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What is the difference between senior and mezzanine debt?
Mezzanine debt is a hybrid form of capital that is part loan and part investment. Senior debt is a loan from a bank. Banks lend off of asset values so most senior loans are collateralized with assets. The bank loan is always secured and in the first position.
How do you structure a mezzanine loan?
Mezzanine financing is a flexible form of long-term capital which includes the following structures: Subordinated debt plus an “equity kicker” in the form of warrants to purchase common stock; Subordinated debt plus an equity co-investment; Subordinated debt without equity; Convertible debt; and. Preferred equity.
What is the difference between senior and junior debt?
Junior debt refers to bonds or other debts that have been issued with lower priority than senior debt. Unlike senior debt, junior debt is not typically backed by any type of collateral. As a result of these attributes, junior debt tends to be riskier and carry higher interest rates than senior debt.
How does mezzanine debt work in real estate?
In commercial real estate finance, mezzanine debt is a source of additional financing on real estate that is already subject to a mortgage. A mezzanine loan is secured by a pledge of the equity of the entity (such as a limited liability company) that owns the mortgaged real estate.
Is mezzanine debt risky?
Mezzanine debt bridges the gap between debt and equity financing and is one of the highest-risk forms of debt—being subordinate to pure debt but senior to pure equity. In practice, mezzanine debt behaves more like a stock than debt because the embedded options make the conversion of the debt into stock very attractive.
Is mezzanine debt senior debt?
Mezzanine loans are subordinate to senior debt but have priority over both preferred and common stock. They carry higher yields than ordinary debt. They are often unsecured debts. There is no amortization of loan principal.
How do you value a mezzanine debt?
What is the pricing for mezzanine debt? Pricing is usually 10% current pay interest, 2% deferred interest and a small 1to 2% yield enhancement. The yield enhancement usually brings the total return to 13% to 15% all in. The prospective borrower also reimburses the lender for legal and due diligence costs.
Who buys mezzanine debt?
A mezzanine lender is generally brought into a buyout to displace some of the capital that would usually be invested by an equity investor. Mezzanine debt takes up some of the financing that an equity investor would otherwise chip in. Suppose a private equity firm wants to buy a $100 million company.
Is mezzanine debt convertible debt?
Mezzanine debt capital generally refers to that layer of financing between a company’s senior debt and equity, filling the gap between the two. In a broader sense, mezzanine debt may take the form of convertible debt, senior subordinated debt or private “mezzanine” securities (debt with warrants or preferred equity).
Can senior debt be unsecured?
Senior debt is usually unsecured and backed by the general assets of the company.
Can a junior loan have a higher principal than a senior loan?
Junior loans (or “junior mortgages” or “second-lien” debt holders or mezzanine capital) have a lower priority than a first or prior (senior) lender. In the event that a borrower defaults, the lien priority determines the order in which lenders are repaid. In general, senior lenders are always repaid first.
Is senior unsecured debt subordinated?
Senior Unsecured Debt means indebtedness for borrowed money that is not subordinated to any other indebtedness for borrowed money and is not secured or supported by a guarantee, letter of credit or other form of credit enhancement.
Is Mezz debt secured?
Mezzanine debt is the middle layer of capital that falls between secured senior debt and equity. This type of capital is usually not secured by assets, and is lent strictly based on a company’s ability to repay the debt from free cash flow.
What is Mezz in real estate?
Mezzanine debt is a type of subordinated financing used to increase leverage – and levered returns – in a commercial real estate transaction. Similar to senior debt, mezzanine loans have fixed or floating interest rates and set maturity dates.
What is the collateral for mezzanine debt?
As collateral for the Mezzanine Financing, the Mezzanine Borrower would pledge its membership interest in the Mortgage Borrower. Unfortunately, mezzanine loans are often underwritten at higher interest rates than traditional mortgage loans since a mezzanine lender will not be secured by any real property collateral.
How mezzanine debt is negotiated?
If mezzanine debt is sold, it’s done in a private negotiation and typically involves price concessions on behalf of the seller. The connection with the LBO sponsor: A portion of the mezzanine financing is typically provided by the same private equity company sponsoring the LBO.
How do delayed draw term loans work?
A delayed draw term loan (DDTL) is a special feature in a term loan that lets a borrower withdraw predefined amounts of a total pre-approved loan amount. The withdrawal periods—such as every three, six, or nine months—are also determined in advance.
Why is mezzanine debt risky?
Often the company can only repay the mezzanine principal if the borrower successfully grows. This is what makes a mezzanine lender a risk lender. They take real risk when they make their loans and have to make sure they are picking companies that will be successful and generate cash flow over the long term.
Why is debt cheaper than equity?
Since Debt is almost always cheaper than Equity, Debt is almost always the answer. Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders’ expected returns are lower than those of equity investors (shareholders). The risk and potential returns of Debt are both lower.
Are MBS structured products?
Securitization, much like structured finance, promotes liquidity and is used to develop the structured financial products used by qualified businesses and other customers. Mortgage-backed securities (MBS) a model example of securitization and its risk-transferring utility.
Where does mezzanine debt sit?
Mezzanine financing is a form of a loan that sits beneath senior debt in a company’s capital structure but on top of preferred equity or common stock. Mezzanine financing gets its name for two reasons.
