Using Mezzanine Loans for Leveraged Buyouts

Mezzanine loans help businesses that are looking to finance a development project get access to funding. A mezzanine loan is a form of financing that cedes some ownership or financing to a lender in exchange for the leveraged value of an existing property and its present loan amount.  A mezzanine loan is a common financing tool used by businesses with property that is in need of development.

A mezzanine loan can be used to finance a leveraged buyout.  A leveraged buyout uses securities and other capital assets of one company to put together the funding necessary to purchase or acquire another company.  Mezzanine financing through loans represents an aspect of the pool of capital needed to accomplish the acquisition.

The process involved in using mezzanine loans for the purpose of leveraged buyouts includes the following steps.

Step 1: Determining the Amount of Funding Needed

A financial underwriter is going to work with the company in order to make a determination as to the amount of funding that would be available through a mezzanine loan. This is done through an analysis of the acquiring company’s debt balances and determining the total value of the property being held. This includes stabilized and non-stabilized property as well as viable new developments. Each of these things can be outcomes of a mezzanine financing plan.

Step 2: Apply for Mezzanine Loan

Once the amount of capital that can be raised through mezzanine financing has been calculated, a lender is brought in to help make arrangements for the loan. The financing company will perform its own analysis and due diligence to determine the feasibility of the development and the advisability of making the loan, in connection with the lender’s risk.

Loans based on a current income producing property are going to pose less risk than those that are value-add or new development.

Step 3: Apply Loan Proceeds to Overall Financing Package

When the loan has been approved and the company receives the loan proceeds, other forms of capital are raised to complete the amount needed for the buyout.  This may include a secondary offering of stock of the company or the issuance of preferred shares that do not have voting rights. 

Mezzanine financing is an aspect of the total funding used to accomplish the leveraged buyout of one company by another.  Because mezzanine loans are a debt/equity hybrid, consideration must be given to the amount of debt raised and the impact that it will have on the company’s financial position.