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Mezzanine Debt
Mezzanine Debt
Senior Debt
Repayment Start Repayment Term Final Maturity Date Facility Limit Interest Margin Date Years Date AUD M % p.a. Applied 4.56 01-Jan-09 6.00 Yr(s) 31-Dec-14 90.00 Constr 1.75% Calculated 4.56 Op Y 1 1.75% Delta Op Y 2 1.75% Op Y 3 2.00% Op Y 4 2.00% Op Y 5 2.00%
Establishment of DSRA/c
AUD M
Mezzanine Debt
Repayment Start Repayment Term Final Maturity Date Facility Limit Fixed Interest Rates Date Years Date AUD M % p.a. 01-Jan-09 7.00 Yr(s) 31-Dec-15 30.00 10.00%
Construction funding
Construction cost is funded in an order of Senior Debt (limit $90M), followed by the Mezzanine Debt (limit $30M) and then Equity, as illustrated in the charts below. This example illustrates that the Senior Debt provides 70% of the funding allocation. Mezzanine Debt and Equity make up the remaining 30%
Construction Funding (M)
30.00
Equity
Typical structure of mezzanine debt: Fixed rate Aggressively priced/higher interest rate (in consideration for making a loan which is not first ranked in security) Long-term Deeply subordinated (with constrained enforcement rights when senior debt is unpaid) Secured (on second rank basis) or unsecured Typically provided with lesser due diligence compared to senior debt
There has been growing existence of mature institutional markets providing mezzanine debt as part of project financing structures.
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Interest paid on Mezzanine debt will usually be tax deductible, dividends are not The senior creditors benefit from the cushion of the junior debt Debts under mezzanine arrangements are often payable after certain years, delaying the obligation for the borrower to repay the debt.
Dec-08 Jan-09 Dec-08 Mar-09 1 1 Apr-09 Jul-09 Oct-09 Jun-09 Sep-09 Dec-09 1 1 1
Cashflow Statement
EBITDA Interest Income Working Capital Movement Operational Cashflow 8.00 8.00 7.45 7.45 7.99 7.99 7.99 7.99
CapEx
Construction CapEx Senior Debt: Interest during Cons Mezzanine Debt: Interest during Cons Establishment of DSRA/c Tax Total Cashflow Before Funding
8.00
7.45
7.99
7.99
Funding
Senior Debt Mezzanine Debt Equity Total CFADS 8.86 8.57 17.43 8.00 7.45 7.99 7.99
Interest
All-in Rate All-in Rate Interest % p.a. % p.p. AUD M 10.00% 10.00% 10.00% 10.00% 10.00% 2.38% 2.40% 2.43% 2.43% 0.71 0.70 0.69 0.67
Senior DSRA/c: Addition Senior DSRA/c: Release Cash Available for Mezzanine Debt Service
Conclusion
Mezzanine financing offers an important form of finance for some transactions. Mezzanine debt arrangement can fill the gap between the available senior debt and equity, and it has potential to provide higher equity returns to the sponsors. However, there is a lot of scope for conflicts of interests between senior debt and mezzanine debt lenders. An inter-creditor agreement is an important way to give clarity as to the relative rights and obligations of the different classes of lenders arrangements. To learn more see our Mezzanine Debt Workshop.
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