This chapter, before we're ready to conclude on the topic, will take us into the somewhat more legal side of mezzanine finance. Also known as contractual finance, the pricing of any mezzanine instrument is a function not only of creditworthiness and equity risk which the instrument is exposed to (i.e., subordination), but also how the instruments are legally structured. In that sense, the product group is made up of boilerplate (or master) instruments, which can be further tailored by using a certain set of covenants, thereby reducing or expanding the effective riskiness of the instrument in a particular deal.
An individual review of all products and their term sheets would be extremely academic and would front-load the discussion with facts rather than a perspective on the product group. However, I have opted to include a model contract for each product, which can be reviewed on the individual merits of each of the products, in Appendix 1 of this book.
In this chapter, I will focus more on the contractualized framework of the position of mezzanine instruments, the role of inter-creditor agreements and the position of mezzanine investors in cases of (un)voluntary debt restructuring. By doing so, I will still (try to) review a significant (and most relevant) part of the covenant spectrum, but framed more towards application in certain factual situations, and focused towards the implications of certain choices.