Mezzanine Debt

Mezzanine debt sits between senior debt and equity in the capital structure. Below it, the senior lender has first call on assets; above it, the equity holders take residual returns. Mezz fills the leverage gap when the senior tranche tops out — common in leveraged buyouts, MBOs, and acquisitions where the deal can carry more leverage than the senior lender will fund.

Pricing reflects the position in the stack: 12–18% all-in is typical, structured as a coupon (cash interest), a PIK component (interest paid in additional notes rather than cash, deferring the cash drain), and sometimes a warrant (equity upside in exchange for the higher subordination risk). The mix is negotiated against the sponsor's projected exit and the management team's tolerance for equity dilution.

Mezz makes deals possible that senior debt alone couldn't fund without raising more equity. The decision between adding mezz versus injecting more equity is fundamentally about the cost of capital: mezzanine at 14% is cheaper than equity at a 25% expected return, but it carries fixed servicing obligations the equity wouldn't.