As per today’s brilliant Dan PrimackTerm Sheet. J.P. Morgan’s Silicon Valley bankers have developed (and trademarked) a “high-tech version of mezzanine finance”.
Not enough information is public and it’s too early to understand but this is basically seems to be Silicon Valley’s version of mezzanine bridge financing designed to give an exit to “too eager to IPO” early investors/employees with guarantees adapted to the company’s business and development stage.
Considering that SurveyMonkey (the first issuer of SPL bonds) was founded in 1999 and actually generates significant cash (2012 Revenues of $113 million and Earning of $61millions) and probably has limited need for more investments – my guess here is that early investors/employees were costly to carry and were pushing for an IPO asap – the SPL bonds (a combination of cash-pay and PIK bonds) gave them an exit and reduced cost of debt.
The complex part here is how to price and negotiate the exit (I’m guessing warrants) and the guarantees (bondholders probably have some grip over SurveyMonkey’s future cashflow and in the case of the other SPL issuer Jawbones – the actual physical inventory). Other than that, the PIK bonds probably have a low penalty for pre-payment in the case of an equity offering and investors are also willing to ignore rules of thumbs like the max 1-1.5 xEBITDA (hit me if you have more info). All that probably demands a higher closing fee than the usual 2% and as Primack mentions “J.P. Morgan effectively has an inside track for the IPO business of both SurveyMonkey and Jawbone, not to mention for future debt and acquisition requirements.”
All in all – this seems to be an interesting remedy to EM companies – instead of extending/renegotiating over and over again bridge-loans till the IPO market is open again.
Lockmann.org 