- Most common investments include Subordinated Notes and Preferred Stock
They have the following characteristics:
1) High fixed coupon rate (e.g. 10-15%) some payable in cash, some in PIK. Floating rates only when increased competition.
2) Incurrence covenants
3) No need for annual principal repayments and a maturity of 5-8 years
4) Call protection for 1-2 yrs, prepayment penalties
5) OID of 2-3%
6) Equity kicker in options, warrants or preferred stock
Main sources of return are:
1) Cash interest payments
2) PIK interest, accrues to the mezzanine balance
3) Commitment fees or OID
4) Prepayment fees for call protection
5) Equity participation upon exit
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