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Mezzanine Finance

  • Mezzanine Finance fills the gap between Senior Debt and Equity. It's subordinated to the Senior Debt and could have an option for a conversion to Equity.


  • Mezzanine Finance is used to finance aggressive growth plan, acquisitions or it's utilised to achieve goals that require capital beyond what senior lenders will extend.


  • Mezzanine Finance is expensive than Senior Debt and is priced higher than Senior Debt; given its risk profile vis a vis Senior Debt. Mezzanine Finance is cheaper than Equity in terms of overall cost of capital and is less dilutive than raising Equity.


  • Mezzanine Finance is means by which companies can access capital beyond what they're otherwise able to achieve on a senior basis. Mezzanine financing is also the last stop along the capital structure where owners can raise substantial amounts of liquidity without selling a large stake in their company.


  • Mezzanine financing is usually unsecured and subordinated to Senior Debt both structurally in terms of its right of repayment, as well as time subordinated with a longer dated maturity, which leads most senior lenders to consider mezzanine financing as “equity” like, sitting behind their facilities. 



End use of Mezzanine Finance

Mezzanine Financing is generally used in the following transactions:

  1. Acquisitions

  2. Growth Capital

  3. Refinancing

  4. Recapitalisation

  5. Restructuring

  6. Leverage buyout

  7. Management buyout

  8. Shareholder buyout


As Mezzanine Finance is the most expensive form of debt, it is only used when the alternative would be raising additional equity. 



Mezzanine Finance - Structures

Generally used structure for Mezzanine Financing is a subordinated, unsecured term loan plus warrants. Since the loan is subordinated and unsecured, borrowers should have positive cash flow.  Some of the structures for Mezzanine Financing are as below:

  • Subordinated debt plus an "equity kicker" in the form of warrants to buy Equity

  • Subordinated debt plus an equity co-investment

  • Subordinated debt without equity

  • Convertible debt

  • Preferred equity


Mezzanine Finance – Process

  • Mezzanine debt is typically issued through privately negotiated transactions. A Mezzanine lender’s decision to extend loan to a borrower is usually based on the Borrower’s ability to generate free cash flow (as opposed to being based on asset backing) and on the growth prospects for the business and industry.

  • Mezzanine lenders would require access to company information, such as past audited financial statements, and other information on the borrower. This gives mezzanine financing lenders better understanding of the borrower, negotiate terms and structure loan in way that is appropriate for the underlying business.

  • Mezzanine lenders (depending upon size of Mezzanine Finance) negotiate board observation rights as part of the terms of their lending. Receiving board of director materials and attending the meetings, alongside what is often frequent dialogue with company owners and management, gives mezzanine lenders the ability to closely monitor their loan and stay ahead of potential business issues. It also helps to speed with company performance and knowledgeable should amendments to the credit documents be necessary.


Mezzanine Finance – Advantages & Disadvantages


  • Mezzanine financing is ultimately a way for companies to grow faster than they could otherwise on a senior basis alone

  • Mezzanine financing provides more flexibility in terms of looser financial covenants and fewer conditions than traditional bank loans

  • It allows companies to mobilise liquidity that requires capital beyond senior debt availability

  • Mezzanine Finance is comparatively long term, small amortization during its tenor with a large balloon payment

  • Recapitalisation by Mezzanine Finance results in the existing owner retaining the control of the company



  • Expensive than Senior Debt

  • Mezzanine Finance could have an embedded option to convert into equity resulting in a small level of equity dilution

  • Generally, includes prepayment penalty

  • Full upfront drawdown


Mezzanine Finance – Providers

  1. Private Equity Companies

  2. Hedge Funds

  3. Investment Companies

  4. Banks (very selectively)

  5. Other non-bank lenders

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