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In finance, mezzanine capital is a colloquialism that is used to refer to a subordinated debt or preferred equity that represents a claim on a company's assets which is senior only to that of a company's common shareholders. Mezzanine debt (or mezzanine loan) is typically unsecured, high-yield, subordinated debt, while mezzanine equity is issued in the form of preferred stock.
Mezzanine comes from the Italian word meaning half, in the middle or lower.
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Along with the typical interest payment associated with debt, mezzanine capital will often include an equity stake in the form of warrants attached (or equity co-investments) to the debt obligation or a debt conversion feature identical to that of a convertible bond.
Mezzanine capital is a more expensive financing source for a company than secured debt or senior debt. It is more expensive because of the increased credit risk, i.e. in the event of default, mezzanine debt is less likely to be repaid in full. It is only secured by the equity of the company, and not the company's tangible assets (e.g., property, cash or accounts receivable). In compensation for the increased risk, mezzanine debt holders will require a higher interest payment or an equity stake in the company. However, it is a cheaper source of financing than equity as the current equity holders achieve less dilution.
- Financial sponsors may seek to help finance a leveraged buyout with mezzanine capital in order to reduce the amount of the investment.
- An early-stage company may choose to raise money with mezzanine capital if the company does not have sufficient assets to collateralize, but does not want to achieve further dilution by raising additional equity.
- Middle-market companies may be unable to access the high yield market due to high minimum size requirements, which creates a need for flexible, private mezzanine capital in the US$20 million to US$100 million range.
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