What is Mezzanine Debt?

Mezzanine debt is a private loan sitting between bank loans and ownership in a company's funding stack. If things fail, it is repaid only after the banks, so it charges much higher interest. It is used when banks stop lending and owners refuse to sell shares.

The name comes from the mezzanine floor of a building, the level between the ground and the top, and the money version works the same way. The ground floor is senior debt, the bank loans and bonds repaid first if the company is sold or fails; the top floor is equity, the owners who collect whatever is left. Mezzanine sits between the two. It is repaid after the senior lenders, but before the owners. That spot is risky, because after the senior lenders take their share there may be little left, so the price scales: if a bank charges 6 to 8%, a mezzanine lender will likely want 12 to 20%. Lenders often add an equity kicker, a small right to buy shares cheaply if the company does well, and the interest is often paid in kind, added onto the loan instead of paid in cash. Its natural home is the buyout, where a buyer purchases a whole company mostly with borrowed money. When the banks have lent all they will, and the buyer will not give up more ownership to raise the rest, mezzanine fills the gap: expensive, but available.

A second mortgage on a house. The first bank holds the first claim: if the house is ever sold off in default, it gets paid back before anyone else. A second lender can still lend against the same house, but knows it only collects from whatever is left after the first bank, so it charges a much higher rate for standing second in line. Same house, same borrower, different place in the payout line, different price.