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Encyclopedia > Mezzanine loan

Contents


Basics

A Mezzanine Loan is a relatively large loan, typically unsecured (ie. non-recourse, or not backed by a pledging of assets) or with a deeply subordinated security structure (eg. third lien). Maturites usually exceed five years with the principal payable at the end of the loan term. In a standard offer, the loan carries a detachable warrant (finance) (the right to purchase a certain number of shares of stock or bonds at a given price for a certain period of time) or a similar mechanism to allow the lender to share in the future success of the business. Mezzanine loans can be used in financing a startup company or a leveraged buy-out, usually as part of a larger financing package. For other uses of the term Warrant, see Warrant (disambiguation) A warrant is a security that entitles the holder to buy or sell a certain additional quantity of an underlying security. ... A startup company is a company recently formed, usually until IPO or acquisition. ...


Return and Interest

Mezzanine lenders, typically mezzanine funds, look for a certain minimum internal rate of return which can come from three sources: cash interest, payment in kind and warrants. Cash interest is the same as interest (finance), usually payable on the principal in equal periods until maturity. Payment in kind (PIK) is in addition to cash interest and accrues period after period, thus increasing the underlying principal (ie. compound interest). The PIK part is due on maturity of the principal. The achieved selling price of the shares acquired under the warrant are also part of the total return of the lender. The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. ... In finance, when a bond pays in kind, it means that the amount of principal owed to the bondholder is increased in lieu of paying current interest. ... In finance, interest has three general definitions. ...


The idea behind the interest structure is to postpone burdening a borrower with the full interest cost of such a loan until the due date, effectively betting on substantially increasing cash flows (and equity value for the warrants) towards maturity. An extreme of such a financing instrument is the PIK loan. The other extreme would be, technically speaking, the simple loan. It has been suggested that Lenders be merged into this article or section. ...


Interest on mezzanine loans is substantially higher than senior debt or debt of higher priority, thus making the compound interest a substantial part of the repayable principle. In addition, mezzanine loans typcially carry some refinancing risk, meaning that the cash flow of the borrower in the repayment period will usually not suffice to repay all monies owed if the company does not perform excellently. By that definition, mezzanine lenders prefer borrowers with strong growth potential. In finance, cash flow refers to the amounts of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. ...


Real estate finance

In real estate finance, mezzanine loans are often used by developers to secure supplementary financing for development projects (typically in cases where the primary mortgage or construction loan equity requirements are larger than 10%). These sorts of mezzanine loans are often collateralized by the stock of the development company rather than the developed property itself (as would be the case with a traditional mortgage). This allows the lender to engage in a more rapid seizure of underlying collateral in the event of default and foreclosure. Standard mortgage foreclosure proceedings can take more than a year, whereas stock is a personal asset of the borrower and can be seized through a legal process taking as little as a few months. Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects. ... A real estate developer (American English) or property developer (British English) makes improvements of some kind to real property, thereby increasing its value. ... A mortgage is a method of using property as security for the payment of a debt. ... Foreclosure is the legal proceeding in which a bank or other secured creditor sells or repossesses a piece of real property (immovable property) due to the owners failure to comply on its promissory note. ...


Leveraged buy-outs

In leveraged buy-outs, a mezzanine loan is used if the purchase price of the target exceeds leverage levels up to which lenders are willing to provide a senior loan or a second lien loan. It is typically provided to the acquistion vehicle, either another company or a special purpose entity (SPE), and not to the target itself. In an SPE with no intrinsic cash flows, the repayment structure of the cash interest through eg. dividends introduces additional risk (eg. minimum or accumulated net profit,tax) to the instrument. Leverage is related to torque; leverage is a factor by which lever multiplies a force. ... It has been suggested that this article or section be merged into loan. ... A special purpose entity (SPE) (formerly special purpose vehicle) is a firm created by a company to fulfill narrow or temporary objectives, primarily to isolate financial risk. ... A dividend is the distribution of profits to a companys shareholders. ... Net profit is an accounting term which is commonly used in business. ... A tax (also known as a duty) is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ...


Mezzanine loans in leveraged buy-outs typically bear a substantially higher interest and fee burden than senior loans or second lien loans of the same transaction, however, are less expensive than a PIK instrument. The aquirer has to be very diligent in assessing whether the cost of taking out a mezzanine loan does not outbalance his internal rate of return of equity investment. One pays a fee as renumeration for services, especially the honorarium paid to a doctor, lawyer or member of a learned profession. ...


  Results from FactBites:
 
Mezzanine loan - Wikipedia, the free encyclopedia (649 words)
Mezzanine loans can be used in financing a startup company or a leveraged buy-out, usually as part of a larger financing package.
These sorts of mezzanine loans are often collateralized by the stock of the development company rather than the developed property itself (as would be the case with a traditional mortgage).
Mezzanine loans in leveraged buy-outs typically bear a substantially higher interest and fee burden than senior loans or second lien loans of the same transaction, however, are less expensive than a PIK instrument.
HVS International - Global Hospitality Consulting (1065 words)
Mezzanine finance can be loosely defined as a type of debt financing in which a lender’s recourse is subordinate to that of the in-place senior loan.
Mezzanine loan; in its “true” form, the loan is secured by 100% ownership interests in the borrowing entity.
The result is a rapidly increasing mezzanine loan balance, which ideally must be matched by proportionate growth in net income (and thus, the market value of the collateral) to keep the overall LTV ratio at an acceptable level.
  More results at FactBites »

 
 

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