Subordinated debt: How does it work?

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At present, there are many financing methods to support business growth. Among these is investment by Maxima debt, a source of financing that is of particular interest to SMEs.

Maxima debt: what is it exactly?

Mezzanine debt: what is it exactly?

Nicknamed also ” junior debt “, Maxima debt is a debt subordinated to the repayment of a bank debt known as “senior debt”. In other words, its repayment can not take place until the senior debt is fully paid. It is characterized by a duration between 8 and 10 years.

A mezzo financing tool

It should be known that the term “Maxima” comes from the Italian “mezzo”, meaning “in the middle”. Maxima financing thus has an intermediate character between equity investment (capital) and traditional debt (senior).

Note that Maxima debt holders are called “Maxima”.

In which situations do I use Maxima debt?

This method of financing can be used in 2 main cases:

For the financing of a fast-growing company

Rather than opting for a reinforcement of own funds, the company decides to establish a tranche of Maxima repayable term. This will allow it to postpone the request for capital funding and optimize the dilution for the partners.

As part of a financial package of the LBO type

On the occasion of a business acquisition via a Leveraged Buy-Out (LBO) arrangement, the project’s promoters integrate a Maxima tranche between capital and senior debt. This will increase the leverage a little while increasing the shareholders’ gain on their own funds.

How is a Maxima debt?

How is a mezzanine debt?

As has been said before, Maxima debt is a form of interim financing. As a result, it consists of two investment devices:

  • Debt financing through bonds (securities in the form of a loan).
  • Capital financing through shares (securities representing a fraction of the company’s share capital).

Maxima debt: what are the benefits?

Mezzanine debt: what are the benefits?

Maxima debt is a very advantageous hybrid financing method. And for good reason, it leaves the newly created company or the holding company time to develop. Since it uses the sum of Maxima financing primarily, it is able to keep their capital intact.

Another advantage of Maxima debt: it helps to increase the leverage effect. Indeed, its repayment is in fine, which allows the company to grow and develop before the maturity date of the debt. It also makes it possible to develop a “tailor-made” financial package for the company. In short, it represents a very flexible mode of financing.

It also offers the possibility of benefiting from a longer duration of indebtedness than that of a conventional credit. In addition, it allows the company to enjoy greater flexibility in target management. This is also possible thanks to the low restriction of covenants.

Moreover, this so-called “junior” debt allows the company to have more freedom. The Maxima investor only has a limited co-management right. Likewise, he only sits temporarily on the board of directors.

In addition to filling funding gaps, it also improves the solvency of the company. Moreover, it is able to strengthen the structure of the balance sheet while providing a more flexible remuneration. In fact, it makes it possible to subtract interest from taxes.

The disadvantages of Maxima financing

The disadvantages of mezzanine financing

Financing with Maxima debt nevertheless involves risks that should not be neglected at the time of the financial package. Indeed, compared to conventional financing by credit, it generates higher costs. Especially since it imposes greater transparency. In addition, unlike “pure” equity, the funds it makes available to the company have a limited duration.

The risk also exists in the event that the expected results are not met. For the holder of the debt, a risk of non-repayment is to be feared if the senior debt is not fully paid at maturity. For shareholders, instead of the expected leverage, a chisel effect is to be feared.

The repayment of Maxima debt

The repayment of mezzanine debt

Maxima financing is ultimately repaid, ie once bank credit is paid. At the end of the operation, two alternatives are offered to the Messana:

  • The company repays its loan when bonds mature.
  • He obtains shares of the company according to the conditions defined at the time of financing.

Know that the price of the shares acquired by the Maxima is fixed to the assembly of the operation. But at the end of the operation, the choice comes back to him as to the form of his repayment.

Maxima debt: a tool very different from crowdlending

Mezzanine debt: a tool very different from crowdlending

Although the loan in fine of a crowdlending approach of that of a Maxima debt, these two modes of financing are not comparable. And for good reason, the Maxima financing proposes deadlines (8 to 10 years in fine) which exceed clearly those requested within the framework of a crowdlending. Moreover, for a business acquisition project, the Maxima is the most appropriate tool.

In addition, it is more suited to a private equity transaction and a more complex financial arrangement.

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