Why is it that providers of bank debt view mezzanine debt more like equity, thereby allowing the issuer to contribute a lower equity investment? If this reasoning is based on mezzanine debt being subordinated, then the same should apply in regard to high-yield bonds, right?
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There’s a lot to correct here so I’ll just do one and let others pitch in: high yield bonds aren’t necessarily subordinated bonds
That is correct - there could be no other debt on the sheets so the HY would be first paid, so not subordinated
Well a lot of mezz debt has equity kickers - I wouldn't say it is treated as equity though. Mezz debt could include warrants, convertible debt, call options, or rights and technically speaking it is treated as debt unless the equity kicker is trading in the money. You could think of it as equity because the equity portion has the most upside. If you are looking at a firms balance sheet it is treated as debt until it is trading in the money.
So you'd disagree with mentioning 'enables the borrower to provide less "real" equity' as an advantage of mezz?
I'm assuming you're talking about an LBO where any kind of additional debt would allow the issuer to contribute less equity. More bank debt would add to less equity as well, not just mezz debt.
No, I've read an explanation on mezz where they named this as one of the main advantages for borrowers.
I mean, you can maybe stuff a little extra leverage through by running it through multiple tranches versus what your senior lender alone would be comfortable lending, but I don’t think it’s so impactful that I’d call that statement accurate.
Mezz whore here.
Most mezzanine debt includes an equity sweetener in some form. Sometimes it does not, but it really varies from lender to lender, or at least it does in LMM deals.
As an entrepreneur/PE monkey, I personally view it as debt because usually we have an option to buy out their equity when they do ask for a sweetener. Some mezz guys care more about upside they get via the equity so they may not let you buy them out easily but I've never seen a term sheet without that.
The senior lenders I've dealt with just want to make sure the math still works with any mezz you use to fill the gaps. In some spaces where there aren't many hard assets and the company is still relatively small, a mezz lender might provide all required debt but that's for tiny deals.
The more interesting development in the space is the way SaaS deals are being structured BTW. A lot of lenders love SaaS companies, and I think they're starting to get a little stupid about the way they lend out against subscription revenue. Talked to someone at a BB's tech lending group the other day who lends against money burning SaaS companies to try and understand what they look for/logic/etc... and there really was none lol.
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