Mezzanine Debt
Subordinated debt in an LBO capital stack that sits below senior secured debt and above sponsor equity in the priority waterfall. Typical features: 10-15% all-in target return; cash coupon of 8-12% plus PIK toggle to 10-14%; equity kickers (warrants for 1-10% of fully-diluted equity); 7-10 year maturity; minimal maintenance covenants; subordinated security. Mezzanine bridges the gap between senior-debt cost of capital (mid-single-digit yields) and sponsor-equity cost of capital (20%+ target IRR). Used most heavily in mid-market LBOs where senior leverage maxes out below the sponsor's required equity check.
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Related terms
Absorption Rate · AFFO per Share · Allowed Return on Equity · Alternative Investments · Anchor Tenant · Assets Under Management
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