CHAPTER 22
Mezzanine Capital
Mezzanine capital is subordinated debt that provides borrowing capability beyond senior debt while minimizing the dilution associated with equity capital. It may be secured through a second lien on assets, or it may be secured by company stock. Since it forms an additional layer of debt, it carries more risk for the lender than normal or senior debt. It ranks behind senior debt for purposes of principal and interest repayment. Mezzanine capital is generally the lowest-ranking debt obligation in a borrower's capital structure. Compared to a bank loan, it contains a fairly loose covenant package. These factors make mezzanine debt more expensive than senior debt for the borrower. Nevertheless, it remains cheaper than institutional equity investment and may be available when the supply of equity is limited.
The mix of senior and mezzanine debt is influenced by a borrower's cash flow projections, because mezzanine capital typically is repaid either in installments or in one balloon payment at the end of the term. Mezzanine capital is an appropriate financing option in situations where access to conventional bank debt may be limited because of a lack of tangible assets or strong guarantor, an unduly conservative assessment of a company's prospects, or when the dilution implied by raising additional equity capital is unattractive. This chapter describes mezzanine capital for private companies in need of $1 million to $25 million.
Mezzanine financing is used ...
