Uncertainty surrounds Euro’s mezzanine return

Author: | Published: 31 Aug 2011
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Mezzanine financing is returning to the European market, following Securitas Direct’s €394 million ($568 million) mezzanine loan, and the further need to refinance large bridge loans.

But lawyers are unsure how long the trend will last and how restrictive the loans’ covenants will be.

Securitas, a Swedish security provider, obtained the loan from Morgan Stanley and five other banks to help repay its bridge financing. The company is reported to have secured the loan as covenant-lite, according to sources close to the deal.

“This [Securitas deal] flies in the face of what the mezzanine community has been working towards since 2010’s RBS Worldpay deal, which was seen as the template for the mezzanine, with improvements to the senior terms,” said one London-based partner. “Securitas has driven a coach and horses right through that,” said the partner.

Typical mezzanine allows for more bank-friendly terms, as bank loan maintenance covenants, not bond style incurrence covenants.

The Securitas loan may have featured covenant-lite terms because the company also has a bond portion, and was trying to avoid subjecting itself to two tests – one under the mezzanine, one under the bonds. “They were seeking consistency under their facilities,” said one layer.

However, the position on the intercreditor could easily have followed the traditional mezzanine structure established by Worldpay, with regards to enforcement, the release of security and the relationship between the senior and mezzanine portions.

Despite Securitas, it’s expected that mezzanine lenders will have more clout, not less in the coming months. If conditions do worsen, some mezzanine lenders could include more restrictive covenants.

These can include requirements that the borrower is not to borrow more money, refinance senior debt from traditional loans, or create additional security interests in the company's assets.

“Obviously that would require the senior’s agreements in some cases,” said one source. Some financial institutions such as Morgan Stanley and Goldman Sachs offer senior and mezzanine debt facilities, albeit from within discrete departments.

“Anything could be up for grabs,” said the lawyer.

However, although mezzanine structures have appeared because macro-economic factors have deterred high yield investors, if the situation worsens further then some believe there will be no economic incentive for mezzanine lenders either.

Similarly, if the high yield market does return, mezzanine will also be usurped due to its higher interest rates of 12 to 14%.