioning the company for long-term strategic success.
Conclusion
In conclusion, mezzanine financing is utilized by various companies and stakeholders in different scenarios. Whether it’s recapitalizations, leveraged buyouts, management buyouts, growth capital needs, acquisitions, shareholder buyouts, refinancings, or balance sheet restructurings, mezzanine financing provides a flexible and valuable capital solution. Its unique position between debt and equity allows companies to access funds beyond senior debt while preserving control and achieving their strategic objectives.
