Mezzanine Finance Offers NZ Borrowers Lots of Flexibility
Mezzanine finance is a loan that uses the equity interests of the borrower to give security to the pledged amount. The borrower has to be an owner of the pledged equity and this form of financing is very common in real estate to help developers to complete projects or other deals. It is also use in operating businesses.
Mezzanine financing is considered similar to a second mortgage which is normally secured by a fraction of the ownership in any property. A mezzanine finance loan is secured by the stock of the borrowing company and leads to fewer legal problems of it being acquired or taken over. They are entered into only when the borrower has ownership of the property, and if it is an income producing property, this income can be used to pay off the loan. This makes mezzanine finance a very popular method by which landlords, owners of office buildings or other commercial property, obtain additional finance.
Mezzanine finance, if properly structured, can help a borrower to acquire all the needed funding for buying out an acquisition. It must be properly structured and all financial presentations must be made to the lenders to convince them of the viability of the project. Lenders who offer such finance pay more attention to the credit worthiness of a company and its ability to maintain a stable cash flow. They are more concerned with getting back the principal loaned out and get their returns through any interest rates charged, and any returns on the dividends of the equity pledged with them. The loan does not have to be protected by any assets, and lenders are partial to companies that produce stable cash flows that do not go through any cyclical variations.
Providers of mezzanine finance in NZ depend on the management of the borrowing companies to produce the necessary cash flows that can ensure repayment of the loan amount and interest. They will therefore not have any interest in taking on a management role, even though they do have a lien on the equity and will wait patiently for the loan period to lapse before taking any other action. These loans are normally provided for periods of 1 to 7 years. Personal guarantees are rarely asked for. However, interest rates are higher than a bank loan but this is the price to cover any risks to the lender. Loan amounts are limited to a multiple of the earning before tax, and the lower the multiple the greater are the chances of getting such loans on advantageous terms.
Businesses use this method of financing to launch new products, expansion of markets or even to acquire new businesses or properties. A common usage is for mezzanine finance for property development. Payments of loan amounts obtained against mezzanine finance are not required to be paid till the loan period matures, and this does allow a business to reinvest any cash flow generated and not use it to return part of the capital. Mezzanine lenders do not interfere in the running of a business, even in difficult times, and as such owners of a business never lose its control. The amount available through mezzanine finance are also substantially higher than other loans based on cash flow, and this does give a business owner a far bigger scope for facilitating expansion and growth.
Description of mezzanine financing
Mezzanine financing is more expensive than first mortgage financing and returns are generated from participating in the equity of a project. Interest payments on this financing have to take a preference over any distributions made against equity. It is possible to push all payments to dates nearing maturity, in which case a greater amount of equity may have to be given up. In such cases interest payments do get compounded and add substantially to the amounts due.
Mezzanine financing allows companies that have a strong historical performance to use the leverage of this efficiency to get large amounts of money to further help growth and profitability. It can be one in which regular interest is paid periodically, added on to the loan amount to be made out as a balloon payment at the end of the loan period, or where the lender is given an option to convert the amount into equity. This gives the borrowing entity far more flexibility than a bank loan or by selling an equity stake at the beginning of the arrangement. Returns for these lenders are between 18 and 21% and they do offer loans that can go as high as 90 percent of the actual requirement for a project.
Obviously with numbers like these both sides are going to benefit. The borrower has more flexibility and the lender makes a healthy return.
Among the top mezzanine finance companies in NZ is Global Pacific Finance. They are located in Auckland but do provide funding services across New Zealand. They have provide funding for business expansion, property development and financing the purchase of capital equipment among many others. If you need flexible commercial finance in NZ, take a look at mezzanine finance today.
Click here for details of the Global Pacific finance options.