- resources in finance

The Calgary CFA Society

Mezzanine Finance

Prof. Ian Giddy, New York University

What is Mezzanine Finance?
Mezzanine finance is corporate debt that, from a security perspective, ranks behind senior debt finance such as traditional bank loans and overdrafts, but ranks in front of equity investment. This increased risk and the fact that there is little or no security available, means that a higher investment return is required. The return may be in the form of a higher interest rate, or equity participation, or some other form of deferred payout.

The Course
This two-day interactive course offers a practical study of the techniques and pricing of mezzanine, subordinated and equity-linked debt with a special emphasis on smaller and private companies.

The workshop will include case studies of actual deals, showing how mezzanine debt can serve as a catalyst to help an enterprise or project to get started or raise capital. We'll use lecture-discussions, spreadsheet analysis, deal memorandums and hands-on exercises. These will give participants the opportunity to demonstrate their understanding of techniques that can be employed in structuring transactions in the future . 

Some Features of the Course

What can participants expect to gain from this course?

  • Learn or update knowledge of required rates of return, cost of capital, and acquisition finance
  • Identify the key elements of mezzanine finance
  • Be able to identify appropriate subordinated and mezzanine financing techniques for particular situations
  • Work out appropriate rates of return for risks taken, and how to structure the payment of these returns
  • Perform a cash flow analysis to model the senior, mezzanine and equity paydown
  • Learn post-deal mezzanine loan management, restructuring and exit decisions.
Workshop participants will be provided with a package of materials useful for developing mezzanine financing proposals, including pertinent articles, case studies based on actual deals, and sample spreadsheets.

Suggested Pre-Course Reading

Outline of Workshop



Day One Corporate Finance: Debt, Equity and Mezzanine 
  • What is Mezzanine Finance, and where does it fit into a company's financing structure?
  • Why mezzanine for private companies? Why would a bank participate in more than one level of the capital structure?
  • Introduction to The Mezzanine Matrix
  • Mezzanine example: Dubrovnik Eyewear
  • The investor's required return on debt and on equity
  • The corporate cost of funding: techniques of effective cost analysis
  • Cost of capital analysis (Example: WACC for a private company)
  • Cost of funding with debt, equity and hybrids
  • Use and pricing of debt-with-warrants
  • Case study: Singapore Land warrant-linked loan facilities. Why did this company use warrants in its debt financing?
  • How would we estimate a company's effective cost of financing? Application to Dubrovnik Eyewear)
  • Putting it together: WACC with convertibles and hybrids
  • Convertible loans and notes
  • Case study: Songa Convertible. We consider a convertible bond to work out its pricing and the effective cost to the issuer.
  • Convertible preferred shares
  • Case study: Sealed Air Convertible. We dissect a convertible to work out its pricing and the effective cost to the issuer.
  • Callable debt: pricing the borrower's call options and prepayment rights
  • Application: Deep Ocean. How are these options valued?
  • Negotiating mezzanine and hybrids: what are the key requirements? When should options be included?

Mezzanine Financing Techniques

  • Checklist of senior and subordinated financing techniques
  • Senior secured debt in emerging markets -- what does it mean?
  • Application: Example of terms and conditions of a senior secured loan
  • Global default and recovery tables
  • Second lien versus senior-sub mezzanine
  • Case study: Second Lien Facility. How would you adapt this term sheet to your client's needs?
  • Sale-and-leaseback financing
  • Step-up rates, PIKs, participations, warrants, preferred
  • The structure and pricing of sub debt and warrants
  • Example: Woodstream's Mezzanine. What is the effective cost to the issuer of this mezzanine debt issue?
  • Terms and conditions of a mezzanine termsheet
  • Case study: The Woodstream Termsheet. Examine this termsheet. Which features would you, as investor, insist on? Where would you be willing to give way?
  • The warrant financing spreadsheet
  • Seller notes: a useful financing instrument
  • An alternative to warrants: valuation-linked exit
  • Issue: how should documents define exit value? What options to include?

Case Studies

Gateway: WACC in India
Singapore Land
Songa Convertible
Convertible Preferred
Sealed Air Convertible
Deep Ocean Callable
Senior Secured Facility
Second Lien Facility
Woodstream Mezz
Woodstream Termsheet



Day Two

Mezzanine and Debt Capacity
  • Debt capacity analysis for private companies
  • Case study: Spacemasters. A private company is looking for a means of financing an expansion in South Africa. Participants estimate the company's debt capacity and the owner's financing options.
  • Debt capacity analysis and computations for leveraged finance
  • The 12-step method
  • Focus: synthetic ratings and debt pricing
  • Modelling the debt paydown cash flows
  • Focus: exit strategies
  • Case study: ISS
  • Introducing mezzanine: the financing catalyst
  • How to make a mezzanine deal work for all parties
Participation Mezzanine and Hybrid Capital
  • Performance-linked participation debt: an alternative form of mezzanine
  • The participation financing spreadsheet
  • Application: Frutas Nicas. What rate of return can you project for DEMF's investment in Frutas Nicas?
  • Setting targets and linking payout to performance
  • The language of the linkage
  • Case study: Shanghai Solutions. What are the advantages and disadvantages of the Contingent Payment Unit in this deal? What are the exit possibilities?
  • Terms and pricing of the mezzanine in no-liquidity situations
  • Evaluating a funding proposal with revenue-linked mezzanine debt
  • Case study: Suriname Hydropower Services. Can you model the rate of return on the senior and mezzanine funding for this privatization investment?
  • Discussion of appropriate linkage: turnover, cash flow or profit?
  • Post-deal mezzanine management
  • Exit and ownership transition
  • Review: the cost of equity capital funding
  • Hybrid capital notes and senior equity finance
  • Case study: Lottomatica
  • Perpetual notes, preferred and convertible preferred stock
  • Capital finance: temporary or permanent?
  • Exit possibilities and drag-along rights
  • Summary session: Review and analysis of mezzanine choices


Case Studies
Shanghai Solutions
Suriname Hydropower
US Bancorp



Additional Resources
Background Reading
Introduction to cost of capital
Second Lien Loans
Mezzanine Finance 1
Mezzanine Finance 2
How to Survive an Earnout

Useful Links (industry ratios) (bond ratings) (corporate bond spreads) (corporate financial ratios) (option valuation) (convertible bond calculator)
suriname solution.xls
About the Instructor
Dr. Ian Giddy, born in South Africa, has taught finance at NYU, Columbia, Wharton, Chicago and in over 40 countries worldwide for the past three decades. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, he has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous corporations and financial institutions in North and South America, Europe, Asia, the Middle East and Africa. As a banker and consultant he has been involved in the growth of the structured finance market in the USA, Europe and Asia. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance, Global Financial Markets, Asset Securitization in Asia and The Hudson River Watertrail Guide. He and his wife are the founders of Cloudbridge, a nature reserve in Costa Rica. | | | | | contact
Copyright ©2008 Ian Giddy. All rights reserved.