Definition

Mezzanine capital is a long-term, non-amortizing, second secured, subordinated debt instrument.

A hybrid product that is positioned between senior bank debt and equity in the capital structure of a company, mezzanine contains characteristics of both debt and equity. As a loan instrument, mezzanine capital is ranked behind senior debt in terms of security and cash payments, both interest and principal. In return, it will demand a higher return than senior debt.

The mezzanine loan is typically structured to offer the mezzanine lender some form of equity upside, providing the chance to share in any uplift in the company’s equity value through warrants or options. Thus the mezzanine providers’ interests are aligned with equity investors for growing the value of the business.

Originally developed in the North American market, mezzanine capital is an established finance instrument in the European capital markets. In Central and Eastern Europe, mezzanine capital has emerged from being a niche financing tool used in a limited number of deals to a mainstream, widely used form of leveraged finance and growth capital. In recent years the demand for mezzanine capital has seen a constant increase. Given its advantages as a financing tool including smaller size, lower structuring costs and higher flexibility, mezzanine has become a favourite subordinated debt instrument in Central and Eastern Europe.