Mezzanine. Mezzanine versus bank and equity

1. Mezzanine

Prof. R. Aernoudt

2. ”Don't waste your love on somebody, who doesn't value it.” William Shakespeare, Romeo and Juliet

3. Characteristics of both

Own funds
Debts
Quasi-equity
Reimbursable
Own funds in bankers’ eyes
Fixed term
No collateral
Fixed interest
Subordinated
No dilution
Convertible
Equity kicker
Buy-back through
Puts
Calls
Warrant
Option

4. Mezzanine versus bank & equity

Mezzanine versus bank & equity

5. Debt securities

6. Types of investors and their risk profiles

Return
Ordinary
Shares
Preferred
Shares
PE Funds
Subordinat
debt
Junior
debt
Senior
Debt
Mezzanine
Banks
Risk
6

7. Risk and return

8. Use of Mezzanine

Management buy-out (MBO)
Management buy-in (MBI)
Leverage buy-out (LBO): MBO via mezzanine
Leverage buy-in (LBI): : MBI operatie via mezzanine
Buy-in management buy-out (BIMBO): MBO followed by MBI
LIMBO: leveraged BIMBO

9. LBO illustration

2 conditions:
Lending capacity (EV/BT) – Debt max 2 x Own funds
Pay back capacity (CF): 5 to 7 years
Case:
Take-over attempt by VC ‘Wild gease’
Manager can remain temporary; Exit owners
Limit ‘own funds’ to be invested

10. Balance Ltd Nina (in thousand euro)

Assets
Net fixed Fixed assets: 15000
Liabilities
Own funds :25000
LTD: 5000
-----------------------------------------Floating assets: 25000
(stocks 10 000)
STD: 10 000
Total: 40 000
Total: 40 000
[email protected]

11. Ltd NINA (in thousand euros)

Costs
Turnover
Goods
Salaries
EBITDA
Depreciation
EBIT
financial result (I)
Taxes (T)
Net result
Revenues
250 000
180 000
60 000
10 000
5 000
5 000
1000
1200
2800
11
[email protected]

12. LtD NINA

Value
Financing structure
Mezzanine: 50
EV x 2
LTD/CF = 5,5
Agreed: 65 Million euro
Equity financing: 15
Leverage capacity:
Conclusion: I buy for 15 K a
company worth 65 K = leverage
After LBO company is
Less solid
Less liquid
EBITDA x 6//8
Fork: 60 to 80 Million euro
Balance structure: EV 25 K
Gross CF: 9 K

13. 4 Sources of value creation

13