Resources / Glossary / Mezzanine debt

Mezzanine debt.

Aka. Mezz · Subordinated debt · Junior capital
All terms

What is mezzanine debt?

Mezzanine debt is the layer of capital that sits between senior debt and common equity in a company's capital structure. It ranks behind the senior lenders for repayment — it is subordinated — but ahead of the equity, occupying the middle of the stack, which is where the name comes from.

Because it absorbs loss before senior debt does and carries no first claim on collateral, mezzanine costs more. It typically pays a high coupon, often partly in cash and partly in kind, and frequently comes with an equity kicker — warrants or a small equity stake — so the provider shares in the upside if the business performs.

In a buyout, mezzanine fills the gap between the senior debt a business can support and the equity a sponsor wants to write. It lets a deal carry more leverage than senior lenders alone would provide, without forcing the sponsor to fund the whole balance with equity.

How mezzanine debt actually works

Mezzanine is priced and structured to compensate for its junior position.

  1. Rank junior. The mezzanine sits below senior debt in priority, so it is repaid only after senior obligations are satisfied.
  2. Pay a blended return. The return combines a cash coupon, often a pay-in-kind component, and frequently an equity kicker — targeting a return well above senior debt.
  3. Subordinate by agreement. An intercreditor agreement governs how mezzanine and senior lenders rank, who gets paid when, and what the junior lender can and cannot do in a default.
  4. Exit with the deal. Mezzanine is typically repaid on a sale or refinancing, with the kicker realized when the equity is monetized.

Mezzanine versus second lien

Both are junior to the senior term loan, but they differ in form. Second-lien debt is secured — it holds a second-priority claim on the same collateral as the first lien. Mezzanine is usually unsecured and subordinated, sitting still closer to equity, and more often carries an equity kicker.

The practical effect is ranking and recovery: in a distressed scenario, second-lien lenders have a secured claim on collateral after the first lien, while mezzanine holders sit further back, closer to the equity they resemble.

Frequently asked.

4 questions
01 Why is mezzanine debt more expensive than senior debt?

Because it takes more risk. Mezzanine is subordinated, so it absorbs losses before senior debt and is repaid only after the senior lenders. To compensate for that junior position and the lack of a first claim on collateral, it commands a high coupon and frequently an equity kicker, targeting an equity-like return.

02 What is an equity kicker?

An equity kicker is an equity participation attached to mezzanine debt — typically warrants or a small ownership stake — that lets the lender share in the company's upside. It boosts the lender's total return beyond the coupon if the business grows and the equity gains value, partly compensating for the risk of the junior position.

03 Where does mezzanine sit in the capital structure?

Between senior debt and common equity. It is repaid after the senior lenders but before the equity holders. That middle position — junior to debt, senior to equity — is what gives it both its name and its hybrid debt-equity character.

04 When do sponsors use mezzanine debt?

When a deal needs more leverage than senior lenders will provide but the sponsor would rather not fund the gap entirely with equity. Mezzanine bridges that gap, increasing total leverage and improving the sponsor's potential return on equity, at the cost of a more expensive junior layer.

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