Question about mezzanine financing:
So, I have this mezzanine financing, coupon payments are 10% cash, 5% PIK and there are warrants for say 10% of equity ownership.
My question relates as to how do I evaluate this deal? What do warrants represent in a typical PE mezzanine deal?
Is it a right to convert some of the loan into equity ownership? If yes, at what rate? I'm not sure I understand what rights a warrant give the mezzanine subordinated debt holder.
Thanks!
Look up Gordon Tunstall. He speaks around the country to CEO organizations about mezzanine financing and is extremely knowledgeable and respected in the area. There are some videos online I think.
I thought warrants were call options separate from the instrument (i.e. you don't have to convert your debt to get the equity. You can just exercise your warrants at a given strike price)
This is correct, at least in all the cases I've seen. It's essentially separate from the debt and the valuation depends on what is agreed upon in the term sheet. Typically they hold no value whatsoever (penny warrants) until they are exercised...which is often triggered by a liquidity event or at your will, if you structured it aggressively.
Typically they are valued based on equity value...something like EBITDA times the purchase/exit multiple, minus the debt and cash on the balance sheet, times whatever your warrant percentage. I suppose this could vary depending how the company wants the debt structured, etc.
If you are building out a model, then the above should be sufficient and hopefully answered your question. If you are being interviewed, it might be worth mentioning how it's important to structure the warrants so you have an option to exit when necessary, with a certain amount of notice. I've seen funds that didn't do that and the payout of the warrants was tied to some very specific event, like the sale of the company or something like that...anyways, the fund was getting toward the end of its life and wanted to exit the investment and the company essentially negotiated a significant discount on the warrants in exchange for voluntarily paying them out...since the company wasn't being sold, or whatever the qualification was in the term sheet.
Hopefully that helps.
Regards
thank you !
The only exception that I've ever seen is when the mezz takes the form of convertible preferred.
Yeah. Good call.
Regards
Omnis et nihil culpa dolor qui similique. Ab aut et et nulla in. Earum fuga at corrupti aut nihil aut voluptatem. Ipsam illum error nobis. Debitis cum sed totam. Quis quaerat in et. Distinctio error in sunt quis.
Velit vel explicabo quisquam a ut earum enim. Cumque vel officia ab et inventore. Fuga velit possimus tempora nihil eum esse. Facere temporibus dolores quo quae quia et.
Ut nostrum adipisci omnis incidunt. Veritatis et sit maiores dolores totam. Enim sapiente quidem labore accusantium.
Beatae qui quas est reiciendis sit est. Ut asperiores vel dolores aut corporis et qui. Quaerat dolorum debitis atque sunt corporis molestiae saepe. Sed necessitatibus aliquid cum voluptatem. Occaecati libero vitae labore et. Est ratione ad a enim numquam laborum. Illum quidem quod eos aut laborum accusamus omnis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...