Mezzanine Financing

Mezzanine financing takes its name from the mezzanine floor between the ground and first floors of a building. It fills the gap between what senior lenders will provide and what equity investors are willing or able to contribute.

Mezzanine financing usually takes the form of subordinated loans or preferred shares. Lenders often receive equity-like features, such as warrants to buy shares or the right to convert their loan into shares, giving them a share in the company's success. Some of the interest may be paid in kind, meaning it is added to the loan balance rather than paid in cash.

For example, in a leveraged buyout financed with 60% senior debt and 25% equity, mezzanine lenders might provide the remaining 15%, earning a high interest rate plus warrants.

Mezzanine financing is commonly used in buyouts, acquisitions, growth projects and property development. It is more expensive than senior debt because of its higher risk, but it can be cheaper than raising additional equity and allows existing owners to keep more control. If the company performs poorly, mezzanine lenders are at significant risk of loss.