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Glossary · Structures

What is mezzanine debt?

Mezzanine debt ranks below senior loans and above equity, so it is riskier. It usually pays a higher interest rate, often partly paid in kind, sometimes with equity warrants.

In practice

Mezzanine is usually documented as a separate subordinated loan or note, governed by an intercreditor agreement with the senior lenders that limits its repayment rights and enforcement. It is typically unsecured or secured only by a second lien, and it is often bullet-repaid after the senior debt matures. It is sometimes confused with preferred equity, which is an ownership instrument rather than a loan.

An example

Round numbers, not a real fund

Say a buyout is financed with $100 million of senior loans, $30 million of mezzanine and $70 million of equity. Mezzanine is repaid after the loans and before the equity.

Why it matters

It fills the gap between a company’s senior debt and the equity cheque in a buyout.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.