How do 'inside maturities' affect LBO risk?
An "inside maturity" arises when a junior tranche matures BEFORE the senior tranche. Structurally unusual but problematic — and dangerous when it creeps in through refinancings.
Why is it problematic? The junior tranche (Mezzanine) matures before the senior is repaid. The sponsor must refinance the Mezzanine while the senior is still outstanding. The senior lender can block that refi (via restricted payments). If the Mezzanine cannot be refinanced, a cross-default looms that can collapse the entire capital structure.
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| Tranche | Standard | Inside (problematic) |
|---|---|---|
| Senior TLB | 7 years | 7 years |
| Mezzanine | 8–9 years (longer) | 6 years (shorter!) |
| Mezzanine maturity | Coupon premium |
|---|---|
| 9 years (longer than senior 7yr) | standard |
| 7 years (equal) | +50–100 bps |
| 6 years (inside) | +150–300 bps or the lender declines |
- Negotiate the Mezzanine maturity at least 1–2 years longer than the senior.
- A "maturity cap" clause in the intercreditor agreement: the Mezzanine may not mature while the senior is outstanding.
- In refinancings an inside maturity creeps in: the new senior runs longer than the existing Mezzanine.
- Modeling forgets the maturity profile: the Mezzanine refi is not planned in.
Question: "What would your plan be for an inside maturity?"
Answer: "Avoid it at all costs — negotiate the Mezzanine maturity at least 1–2 years longer than the senior. Pay close attention through refi cycles, otherwise an inside maturity creeps in and creates restructuring risk"