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Mezzanine Financing: Tools, Applications and Total Performance

Mezzanine Financing: Tools, Applications and Total Performance

Luc Nijs

ISBN: 978-1-118-79707-5

Oct 2013

528 pages


An in-depth explanation of mezzanine finance

Mezzanine finance products, which have grown increasingly popular in recent years, involve a unique and complex form of analysis because of their hybrid nature. Because mezzanine finance involves no collateral, it accentuates legal terms, term sheets, and contracts, in addition to depicting dynamics of both debt and equity. Experienced chairman, lecturer, and professor of investment banking Luc Nijs presents readers with a thorough description of product groups, structuring and pricing, and cultural discrepancies in terms of regulation and application in Mezzanine Financing: Tools, Applications and Total Performance. Nijs analyzes common triumphs and failures encountered in mezzanine financing, and he discusses techniques for risk analysis and risk mitigation. A final study of international capital markets, their products' relevance, attractiveness, and liquidity, and the effects on pure equity/fixed-income risk concludes the book.

  • Conveys a professional's advice through case studies of various regions, industries and contexts
  • Provides the only complete analysis of mezzanine finance as no other books take on the topic as their only subject
  • Details an increasingly popular and globally relevant subject in finance

Those seeking a detailed explanation of the complexities within mezzanine financing will encounter a professional account in Nijs's book.

Preface xiii

1 Introduction 1

1.1 The Bi-polar World of Finance 1

1.2 Demarcation of the Product Group 5

1.3 Positioning and Use of Mezzanine Finance 7

1.4 The Risk–Return Conundrum 10

1.5 Providers of Mezzanine Finance 18

1.6 The Market for Mezzanine Products 18

2 The Mezzanine Product Group 25

2.1 Categorization of the Mezzanine Product Group 25

2.2 Case Study: The Kratos Company – Merger Finance 67

3 The Implicit Cost of Mezzanine Products 77

3.1 Measuring Risk 77

3.2 Types of Risk 80

3.3 Equity Risk Versus the Risk of Borrowing: Default Risk and the Cost of Debt 87

3.4 Putting It All Together 90

3.5 How Much Risk is There in a Mezzanine Product? 92

3.6 Cost Versus Return Dynamics for Mezzanine Products 94

4 The ‘Pricing’ Question and Further Financial Dynamics of Convertible Loans and Preferred Convertible Shares 97

4.1 Pricing Grid for Mezzanine Products 97

4.2 Financial Dynamics of Convertibility in Convertible Loans and Preferred Convertible Shares 99

4.3 Case Study: JJ Bars & Restaurants – Mezzanine for Expansion 121

5 The Mezzanine Product Group and the Financial Industry 139

5.1 The Basel Committee and Framework 140

5.2 The Evolution of the Basel Rules (Basel I and II) 140

5.3 Objectives of Basel III and the Central Themes 144

5.4 Impact on the Use of Mezzanine Products in the Financial Sector 163

5.5 Regulation in the Insurance Sector Impacting the Use of Mezzanine Products 163

5.6 CoCo Bonds – Contingent Convertible Bonds 171

5.7 Annex I – Summary Basel III 177

5.8 Annex II – Basel III – Specifi c Features 178

5.9 Case Study Positions: Mezzanine Financing for Financial Institutions 182

5.10 Case Study 1: Financing the Future of Bank Alhanbra 182

5.11 Case Study 2: Growing the Brazilian Market 184

5.12 Case Study 3: Financing a South African FI which is Part of a Larger Conglomerate Prior to an IPO 186

6 Mezzanine and Project Finance 189

6.1 Types of Projects 192

6.2 Financing Aspects 193

6.3 Securitizing Project Loans 195

6.4 Case Study 1: Developing a Toll Road in Poland (A2) 196

6.5 Case Study 2: Building and Operating a Wind Park 203

7 Real Estate Projects and Mezzanine Finance 211

7.1 Wider Application 212

7.2 Other Applications and Return Issues 214

7.3 Case Study: Financing a Real Estate Company in the CEE Region 220

8 Mezzanine and the Private Equity Space 225

8.1 Drivers of Return 228

8.2 LBO Structure 232

8.3 Tax Implications 247

8.4 Alternative Transactions Using Similar Financing Structures 247

8.5 Summary of Different Compartments in the LBO Structure 249

8.6 Summary of Types of Securities in the Leverage Structure of an LBO 251

8.7 Case Study: Buying Orangina – a Typical LBO with Some Interesting Questions Ahead! 251

9 Mezzanine Products and the World of the Rating Agencies and Accountancy Boards 261

9.1 Rating Agencies and the Debt–Equity Continuum 261

9.2 Case Study: Fitch’s Approach to Rating Hybrid for Corporates 272

9.3 Mezzanine Debt, Rating Agencies, the Regulator and Financial Institutions After 2008 284

9.4 Appendix 1: Equity–Content Maximization and Structuring Criteria at Moody’s 293

9.5 Appendix 2: S&P’s and Moody’s Key Structuring Considerations 294

9.6 The Intricacies of the Accounting World 295

9.7 Demarcation Lines and Product Modeling 309

10 Term Sheets, Inter-creditor Agreements and Debt Restructuring 313

10.1 Groups of Covenants 313

10.2 Review of Key Covenants for Mezzanine Products 316

10.3 Other Covenants 318

10.4 Case Studies: The Good, the Bad and the Ugly 319

10.5 A Comparison of Debt Asset Classes 321

10.6 Case Study: LyondellBasell and Lyondell Chemical Company 339

11 Outlook 353

11.1 Introduction 353

11.2 The Not-Too-Distant Past 354

11.3 New Kids on the Block 355

11.4 The Unitranche Product 356

11.5 Reorganization of Insolvency Laws in Europe 359

11.6 Islamic Finance: Sukuks and Non-Risk-Free Bond Look-Alikes 360

11.7 Origination Sources for Mezzanine 361

11.8 The Role of Governmental Organizations 362

11.9 The Refi nancing Wall: Opportunities and Challenges 363

11.10 Performance of Mezzanine Products 363

Appendix 1 Overview of Term Sheets and/or Model Contracts for the Mezzanine Product Group 367

Appendix 2 First Lien/Second Lien Inter-creditor Agreement 415

Glossary 479

Case Guidance/Solutions 489

Index 505