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Mezzanine finance: Lenders rewrite their terms of engagement

One of the many things that got forgotten during the LBO boom was that mezzanine is a risky product.

Another fine mezz

LBO market braced for messy restructurings

It has a blend of equity and junior debt characteristics and is deeply subordinated. At the height of the market, mezz loans were being placed at 8% to 9% which, not surprisingly, many funds say simply did not reflect the risks involved. Mezzanine’s revival in the wake of the credit crunch has seen leverage pull back by a full turn and pricing harden by an average of 1%. Upfront fees for senior tend to range from 2.25% to 2.375% and for mezz are more like 2.5% to 2.75% or 3% in some cases.

Considering the volatility that has persisted in the loan market it is hardly a surprise that pricing is inconsistent. "There is now a big variance in mezz pricing," says Nick Soper, head of debt advisory at Investec Investment Banking in London. "We are mainly seeing pricing north of 1,000 basis points." The movement in pricing is relatively mild when compared with the senior loan market where pricing got down to 225/275/325 basis points for term loans A, B and C; readjusted to 250/300/350bp at the beginning of this year and by April was up to 275/325/375bp.

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