What is a mezzanine loan agreement?
What is a mezzanine loan agreement?
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally, after venture capital companies and other senior lenders are paid.
What is an Intercreditor agreement?
An agreement among lenders, or classes of lenders, describing their respective rights and obligations with respect to the borrower and its assets. This agreement can also specify how payments from the borrower are to be applied among the lenders. …
How do you structure a mezzanine loan?
Mezzanine financing is a flexible form of long-term capital which includes the following structures:
- Subordinated debt plus an “equity kicker” in the form of warrants to purchase common stock;
- Subordinated debt plus an equity co-investment;
- Subordinated debt without equity;
- Convertible debt; and.
- Preferred equity.
How do Intercreditor agreements work?
What is an Intercreditor Agreement? In a typical scenario, there are two creditors involved in a given agreement – a senior(s) and subordinate (junior) lender(s) Capital stack ranks the priority of different sources of financing. Senior and subordinated debt refer to their rank in a company’s capital stack.
How are mezzanine loans secured?
A mezzanine loan is secured by a pledge of the equity of the entity (such as a limited liability company) that owns the mortgaged real estate. If the mezzanine borrower defaults, the mezzanine lender forecloses and becomes the new owner of the pledged entity.
What happens if you default on a mezzanine loan?
If the mezzanine borrower defaults under the mezzanine loan, the mezzanine lender may foreclose on its collateral (ie, the equity interests pledged to it), resulting in the mezzanine lender becoming the borrower under the related mortgage loan.
Why do you need an Intercreditor agreement?
The key purpose of the intercreditor agreement is to ensure that each type of debt used in the transaction has a risk commensurate with its pricing, ie senior debt (which has a lower return) has less risk than the more expensive junior debt.
What is the purpose of Intercreditor agreement?
The principal purpose of the intercreditor agreement is to contractually regulate the relationship between the different types of creditors. Arrangements which relate to the first issue are about ‘subordination’ and arrangements which relate to the second issue are about ‘priority’.
How is mezzanine debt secured?
What is a unitranche structure?
Unitranche debt or financing represents a hybrid loan structure that combines senior debt and subordinated debt into one loan, allowing banks to compete better against private debt funds. Unitranche debt is typically used in institutional funding deals.
What are some key considerations of an Intercreditor agreement?
Key Provisions to Focus on when Negotiating Intercreditor…
- Identity of Mezzanine Lender.
- Foreclosure of Pledged Equity Collateral.
- Cure Rights.
- Purchase Option.
- Consent Rights.
- Financing of Mezzanine Loan.
- Mezzanine Lender as “Affiliate” of Mortgage Borrower.
How is mezzanine debt repaid?
A bank can now refinance the mezzanine debt loan on the strength of traditional collateral. Through a sale of the company – if the value of the company has grown enough and the timing is right, the owner can sell the company and repay the mezzanine lender through the proceeds of the sale.
What happens in an intercreditor agreement for a mezzanine loan?
According to David E. Watkins of Heitman Real Estate Investment Management in Chicago, the mezzanine financing provider typically negotiates for several elements in the intercreditor agreement. The big three are listed below: Notification of non-payment or default on the first mortgage.
What is the purpose of the Intercreditor agreement?
The intercreditor agreement is negotiated by the first mortgage lender and the mezzanine provider. The purpose of the intercreditor agreement is to outline communication channels and provide guidance between the first mortgage lender and the mezzanine investor.
Can a senior lender participate in a mezzanine financing?
In this case, and especially when the mezzanine financing provider is an experienced real estate investor, the first mortgage lender will often welcome their participation. The depth of experience of a reputable mezzanine financing provider can be advantageous for senior lenders, especially if the borrower defaults.
How does the LMA form of intercreditor agreement work?
The LMA form of intercreditor agreement gives mezzanine lenders (as well as sponsors) a cure right by injecting new money as equity in order to cure a breach, such as breach of a financial covenant in the senior debt.
