Mezzanine Financing

Mezzanine financing is a type of junior debt financing that is used to provide additional capital to a company, typically between the company’s senior debt and its common equity. Mezzanine debt is often used to finance the acquisition or expansion of a company, or to recapitalize its existing debt.

Key Features of Mezzanine Financing:

• Junior Debt: Mezzanine debt is a junior security, meaning that it is subordinate to senior debt in terms of seniority and payment priority.
• High-Yield: Mezzanine debt typically has a higher interest rate than senior debt, as it is riskier.
• Convertible: Mezzanine debt often has convertible features, which allow the lender to convert the debt into equity if the company performs well.
• Tranche Structure: Mezzanine financing can be structured in a number of tranches, with each tranche having different terms and interest rates.
• Covenants: Mezzanine debt often has covenants that restrict the company’s ability to take on additional debt or make certain other changes to its operations.

Types of Mezzanine Financing:

• Senior Mezzanine: Senior mezzanine debt is secured by a first lien on the company’s assets.
• Subordinated Mezzanine: Subordinated mezzanine debt is secured by a second lien on the company’s assets.
• Mezzanine Equity: Mezzanine equity is a type of mezzanine debt that is convertible into equity.

Benefits of Mezzanine Financing:

• Access to Capital: Mezzanine financing can provide companies with access to additional capital, which can be used for a variety of purposes.
• Lower Cost of Debt: Mezzanine debt can be a lower cost of debt than senior debt, as it is a junior security.
• Flexibility: Mezzanine debt can be structured to be flexible, allowing companies to meet their specific needs.

Risks of Mezzanine Financing:

• High Interest Rates: Mezzanine debt typically has a high interest rate, which can increase the cost of borrowing.
• Junior Lien: Mezzanine debt is a junior security, so it is at risk of being lost if the company defaults on its senior debt.
• Covenants: Mezzanine debt often has covenants that restrict the company’s ability to take on additional debt or make certain other changes to its operations.

Conclusion:

Mezzanine financing is a valuable tool for companies that need additional capital. However, it is