Lenders rewrite their terms of engagement
LBO market braced for messy restructurings
MEZZANINE FINANCING IS often described as a sponge – essentially a flexible buffer between the senior debt and the equity. In recent years, this description became unintentionally apt as mezz was relentlessly squeezed by larger and larger senior debt tranches with growing amounts of second-lien debt inserted directly underneath them – and above the mezzanine layer.
Between 2004 and 2007, senior debt was abundant and cheap and leverage multiples high – all of which spelled bad news for mezzanine. A privately traded, comparatively expensive, amortizing instrument with limited prepayment penalties can hardly compete in a raging-bull credit market where senior and second-lien lending was being stretched all the way down the capital structure.
"There were deals where the senior debt went beyond where even the mezz should have stopped," notes Martin Stringfellow, managing partner at mezzanine lender Indigo Capital.
But things are very different now. The LBO market has been one of the biggest casualties of the turbulent credit markets. According to Standard & Poor’s LCD, LBO volume in the US has fallen from $153 billion in the second quarter of 2007 to $47 billion in the first quarter of 2008.
