Advertisement
YOU ARE HERE: LAT HomeCollectionsJunk Bonds

O.C. BUSINESS PLUS

'Mezzanine Debt' Powering More Corporate Deals

March 01, 2000|From Bloomberg News

The $240-million buyout of Costa Mesa tool seller White Cap Industries Inc. hit a snag recently when the investor group of managers and a Los Angeles merchant bank couldn't raise the capital needed by selling junk bonds.

So the merchant bank, Leonard Green & Partners LP, shelved plans to raise $120 million in high-risk corporate bonds and instead obtained $75 million in "mezzanine debt" from Northwestern Mutual Life Insurance Co.

Buyers are turning more to mezzanine funding, which is privately placed unsecured debt that can be converted into stock, because investors are becoming wary about junk bonds and the record default rates in U.S. corporate debt.

Defaults hit a high of $44.6 billion last year, and small bonds aren't trading easily. Investors' fear of being caught with poorly performing bonds has played right into the hands of mezzanine suppliers.

More and more, mezzanine money is helping small companies and buyout firms, like Leonard Green, salvage financing plans that have gone awry.

"There's no public bond market for this size and type of deal right now," said Eric Swanson, co-head of senior debt origination at Donaldson, Lufkin & Jenrette Inc., which arranged the financing.

"It's mezzanine debt or an expensive short-term loan that you may or may not be able to replace down the road," Swanson said.

The risk of being unable to refinance a short-term loan is leaving buyout firms with mezzanine debt as the only real alternative to junk bonds.

That's prompted investment banks like DLJ, Merrill Lynch & Co. and Goldman Sachs Group Inc. to set up new mezzanine funds totaling more than $4 billion in the past six months.

For these banks, mezzanine debt is seen as an accompaniment to other products, including loans, stocks and public bonds, and they are hoping it will help them win more business.

Some companies haven't even attempted to issue bonds, opting instead for mezzanine debt and more senior bank loans. Among them are American Reprographics, a small privately held reproduction company being bought by Code Hennessy & Simmons III LP, and artificial sweetener firm Tabletop Inc., which is being bought by an investment group that includes Pegasus Capital Advisors LP and Dell Computer Corp. Chairman Michael Dell for $570 million.

As a result of the demand, mezzanine debt made up 6% of the financing used for leveraged buyouts last month, up from 4.7% last year, according to research firm Portfolio Management Data. High-yield bonds made up 15% of buyout financing last year.

"It's as good a time as ever to be involved in mezzanine," said Salvatore Gentile, a managing director for Blackstone Group Inc.'s new mezzanine fund.

Blackstone, known for real estate and private equity funds, raised $750 million in its first mezzanine fund for institutional investors at the end of last year. Gentile said investors in the fund can expect an annual return of 20%, twice that of a typical junk-bond fund.

Advertisement
Los Angeles Times Articles
|
|
|