Structured Finance Insights: Designing Capital Stacks That Survive a Cycle
A capital stack is not a funding total split across instruments. It is a sequence of claims on cash flow, each with its own timing, cost and behaviour under stress. Most stacks fail not because the business fails, but because the stack was built for the good case.
- Design the stack against downside cash flows, not the base case.
- Mezzanine and structured layers buy flexibility — price that flexibility honestly.
- Covenant headroom is worth more than the last 50 basis points of pricing.
Start with the cash flow, not the instrument
The correct starting point is a monthly cash-flow profile under three scenarios, including one where revenue disappoints by 20–25%. Every layer of the stack is then sized against the scenario the business must survive, not the one it hopes to hit.
Sequencing senior, mezzanine and equity
Senior secured debt is the cheapest capital and the least forgiving. Mezzanine and structured instruments — convertible notes, quasi-equity, cash-flow-linked repayment — cost more but absorb volatility. Equity is the most expensive and the most patient.
The mistake we see most often is over-weighting senior debt because it prices attractively, leaving no headroom when a single quarter underperforms.
Covenants are structure, not paperwork
Covenant design determines whether a difficult quarter is a conversation or a default. Negotiating realistic headroom, cure rights and testing frequency at term-sheet stage is materially more valuable than shaving pricing.
What a resilient stack looks like in practice
Amortisation matched to project or receivable cycles, a structured layer that flexes with performance, and equity sized so that the promoter is not forced to raise at the worst possible moment. That is the architecture we structure toward before taking a transaction to capital providers.
This note reflects our advisory perspective and is not investment advice. Speak with a senior partner to discuss how current market conditions apply to your specific capital requirement.