Royal Bank of Scotland
Michael Elwood of RBS answers some questions about mezzanine finance
Who are you?
Michael Elwood, managing director of corporate and structured finance at the Royal Bank of Scotland.
What do you do?
We support transactions such as management buy-outs, shareholder reconstructions, acquisitions and re-capitalisations. Often, we work alongside private equity companies and provide leverage to a deal through mezzanine finance.
What exactly is mezzanine finance?
There are different risk profiles for each type of debt a business has. The first loan will usually be the least risky, and, therefore, will attract the lowest rate of interest. Other forms of debt involve the loan being fixed upon an asset. Mezzanine finance sits between these layers of debt. It could involve there being no initial repayment and then a bullet payment in the sixth year, after the business has grown. It also tends to mean that the lender would have options to take equity in the business.
What can you do for me that I cannot do for myself?
We can help a company move on to the next stage of its evolution. We usually work with companies that are established and have a trading history, and we help them to crystalise value in their businesses.
What mistakes will you prevent me from making?
We will examine a company’s trading history and see if we can identify any potential weaknesses in their model. For instance, if a company takes a very large share of its business from one particular client, then this would be raised as a risk. Even if that relationship is very strong and the company’s main client is a massive organisation, things could still move on. We would talk to the business about its strategy and advise it on how to move forward. The advice we give is not rocket science, but we have many years of experience providing this kind of guidance.
How else will you save me money?
We have a financial markets team that will look at a company’s profile and look for areas of risk in terms of the wider economy. The team looks at macro-economic areas, such as interest-rate changes and currency movements, and can advise the client how to overcome these issues.
Give me an example of one business you have worked with this year?
A business that was operating in the insurance sector and provided outsource services, such as loss adjustment, came to us for help this year. It was a well established company and had been trading for a number of years, but the owners wanted to move on. However, it also had a keen management team who were interested in taking over the business. We worked with the company and helped the owners to determine the value of the business, allowed the management to take part in the shareholding and moved it on to the next phase.
Why should I trust you?
Any company that wants assurances can meet our clients and find out from them how they have fared. We have a very experienced team and are involved in around 60 deals each year, with many successes. RBS is a leading bank and is well known and respected within the financial services industry.
What will it cost me?
To give you a ballpark figure, RBS will be looking to make about 10-14% on a mezzanine deal.
What’s your criteria?
Usually we will be dealing with established companies who have a minimum turnover in the region of £10m. Our deals are typically between £10-150m, with the average-sized deal being about £50m.
Company: Corporate and structured finance at Royal Bank of Scotland
Description: Provider of mezzanine and corporate financing
Clients: Around 60 per year