Santander has announced that it is planning to open a £200 million mezzanine debt scheme with Government-backing.

The Fund will be made up of £50 million from the Government’s £1.4 billon Regional Growth Fund, together with £150 million from Santander. It is expected to focus on companies looking to expand in regions other than London and the South East and will appeal to business owners who do not wish to sell an equity stake to outside investors.

Through the new programme, Santander is expected to price deals at a highly competitive rate, structured through annual interest charges and payment in kind instruments (PIKs). Interest rates from 5% are being considered for the PIK. The PIK charges accumulate over time and will be paid off at an agreed date from the additional earnings generated from the business expansion.

Santander is also likely to refinance PIKs as a traditional secured loan to the company when it has a larger asset base, protecting the equity of the owners.

Mezzanine loans typically cost more than raising debt because the investors rank behind the secured debt if the company is unable to meet its liabilities. The cash element of the mezzanine loan, which is paid from company cash flow, is also expected to be charged at 5%.

Further details about the new programme will be reported when available.

Source: telegraph.co.uk, 23/11/11