Mezzanine Financing: Tools, Applications and Total Performance

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The Mezzanine Product Group

This chapter will essentially help us to get familiar with the mechanics of each of the products in the mezzanine group. What is key in understanding the product group is the fact that you have five original product groups. You could call them the parent categories, which each include a plain vanilla product model. They include (1) subordinated debt (‘subdebt’) with step-up rates or PIK (payment-in-kind) rates; (2) subdebt with profit participation; (3) subdebt with warrants; (4) convertible loans; and (5) preferred equity. Following on from that list, a wide variety of more exotic models has been generated by practice, when tailoring these basic product categories to the needs of businesses as and when they emerged. I have tried to structure the review of each product category consistently, but only partly succeeded as I prioritized demonstrating the essence and techniques of each of the basic products, which are very different in nature. Nevertheless, this overview will serve well for those looking for a review outlining the mezzanine product group along with the practicalities and flexibility each of the original product groups demonstrates. It includes a technical description of the most important features within each product group, an example to demonstrate the flexibility of the product group in practical terms and, where needed, some details with respect to the contractual aspects of the product group. It further includes the most important ...