What is Mezzanine Debt?

Mezzanine debt is a type of hybrid financing that sits between senior debt and equity in a company's capital structure. It's essentially a form of debt that's not fully backed by assets but rather by the company's cash flows, making it more risky for lenders than senior debt. Consequently, it typically comes with higher interest rates and may include features like warrants or conversion rights that grant the lender an equity stake in the company.

Key Characteristics:

• Hybrid Nature: It combines elements of both debt and equity financing. 

• Subordinated Debt: It's junior to senior debt, meaning in the event of default, mezzanine lenders are paid after senior debt holders. 

• Cash Flow Driven: It's backed by the company's cash flows rather than specific assets. 

• Higher Risk, Higher Reward: Due to the increased risk, mezzanine lenders typically charge higher interest rates and may include equity participation features. 

• "Bridges" the Gap: It's used to fill the financing gap between senior debt and equity, often in situations like acquisitions, buyouts, or expansion.