Vol 8 (2011) - Issue 5

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Mezzanine Programmes in Germany: Looming Challenges for Companies and Funds

In the aftermath of the New Economy crash in 2001/2002, mid-cap German enterprises found it difficult to procure capital. At that time, the capital market was only suitable for larger enterprises and was also frozen due to the preceding events. At the same time, the introduction of the Basle II criteria caused capital scarcity until the middle of the decade. Due to the historically low interest rates at that time, not only in the USA, but also in Europe, investors were searching for lucrative investment possibilities during the same period.

In this situation, so-called 'mezzanine capital' quickly became a favourite for the financing of German companies. Rating agencies or banks treat this financing instrument as equity if certain prerequisites are satisfied, and at the same time it can be classified as borrowed capital, for example, for tax purposes. The market reacted quickly and the ostensibly all-purpose mezzanine capital was marketed in a grand style. One fine-sounding product came after another ('PREPS', 'H.E.A.T.', 'Equinotes') and at first, all participants in the financing panels looked like winners. The issuers of these programmes raked in magnificent commissions, investors cheerfully rubbed their hands at the prospect of high returns and enterprises considered their financing problems solved – especially because most mezzanine programmes provided for a so-called 'PIK payment', i.e. a final maturity loan.

Around EUR 4.4 billion of mezzanine capital from programmes launched by private banks was distributed in the years 2004 through to 2007 to mid-cap enterprises all over Germany, and also partly in Switzerland and Austria. In addition to these, there were also numerous mezzanine programmes of the federal states, state banks and sub-companies of which relatively little is known. The success was so huge that some enterprises made use of several of these programmes simultaneously. The combined turnover of the companies taking out one or more of the mezzanine loans amounted to approximately EUR 53bn and these companies employ more than 327,000 people. Hence, the impact of these programmes for the German economy is undeniable.