Nigel Strachan (pictured), head of business development at Kleinwort Benson’s corporate services business in Jersey and the new chairman of the Jersey Funds Association, sees new opportunities for mezzanine finance to pick up the slack where leverage from traditional sources is thin on the ground.
“Mezzanine finance is essentially a type of finance that provides a solution between bank debt and equity,” he says. “It is a solution that is a hybrid in that it is debt in nature, but it also in some instances has warrants attached to it, so there is an equity element.”
The economic crisis of 2007 and 2008 greatly influenced the mezzanine market along with the entire capital structure, according to Strachan, with the series of bankruptcies, mergers and government bail-outs leading to a big re-evaluation.
“A lot of those events were linked to excessive levels of leverage used, and this was bound to have a knock-on effect on the mezzanine market and on the leverage market as a whole,” he says.
“In 2009, just when we thought the worst was behind us, RBS announced the biggest loss in UK corporate history, and then in March the government stake in the Lloyds banking group became a majority shareholding.
“That really affected the style of the mezzanine model, the key players. Now the market is returning to more club-style deals that were common pre-credit bubble. There is an opportunity for funds that do have dry powder to invest in companies that are essentially good but have a poor capital structures and are burdened with excessive leverage.”
A recent international conference in Paris saw some of the biggest players in the mezzanine market, including Kleinwort Benson, ICG and MML Capital Partners, Park Square Capital, Babson Capital and KKR, discuss progress so far in 2010.
Says Strachan: “We asked whether we are back to business as usual yet and looked at the competitive landscape – whether banks are lending again and what that means for mezzanine’s place in the capital structure, and whether the end of the private equity life cycle in 18 months will provide an opportunity for mezzanine to step back into the capital structure.”
Mezzanine experts are also reflecting on whether the defaults of 2008 have now normalised, what the lessons learned are, and whether there is a role for mezzanine in the refinancing of leveraged buyout debt.
“The Euro zone backdrop at the moment is interesting considering that we don’t have significant top line growth yet, and particularly in the PIGS states there are significant debt repayment issues,” Strachan says.
He believes that mezzanine investors will in future still target the same types of returns, but perhaps not in the traditional way.
“It always was a flexible solution in the capital structure and I guess we need to adapt,” Strachan says. “Good companies will always need leverage and where current leverage is clearly not what it was, there is an opportunity for mezzanine to fill the gap.”
