Mezzanine Finance: Critical Capital for Middle Market Companies
By Marc A. Reich, Ironwood Capital Ltd.
http://www.ironwoodcap.com/about_news_mezzanine.htm
"What is Mezzanine Finance?
Mezzanine finance occupies a location on the balance sheet of a
company between senior debt and equity. Like the architectural feature
from which it derives its name, it sits above the main floor of equity
capital and below the upper floors consisting of senior debt. Like
most mezzanine floors, it is smaller than the floors above and below
it, thus, the dollar amount of mezzanine finance is generally less
than either the equity base or senior debt of a company. Mezzanine
finance can be viewed as a hybrid form of capital, combining elements
of both debt and equity. It most commonly takes the form of
subordinated debt coupled with warrants that enable the investor to
purchase shares in a company at a predetermined price. Mezzanine
finance is not a control investment and is normally not used to take
an ownership position in a company."
"Application of Mezzanine Finance
A mezzanine investment is typically made in a company that is facing
some sort of growth opportunity, e.g., the acquisition of another
company, the acquisition of the company itself by new management, the
establishment of a new product line or distribution channel or merely
internal growth. This growth opportunity is expected to create top
line revenue growth, bottom line growth in earnings, and, most
importantly, increased cash flow which, ultimately, increases the
value of the company. The resulting increase in equity value
translates into an increase in value of the warrants."
Debt would typically refer to the issuance of bonds of various kinds.
Equity would relate to the issuance of common stock.
The issuance of any of these kinds of financial instruments allow a
company to acquire funds to invest in itself or to acquire another
company.
Sincerely,
Wonko |
