Question

1. One of the advantages of mezzanine debt, from the investor perspective, is that there are borrower restrictions. Typically, mezzanine lenders would have the right to approve all of the following except:

a. management-by-law changes

b. dividend payments

c. acquisitions

d. additional debt issuance

2. Structured PIPEs possesses significant risks. Which of the following would typically not be one of these risks?

a. PIPEs structured with “fixed” conversion ratios

b. The large majority of PIPE transactions are not structured

c. PIPEs structured with “floating” conversion ratios

d. PIPE transactions may become “death spirals”

Answer 1

1. a. management-by-law changes

Dividend payments are based on decisions taken by the board of director for the equity shareholders. There is no question that any mazzanine lender would have the right to approve the dividend payments.

All the other options, management-by law changes, acquisitions and additional debt issurance, affects the debt owners and hence mezzanine lenders have the right to approve all of these.

2. PIPEs structured with “floating” conversion ratios

Unlike a fixed conversion, the PIPEs investor can convert their stock at a discount from their market price. Here, the price risk is shared between the investor and the company. Hence, this is not one of the significant risks

PIPE transactions may become “death spirals”, ie. investors in the deals may push down the issue's stock price through spreading false rumours, short sales, for their structured PIPEs to become convertible into a controlling stake of the issuer. A large majority of PIPE transactions are not structured due to which these PIPEs carry a significant pricing risk.

Fixed convertibles do not offer any option of converting their stock at a discount at market price, and the buyer can only convert their bond into stock at the fixed conversion rate as specified by the company, leading to significant risks.