Mezzanine Financing: Tools, Applications and Total Performance

Contents

Preface

1 Introduction

1.1 The Bi-polar World of Finance

1.2 Demarcation of the Product Group

1.3 Positioning and Use of Mezzanine Finance

1.4 The Risk–Return Conundrum

1.5 Providers of Mezzanine Finance

1.6 The Market for Mezzanine Products

2 The Mezzanine Product Group

2.1 Categorization of the Mezzanine Product Group

2.1.1 Subordinated debt with step-up rates

2.1.2 Subordinated debt with PIK interest

2.1.3 Subordinated debt with profit participation

2.1.4 Subordinated debt with warrants

2.1.5 Convertible loans

2.1.6 Preferred shares

2.1.7 The wider space of hybrid instruments

2.2 Case Study: The Kratos Company – Merger Finance

2.2.1 Kratos Inc. – A closer look

2.2.2 Case guidance

2.2.3 Datasets

3 The Implicit Cost of Mezzanine Products

3.1 Measuring Risk

3.1.1 Risk and return expectations

3.1.2 How do you measure risk?

3.1.3 What risks do we compensate for?

3.2 Types of Risk

3.2.1 Diversification as a rule reduces or eliminates firm-typical risk

3.2.2 Modern financial theory is eyeing a certain type of investor

3.2.3 Measuring market risk: the CAPM (capital asset pricing model) theory

3.2.4 The capital asset pricing model

3.3 Equity Risk Versus the Risk of Borrowing: Default Risk and the Cost of Debt

3.3.1 What are the drivers behind default risk?

3.3.2 The risk-free rate

3.4 Putting It All Together

3.5 How Much Risk is There in a Mezzanine Product?

3.6 Cost Versus Return Dynamics for Mezzanine Products

4 The ‘Pricing’ Question and Further Financial Dynamics of Convertible ...