Mezzanine debt
A hybrid financing instrument positioned between senior debt and equity. It offers a higher return than bank debt in exchange for a subordinated rank in the event of liquidation. It may include warrants or convertible bonds allowing the lender to share in the upside.
In practice
Mezzanine debt is used in leveraged buyouts to complete financing without further diluting shareholders. In a 10 M€ acquisition, a typical structure might combine 40 percent senior bank debt, 20 percent mezzanine, and 40 percent equity. The cost of mezzanine is 10 to 15 percent — versus 4 to 6 percent for senior debt — but it avoids additional dilution. Its use is reserved for businesses generating stable and predictable cash flows.