Case Study Details - Playbook of Solutions

Description

Subordinated or mezzanine financing is a hybrid form of capital, positioned between senior debt and equity within a company or project capital structure. This layer of financing typically takes the form of unsecured debt or preferred equity, offering a flexible solution for businesses seeking to bridge the gap between traditional loans and equity financing. Mezzanine investors often have the option to convert their investment into equity, providing them with a potential ownership stake. Sitting between pure equity and senior debt in terms of priority of payment and cost of capital mezzanine’s payment structure often includes interest paid in cash or shares and a component to calculate the conversion of debt-to-equity.

Benefits

Subordinated or mezzanine financing allows to raise capital without significantly diluting existing ownership. Often unsecured and junior to senior debt, it can help secure additional senior loans by leaving collateral free for other lenders. It also helps strengthen the alignment between the company or project and mezzanine investors as they benefit from its growth and profitability. This approach helps reduce the overall cost of capital by balancing a blend of senior debt, mezzanine debt, and equity. For investors, mezzanine financing provides an attractive opportunity, offering high returns compared to traditional debt, along with the potential for equity conversion. Additionally, the interest payments are often tax-deductible, enhancing the investment's overall appeal.

Case Study

Launched in 2022, Pentagreen Capital, a sustainable infrastructure debt financing platform established by HSBC and Temasek, closed in 2023 its first transaction with a landmark mezzanine financing facility for Citicore Solar Energy Corporation (CSEC), the solar development arm of Citicore Renewable Energy Corporation in the Philippines. The transaction structured a USD 100 million Mezzanine Construction Green Loan Facility, with an initial tranche of USD 30 million to finance six solar power projects, adding a total capacity of 490 MW. These projects are expected to avoid 430,000 tonnes of CO2 emissions each year.

Pentagreen's mezzanine financing was designed to address a critical funding gap in Citicore's renewable energy development. By acting as the Mandated Lead Arranger and offering subordinated financing, Pentagreen enabled Citicore to efficiently allocate capital and complete the financing requirements to accelerate the construction of the solar projects and the completion of two additional facilities. This funding supported Citicore’s ambitious goal of rolling out 1 GW of solar capacity annually, in line with the Philippines’ Department of Energy’s targets for renewable energy growth by 2030. The facility also showcased the potential for blended finance to unlock capital for marginally bankable projects in Southeast Asia.

Additional Sources

Mezzanine Financing