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Investing mezzanine debt

investing mezzanine debt

Doughboy November 19, Views Read Edit View history. Often, a financial sponsor will exhaust other sources of capital before turning to mezzanine capital.

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In financemezzanine capital is any subordinated debt or preferred equity instrument that investing mezzanine debt a claim on a company’s assets which is senior only to that of the common shares. Mezzanine financings can be structured either as mzezanine typically an unsecured and subordinated note or preferred stock. Mezzanine capital is often a more expensive financing source for a company than secured debt or senior debt. The higher cost of capital associated with mezzanine financings is the result of its being an unsecured, subordinated or junior obligation in a company’s capital structure i. Additionally, mezzanine financings, which are usually private placementsare often used by smaller companies and may involve greater overall levels of leverage than issues in the high-yield vebt ; they thus involve additional risk. In compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or more senior lenders.

What is Mezzanine Financing?

investing mezzanine debt
Mezzanine debt gets its name because it blurs the lines between what constitutes debt and equity. A mezzanine lender is generally brought into a buyout to displace some of the capital that would usually be invested by an equity investor. Mezzanine debt takes up some of the financing that an equity investor would otherwise chip in. This leverages the buyer’s potential return while minimizing the amount of capital it has to dedicate to the transaction. An example of how mezzanine debt works and why it exists Let’s say you want to buy a small pizzeria in your hometown.

Types of Debt

A number of characteristics are common in the structuring of mezzanine loans, such as:. Typically, mezzanine capital will be used to fill a financing gap between less expensive forms of financing e. Ben July 3, You could go back to mezzanine… or go into PE… or join a credit-related hedge fund… or a xebt lender… or various other credit-related opportunities. Richspider August 5, Investing mezzanine debt addition, mezzanine financing providers receive contractually obligated interest payments monthly, quarterly or annually.

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