Depending on the terms of an agreement, borrowers may have several repayment options. If cash flow is not available or the company wants to reinvest instead of paying interest, companies can capitalize on interest charges called benefits in kind. In the case of leverage buybacks, Mezzanine`s capital, combined with other securities, is used to finance the purchase price of the acquired company. Typically, Mezzanine`s capital is used to bridge a funding gap between less expensive forms of financing (e.g. B priority loans, two-pledge loans, high-yield financing) and equity. Often, a financial sponsor exhausts other sources of capital before reorienting itself towards Mezzanine`s capital. Borrowers are not the only ones facing the advantages and disadvantages of mezzanine credit. This type of credit structure also has advantages and disadvantages for lenders. Mezzanine capital is often a more expensive source of financing for a company than secured debt or priority debt. The increase in the cost of capital associated with mezzanine financing is explained by the fact that it is an unsecured, subordinated (or subordinated) bond in the capital structure of a company (i.e.
in the event of default, Mezzanine`s financing will only be repaid after all priority obligations have been met). In addition, mezzanine financings, which are typically private placements, are often used by small businesses and can overall have a higher leverage effect than high-yield market issuances. they therefore entail an additional risk. To offset the increased risk, Mezzanine creditors require a higher return on their investment than secured or priority lenders. In structuring a mezzanine security, companies and lenders cooperate to prevent the borrower from being subject to the full cost of interest on such a loan. Since mezzanine lenders aim for a return of 14% to 20%, this return must be obtained by means other than simple cash payments. As a result, the mezzanine lender, using equity and pungent interest, effectively defers its remuneration until the maturity date of the guarantee or a change of control of the company. Financial sponsors will attempt to use Mezzanine`s capital in an equity buyout to reduce the amount of capital invested by the private equity firm; Since mezzanine lenders typically have a lower target cost of capital than the private equity investor, the use of mezzanine capital can potentially improve the private equity firm`s investment returns.
In addition, SMEs may not have access to the high interest rate market due to high minimum size requirements, resulting in a need for flexible private mezzanine capital. In real estate finance, mezzanine loans are often used by developers to secure additional financing for development projects (usually when the equity needs for primary mortgages or construction loans are greater than 10%). [2] This type of mezzanine loan is often secured by a second-tier real estate mortgage (.b. the ranking of the top mortgage lenders). Standard mortgage enforcement procedures can take more than a year, depending on the relationship between the first mortgage lenders and the mezzanine lender, which is governed by an intercreditor deed. Mezzanine financing can be financed by a large number of different structures, based on the specific objectives of the operation and the current capital structure of the company. [Citation required] The basic forms used in most mezzanine financings are subordinated bonds and preferred shares. . . .