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What is Mezzanine?

Over 20 years, ICG has established itself as a leading European authority on mezzanine finance with a growing presence in Asian Pacific and North America.

Just as the mezzanine lies between two conventional floors in a building, so mezzanine finance fills the gap between 'senior' bank loan (which has first right of repayment in the event of financial difficulty) and equity capital.

In terms of risk and reward, it falls between senior debt and equity and is often used in conjunction with both to increase the total loan without significant dilution of ownership.

A great advantage of mezzanine is its flexibility. We usually structure it to meet the client's needs as a secured subordinated loan with equity warrants, but it can also take the form of preference shares or a convertible loan.

Mezzanine is a particularly attractive option when bank finance is limited; perhaps because the deal exceeds the credit the banks will extend, or because of a lack of tangible assets or an unduly downbeat view of the prospects.

A long-term solution

Typically, we will provide mezzanine finance with a maturity of seven to ten years – although it is often repaid earlier.

Repayments are made in one payment at final maturity and therefore, unlike bank debt, do not absorb the borrower's cash flow. This can free up cash for the growth and development of the business.

Moreover, mezzanine is cheaper than unquoted equity and allows the existing shareholders to retain a greater percentage of the ownership of the business.

A flexible tool

Mezzanine finance can be used to fund buyouts, to finance acquisitions or capital expenditure, or to replace existing debt. It can also be used for a capital reorganisation, to enable shareholders to realise cash from their investments.

In quoted companies, mezzanine can be used in the form of convertible loans or preference shares to finance acquisitions or growth. This is often appropriate when it is difficult, dilutive or expensive to raise money on the Stock Market.

What does it cost?

Our mezzanine investments are usually structured to provide a cash yield of 3% - 4% over the relevant interbank rate, plus an additional return to reflect the risk involved.

We can achieve this extra return through warrants, options or equity investment that can be realised at the sale or flotation of the business. Alternatively, we can obtain an additional return from a premium payable on maturity or realisation.