Mezzanine capital
Mezzanine capital (or mezzanine debt) is a broad financial term that refers to unsecured, high-yield, subordinated debt or preferred stock that represents a claim on a company's assets that is only senior to that of a company's shareholders.
Structure
Along with the typical interest payment associated with debt, mezzanine capital will often include an equity stake in the form of warrants attached to the debt obligation or a debt conversion feature identical to that of a convertible bond.
Mezzanine capital is a more expensive financing source for a company than secured debt or senior debt. It is more expensive because of the increased credit risk, i.e. in the event of default, mezzanine debt is less likely to be repaid in full. It is only secured by the equity of the company, and not the company's tangible assets (e.g., property, cash or accounts receivable). In compensation for the increased risk, mezzanine debt holders will require a higher interest payment and/or an equity stake in the company. However, it is a cheaper source of financing than equity as the current equity holders achieve less dilution.
Uses
- Financial sponsors may seek to help finance an LBO with mezzanine capital in order to reduce the dollar amount of the investment.
- An early stage company may choose to raise money with mezzanine capital if the company does not have sufficient assets to collateralize, but does not want to achieve further dilution by raising additional equity.
- Middle market companies may be unable to access the high yield market due to high minimum size requirements, which create a need for flexible, private mezzanine capital in the $20 million to $100 million range.