Debt Equity an alternative solution ?
…..when banks will not follow you after Covid crisis….
Media & Entertainment (M&E) industry is in a transformation phase as both old and new continue to coexist and globalization of services is remodeling the media and entertainment based landscape. Year after year, digital revenues account for a larger share of the industry’s total revenue. By 2023, it’s expected that digital revenues will account for over 60% of total revenue in the media and entertainment industry[1].
Some companies did not get any support during Covid Isolation. And obviously they have to sort out how to survive. For them, but also others with high debt levels, there is maybe another alternative to private equity….Mezzanine finance solutions.
Mezzanine finance solution is an easily adaptable capital structure to suit both the lender and the borrower as well as to protect the interests of the debt fund investors. Mezzanine debt is situated between the senior secured bank debt and the equity in an issuer or borrower’s capital structure. From an issuer’s perspective, mezzanine debt can reduce overall capital costs by providing additional debt financing that can enhance equity returns.
What type of Loan mezzanine structure?
Mezzanine financings are completed through a variety of different structures, including:
● Term 3 to 7 years
● Ticket size above €5 million
Interests can be
● Cash interest is either fixed throughout the term of the loan or is floating based on LIBOR or other base rate
● A combination of cash and ‘Payable in kind’ – PIK.
The mezzanine deals along with the typical interest payment associated with debt, also includes an equity stake in the form of attached warrants or a conversion feature, similar to that of a convertible bond.
What are Mezzanine Debt instruments?
● Convertible debt, which is debt that converts into common equity at specific terms.
● Participating in debt, where interest payments are combined with participation in equity or convertible with Warrants.
The Mezzanine debt instruments benefits are:
● Attractive risk-adjusted return,
● Downside protection of private structures,
● Reduced volatility from high current coupon.
What are the mezzanine financing investment requirements?
Mezzanine loans will typically assume many of the following attributes:
● Total sales, profits or EBITDA positive (above €2 million) as a measure of cash flow.
● Minimum 5 years of operations and 2 years of audited financial
● Loan Amount:$2 million to $6 million
● Interest Rate: 10-12% paid currently, plus 4-8% in deferred interest
● Term: 5 years interest only; bullet maturity (pre-payments may be allowed)
● Collateral: behind Senior Lender + an unencumbered pledge of owners’ stock
● Other Requirements: Financial Covenants (Operations, Leverage and Liquidity), and Board Observation rights
Why Mezzanine Financing from Luxembourg ?
Luxembourg is the largest European fund domicile and the second largest fund centre in the world after the US.
With its track record in investment funds, its flexible and efficient legal, regulatory and tax environment, Luxembourg is an attractive and strategic location for a debt platform.Shadow banking accounts for 40% of total investment in Europe, although it declined slightly in 2018. According to ECB figures, Luxembourg is by far the largest player in Europe, with € 14 trillion in assets managed in the country. In its July 2019 report on shadow banking, the European Central Bank estimates its weight at 41.900 billion euros for the whole of the European Union. For the euro area, the total is 33,600 billion euros. The term “shadow banking” – finance from the shadows – includes all financing activities of the economy outside the banking sector. Investment funds are therefore a big part of it. Note that the term has a negative connotation, while the activities are completely legal, the ECB has chosen to replace it with the term “non-bank financial intermediation”.
Diversified with global reach
The Luxembourg financial centre offers a diverse range of financial services connecting investors and markets around the world.
The financial centre’s unique cross-border expertise attracts financial service providers from around the globe, while Luxembourg’s capital markets infrastructure makes it the ideal place for companies of all sizes to finance their European and global activities.
Smart and forward-looking
From building Europe’s number one international fund distribution platform, to the listing of the world’s first Green Bond, Luxembourg has been a pioneer for many decades. With its large pool of multilingual talent, the Grand Duchy’s financial centre is a perfect launch pad for new products and services requiring cross-border appeal.
Stable and solid
Luxembourg is politically stable, it has very low public debt, and an economy with proven staying power, consistently outperforming the EU average. The global financial community has recognised Luxembourg’s sustained competitive edge with AAAcredit ratings.
Media & Entertainment Invest (ongoing) is a Luxembourg alternative investment fund to support financing of companies and projects. MEI partners intend to primarily invest in middle market buyouts, companies seeking growth capital and select late stage venture capital opportunities. MEI Partners believes these areas of investment within the private equity asset class can offer the most attractive risk-adjusted returns for investors. MEI Partners seeks to invest in companies with the following characteristics: Sizeable customer base and proven business model, Track records of earnings and cash flow generation.
Media & Entertainment invest in companies at various stages of development and frequently support our portfolio companies with follow-on investments as their financing needs change. We welcome proposals from technology and non-technology companies seeking $1 to $5 million in capital to fund growth plans and projects.
Key attributes Borrowers’ deal flow:
1. Franchise Media and Entertainment sector
2. High free cash flow
3. Above market growth prospects
4. Diverse sources of profitability
5. Leading management teams
6. Appropriate capital structure
For more : pierre.michea@7thdegreeconsulting.eu
[1] The Media and Entertainment (M&E) industry has multiple segments that combine into one vertical: Film movies, Sport (live, post event broadcast), Virtual reality and augmented reality content, Gaming platform distribution, Video On Demand, Streaming for all contents, Pay TV, OTT (« over-the-top »), Online pay apps that distributes media content, New devices (internet Boxes, connected drones), Telecom distribution technologies -5G; IOT (Internet Of Thing: device connected and interacted via internet), interactive technologies and apps for Smartphone/Tablets, SmartTVs, Gaming – video game development, Digital media content marketing, All paid content distribution activities over the Internet, Pay per click services…
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