Mezzanine

Mezzanine capital is a hybrid form of financing that sits between equity and debt. It is usually subordinated, but in return offers lenders higher interest or a participation in success. Companies use it to close a financing gap between bank debt and equity. Its forms are varied, ranging from subordinated loans through silent participations and profit participation rights to convertible bonds.

The remuneration structure is characteristic: alongside cash interest, a deferred interest component is often agreed and added to principal, preserving liquidity in the early years, supplemented by a final payment or warrants allowing the provider to share in value creation. Total returns sit well above bank terms and below equity investors' expectations, which explains its economic position. The main advantage for the entrepreneur is that no shares are given up and control is retained, while debt capacity is extended beyond what banks alone would finance.

In accounting terms mezzanine can under certain conditions be treated economically as equity, improving the rating and the negotiating position with banks. The specific classification depends on subordination, tenor, profit dependency and loss participation. The instrument is used in acquisitions, growth financing, succession solutions and shareholder changes. For the provider, security is the essential difference from equity, because despite subordination it regularly receives information rights, consent requirements for material measures and additional intervention rights in a crisis. Negotiation therefore turns less on the coupon than on these rights. Entrepreneurs should check whether a conversion or warrant component is included, since in a successful case it does lead to an equity stake and thereby qualifies the original advantage of avoiding dilution.