In early September 2010, MidCap Advisors was retained by a fast growing specialty manufacturer to help raise $5MM in growth capital.  The company generates approximately $12 million in revenue and $1.8MM in EBITDA.  Using their senior lender for growing working capital needs, after a discussion with the shareholders we determined that securing subordinated debt or mezzanine debt was the best way to obtain the required capital and minimize the amount of equity they would need to give up.

We contacted 30 mezzanine lenders during the first two weeks of September.  For companies with profitable operations and solid growth prospects there is a great deal of capital available.

After only 3 weeks of work, we collected over a dozen financing proposals.  The following is what we learned.

• Mezzanine lenders are looking for a total IRR of 21-26%.
• Current interest rates are 11-13%.
• PIK or payment in kind interest rates are 0-3%.  PIK is a form of interest that is charged but not paid in cash. Instead the interest payment is added to the principal amount of the note.
• Warrants are between 6-8%.  Warrants provide the lender with common stock in the company.
• Closing fees between 1% and 2%.
• Most lenders were comfortable with a 3.5 to 5 term and were willing to accept a bullet amortization.  A bullet is when the loan is interest only with principal repaid in full at the end of the term.

We reviewed all of the proposals with our client and helped them do an "apples to apples" comparison based on a discounted cash flow analysis of the total cost of capital.  Our analysis took into account the amortization schedule as well as the current interest rate, the PIK or payment in kind interest, warrants, and closing fees proposed by each lender.  Because of the competitive process we ran, our client was able to make an informed decision based on multiple proposals. The transaction is scheduled to close by the end of September.

If you would like detailed information about the various terms and structures available in today's highly competitive capital market, please contact the MidCap Advisors office nearest you.