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Mezzanine Slice Gets Respect
A recent report by investment bank Mayfair Associates concludes that as both banks and equity investors pull back from the market, mid-sized companies seeking growth financing are filling the gap with mezzanine debt.
Mezz debt typically carries higher interest than traditional asset-based loans, is junior to them, and offers the lender the opportunity to convert the debt to equity in the event such a transaction would offer a greater return.
Mayfair claims that buyout structures in the mid-Nineties were typically 30% equity, 70% senior debt. Today, however, they propose that equity accounts for 40% of the financial structure, senior debt is 45%, and the remainder -- 15% -- is mezz debt.
In addition to banks' reluctance to lend in the face of weak debtor sales, equity investors have been discouraged by today's low prospects for gaining liquidity through an IPO or acquisition. Mezz debt therefore occupies a middle ground -- near-term returns with an upside.
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