Eric Seward, Managing Director, PGIM Private Capital and Stephen Szejner, Managing Director, PGIM Private Capital discuss:
- How the current market has impacted mezzanine financing
- Opportunities in the mezzanine market; and
- Trends to look out for in 2023
How has the current market environment impacted mezzanine financing, specifically as we enter a market with discussions of an ongoing recession?
Eric Seward: The current market environment has had a significant impact on mezzanine financing. Anytime there's economic uncertainty, the senior credit markets tend to pull back and mezzanine is oftentimes the replacement to fill that gap. We've been tremendously active this year as that has taken place across the private credit markets and as interest rates continue to rise, the cost differential for mezzanine is no longer as significant as it has historically been relative to senior debt.
Are there opportunities in the current mezzanine market?
Steve Szejner: The senior credit markets have pulled back significantly, leaving significant gaps in many capital structures across corporate America, and we don't expect those market conditions to change during the course of 2023. We've been quite busy, especially over the last three to six months with a number of transaction opportunities, both with strong private equity sponsors and with companies directly.
Are there trends to look out for in 2023?
Eric Seward: There are certainly trends we're focused on in 2023, most of which will be predicated upon what happens with the economic environment as well as interest rates. Rising short term interest rates, economic uncertainty, pressure on consumer spending, all have an impact on what can get done from a senior leverage perspective, which in turn drives the ability to put mezzanine financing in place for certain types of transactions.
Mezzanine is a much more patient and flexible form of capital, and the cost differential is no longer as significant given the dramatically increasing interest rates over the past 12 months, which we expect to continue. This will also create pressure on companies from an inflationary price perspective. Supply chain continues to be a challenge for many companies and rising interest rates in general create cash flow constraints for companies that are utilizing leverage.