Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Venture capitalist source of financing MBO
- This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- June 22, 2017 at 11:54 am #393788
Below are examples of financing packages after discussions with the VC and the bank about financing a MBO for HH.
Equity invested by managers ($1 share carry’s 1 vote) $10M
Equity invested by VC ($1 share carry’s 1 vote for every 10 shares) $30MBorrowing from VC- unsecured- 10% interest rate redeemable in 5y $30M
Borrowing from Bank- secured- 6% interest rate redeemable in 5y $30MTotal $100M
Which 2 of the following about the financing packages are wrong. By process of elimination it is clear that 1 and 3 are true, therefore 2,4 must be false but I would like to understand the theory for point 4.
1. Managers own enough of the equity to enable them to vote and carry decisions. (TRUE- THEY HAVE 10M VOTES)
2. VC own enough of the equity to prevent the managers from voting and carrying decisions in a general meeting. (FALSE- THEY HAVE ONLY 3M VOTES. MANAGERS HAVE 10M VOTES)
3. If HH were to go into liquidation the bank borrowing would take priority over all the other sources of finance. (TRUE, DEBT HAS TO BE REPAID 1ST)
4. The bank borrowing interest rate is lower than that on the borrowing from the VC because the bank borrowing is a mezzanine loan.(FALSE)
What is a Mezzaine loan? I read in my book that it is a form of debt/ junior debt which is secondary to senior debt? If it is a junior form of debt does this mean that it is not as risky as normal debt.. therefore should have a lower interest rates than 6% and this is why point 4 is incorrect because if it was a mezzanine loan it would have a lower interest rate? Also what are the other characteristics of a Mezzaine loan/debt?
Thanks
June 22, 2017 at 2:24 pm #393802Mezzanine debt is unsecured debt. So the order of payout if a company goes into liquidation is firstly secured debt, secondly unsecured debt, and then equity.
So mezzanine debt, being unsecured, is more risky that secured debt.
You have either mistyped part of the question or the answer, or there is a typing error in your book. On what you have typed, the bank loan is secured debt and it is the borrowing from VC that is mezzanine finance.
June 22, 2017 at 3:00 pm #393812thanks for the explanation sir. Looks like there is an error in the book. No worries I get the gist. Thanks
June 23, 2017 at 7:04 am #393857You are welcome 🙂
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