Doha - Mezzanine funds are becoming increasingly attractive as a new source of financing for mid-market companies in the Middle East and North Africa (MENA) market.
The demand for such funding is expected to grow significantly in the coming years.
From the perspective of medium sized enterprises in the MENA region, one of the most daunting challenges is obtaining the financing needed to fund a variety of corporate goals, including growth capital expenditures, acquisitions and recapitalizations.
In the Middle East and North Africa region and Turkey the challenge in obtaining debt financing stems from a market that has traditionally been dominated by commercial banks which demand high levels of collateral and prefer lending to larger companies.
However, fast-growing mid-sized companies are now finding a new attractive tool to help secure the funding they require: mezzanine debt. In contrast to traditional lenders, mezzanine lenders look favourably on stable, profitable mid-market companies, especially those in service-based industries which, due to their lack of hard assets, require a cash-flow based lending approach.
NBK Capital, which operates in the region from offices in Kuwait, Dubai and Istanbul, together with GSC Group, a leading provider of mezzanine capital in Europe and a global investment manager of credit-based alternative assets, launched a joint venture to address this unmet mid-market customer demand.
The venture, the first of its kind in the MENA and Turkey region, currently has $115 million available to fund mezzanine financing in the area, a sign that there is strong interest in this new financing concept.
NBK Capital's Chief Executive for Investment and Merchant Banking, Amjad Ahmad, explains: "Mezzanine financing is an attractive option for small and medium enterprises seeking capital given the stringent lending practices in the region and the instrument's flexibility.
"We are confident that mezzanine financing represents a strong growth opportunity in the Middle East and North Africa, for private equity sponsors and corporate clients."
Mezzanine financing is a form of debt capital, a hybrid of debt and equity financing that is usually structured as a loan, note or other debt instrument that is contractually and/or structurally subordinated to senior bank debt.
Mezzanine financing often benefits from second ranking security interests and is always senior to the equity. Mezzanine securities generate a significant portion of their return on a current and contractual basis. In addition, mezzanine securities may have an equity "kicker," usually in the form of warrants or common stock.
Part of the attraction for such financing is the fact that it can be arranged fairly quickly. Moreover, because mezzanine capital is subordinated to the senior bank financing on the borrower's balance sheet, the company is able to optimize the amount of total leverage.
Financial observers in the region believe that the amount of demand for mezzanine financing during the next few years will increase significantly. This growth will be driven by many factors including the highly attractive regional investment environment that is fostered by continued strong economic growth and the average GDP increasing by 6.3 percent.
GDP growth rates are expected to stay at levels over 5 percent for the foreseeable future and with oil at over US$100 a barrel there will be large amounts of regional liquidity in the short to medium term.
Walid Cherif, who heads up the NBK Capital - GSC mezzanine team, said: "We believe mezzanine lending to mid-market companies offers attractive risk-adjusted returns, with current income, downside protection and equity upside.
© The Peninsula 2008
