Quasi-Equity Financing

These loans have a lower capital repayment and interest rate payment priority than senior loans but a higher one to preferred shares or equity. Generally, there is no collateral (security), thus in the event of default all other lenders are repaid before the holders of subordinated loans. Capital cost (interest rates) for Subordinated Loans is higher than for senior loans (to cover the higher risks.), but lower than for equity required returns.

Up-front capital infusion by the investor in return for a percentage royalty which would be payable at regular intervals and which would be calculated on the basis of the net revenue generated over the life of an asset or license (Oil, Natural Gas, Minerals, etc). As payments fluctuate with revenue, royalty investors are better aligned with equity holders than debt providers, but bearing a significant lower risk than pure equity investors. It may be structured so that royalty payments only begin after the company has recovered its capital costs. Royalty financing enable a company to realize value on future production, allowing it to capitalize on proven reserves before the operation becomes productive. This means that, unlike equity financing there is no dilution, and unlike debt financing the investor is taking both production and commodity price risk.

As with a royalty financing agreement an up-front capital infusion is made by the investor but instead of receiving a percentage on the net revenues, the investor is entitled to a percentage of the production itself over the life of the asset or license. In addition to the up-front payment, it can be structured with an embedded fixed price (per tonne/per barrel/per MMbtu) payment made by the investor at the time of sale. Just as Royalty, Streaming Financing enable a company to realize value on future production, allowing it to capitalize on proven reserves before the operation becomes productive, but in this case with a customized exposure to commodity price cycle.

Combining subordinated loans with a profit participating kicker, under which the lender is remunerated by both a base interest rate and participation in the profitability of the company, allowing the company to access capital financing without diluting its equity. Participating Loans are repayable after all other debts of a company have been repaid, and thus rank just above equity, without any equity dilution for the company.

This type of subordinated debt financing provides non-dilutive equity risk capital that is remunerated based on the company’s performance, just as an equity investment is. The financing structure includes bullet repayment and remuneration linked to the equity risk. Loans can be secured and unsecured and provide different levels of subordination. This type of debt financing is typically used as a complementary method to equity venture financing and it addresses the specific needs of innovative companies or high-risk endeavors. The financing does not dilute equity ownership, complementing the equity capital. When investors make a venture debt investment, it typically also acquires the right to purchase shares in the company, whilst at the same time granting options to the current shareholders to enable them to retain their share of ownership.

debt where the initial investment is structured as a debt claim, earning interest. The debt is either repaid, or, at the discretion of the investor, it can be converted into equity – ordinary or preferred shares – at a predetermined conversion rate. A convertible bond is essentially a bond combined with a share option where the holder may exchange the bond for a predetermined number of shares at a predetermined price. Because convertibles can be changed into shares they have lower interest rates.

Equity that ranks senior to common shares upon profit distribution and upon liquidation. Preferred stocks entitle the holder to a fixed-rate dividend, paid before any dividend is distributed to holders of ordinary shares. Holders of preferred stock also rank higher than ordinary shareholders in receiving proceeds from the liquidation of assets if a company is wound up. The holders do not have voting rights on strategy and direction of the company.