Issuance of mezzanine finance soars

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Mezzanine: Refers to a kind of financing that is a hybrid of a bank loan and equity investment. It often involves the sale of unsecured long-term debt plus warrants to buy equity in the company, generally in five to seven years.

Issuance of mezzanine finance soars

By Paul J Davies
Oct 9, 2006

Issuance of mezzanine finance, the deeply subordinated loans increasingly used in private equity buy-out deals, is set for a record year and is only just shy of the total issued in all of 2005, according to S&P LCD, the loan market research group.

The EU1bn mezzanine tranche last week from Casema, the Dutch cable group sold in July by Carlyle, Providence and GMT Communications to Cinven and Warburg Pincus, took issuance for the year to EU8.4bn - 38 per cent ahead of the first three quarters in 2005 and only just short of the EU8.9bn total for that year.

Mezzanine debt has proved attractive for yield-hungry investors in the debt markets such as hedge funds and some collateralised loan obligations, which pool together groups of loans and sell credit notes with varying risk profiles.

However, the strength of demand for the debt has seen average spreads contract over the first nine months of this year by 74 basis points to 309bp over Euribor, the risk-free rate, at the end of September, according to S&P LCD.

The Casema issue dwarved the next largest mezzanine financing ever seen in Europe by almost 50 per cent. The record was previously held by Gala, the bingo group, which placed £460m of mezzanine last December.

Use of mezzanine is growing within deals as well, with mezzanine financing making up on average 11 per cent of the value of a leveraged buy-out this year compared with a historical average of about 9 per cent.

The expansion of all the different classes of debt financing is what is allowing private equity groups to increase their leverage and put less of their own money into deals.