Financing The Lbo;

 

"Financial engineering is a lot like building a bridge," says leveraged buyout specialist Ted Stolberg of Weiss, Peck & Greer. "You can build it any way you like as long as it doesn't collapse when heavy trucks run over it and you can add additional lanes when you want more traffic to go over it. And when it's all done, it should be a thing of beauty, like the Golden Gate."

Sounds simple enough, doesn't it? Not always.

Typical was the architecture of a $27.5-million LBO involving TransLogic Corp., a Denver manufacturer of conveyer systems. It began with $1.5 million in equity put up by WPG and the managers, to which was added (1) a $10-million revolving loan from a bank, (2) $6.2 million in industrial revenue bond proceeds from a second bank, and (3) an $8-million chunk from a Massachusetts insurance company.

Usually, as a deal gets bigger, so does the financial construction crew -- and the help doesn't come cheap. Indeed, the terms behind some of the financing components make loan sharks look like goldfish.

Consider the "mezzanine" financier. This enterprising character, usually an insurance company, takes a subordinated debt position between the senior secured lender and the equity interest (and hence the name mezzanine). Maybe the view isn't quite as good as the senior lender's, but it's not too bad. In exchange for a long-term note, the mezzanine money gets an interest rate of three or four points above the prevailing prime rate, plus an equity kicker that can run as high as 25% of the company.

More profitable is the lender who provides the "bridge" financing that holds until a long-term lender is found. While mezzanines normally do not require principal repayment for roughly seven years, the bridge expects to be repaid in less than one year. And just so they won't get bored waiting, bridge financiers are given an interest rate of four to five points above prime and hefty equity kickers generally ranging from 10% to as much as 25%. In addition, the bridge financier charges sizable up-front fees for the service. Not surprising, over the past three years bridging has turned into a lucrative sideline for several large brokerage firms.