Mezzanine DebtManagement BuyoutUnited Kingdom

£50M Mezzanine for UK Management Buyout

Subordinated mezzanine facility with PIK interest option and equity warrants supporting management-led buyout of business services company from family ownership.

Deal Overview

Transaction TypeMezzanine Financing

Facility Size£50M

SectorBusiness Services

Total Leverage5.5x EBITDA

Term8 years

StructureSubordinated mezzanine

JurisdictionEngland & Wales

Closing DateQ2 2024

The Challenge

A senior management team partnered with a small private equity sponsor to acquire a UK business services company from founding family ownership, requiring subordinated debt to complete the capital structure while minimizing management equity dilution.

Key complexity factors included:

•Limited equity capital from management team requiring mezzanine to bridge valuation gap
•First-time MBO team requiring flexible payment structure during transition period
•Subordination to senior lenders requiring coordinated intercreditor negotiations
•Family seller preferences for clean exit and management team continuity

Our Solution

We structured a £50M subordinated mezzanine facility with PIK toggle option and equity participation supporting the management buyout. The solution included:

Structure

→£50M subordinated mezzanine with 8-year maturity and bullet repayment at maturity
→PIK toggle allowing borrower to elect paid-in-kind interest for first 3 years post-closing
→Equity warrants for 8% fully-diluted equity with standard ratchet and participation rights
→Covenant-lite structure with incurrence-based restrictions only

Execution

→12-week timeline coordinated with senior debt and family seller negotiations
→Subordination and intercreditor agreement with senior lenders establishing payment waterfall
→Warrant documentation aligned with management equity incentive plan and PE sponsor terms
→Second-lien security over same collateral as senior lenders with turnover provisions

Deal Structure

Capital Structure

Senior Debt£80M

Mezzanine£50M

PE Equity£40M

Management Equity£8M

Pricing & Terms

•Cash Interest: 11% per annum
•PIK Interest: 13% per annum (if elected)
•Prepayment: Soft call protection years 1-4
•Warrants: 8% FD equity with exit participation

Key Documentation

Mezzanine Facility Agreement

Subordinated loan agreement with PIK toggle mechanics, covenant-lite package with incurrence restrictions, and prepayment terms with make-whole provisions during protection period.

Intercreditor Agreement

Senior/subordinated intercreditor establishing payment waterfall, turnover provisions, enforcement standstill (180 days), and permitted payment baskets for mezzanine interest.

Warrant Instrument

Equity warrant agreement for 8% fully-diluted equity with standard anti-dilution protection, tag-along rights, and put/call mechanics aligned with PE sponsor shareholders agreement.

Security Documents

Second-lien security package mirroring senior lender collateral, subordination of security enforcement, and turnover provisions for prohibited payments and collateral proceeds.

Transaction Timeline

1-3

Weeks 1-3

Mandate & Term Sheet

Mezzanine lender selection, management presentations, and indicative term sheet negotiations

4-8

Weeks 4-8

Due Diligence & Documentation

Financial, commercial, and legal due diligence with facility agreement and warrant documentation drafting

9-11

Weeks 9-11

Intercreditor & Security

Subordination agreement negotiation with senior lenders and second-lien security perfection

Week 12

Closing & Management Transition

Coordinated closing with senior debt and share purchase, management equity subscription, and transition from family ownership

Outcome

The transaction closed successfully, enabling the management team to complete the buyout with appropriate capital structure and payment flexibility during ownership transition.

Post-closing benefits:

•PIK flexibility: Management elected PIK interest for years 1-2 preserving cash flow for working capital and operational improvements during transition
•Management retention: Equity participation via both direct ownership and warrant alignment ensured management commitment through business transformation
•Refinancing success: Strong operational performance enabled mezzanine refinancing after 5 years at lower cost with warrant take-out at attractive valuation

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