Mezzanine Debt
Investment Banking glossary · M&A & LBO Modeling Dynamics
Definition
Junior debt that sits between senior debt and equity in the capital structure. Carries high all-in cost — typically cash interest of 8-10% plus PIK interest of 3-5% (with PIK compounding into principal rather than paid in cash). Often includes equity warrants (right to buy equity at a favorable strike) giving the lender upside participation. Most common in middle-market LBOs and growth-financed acquisitions where senior debt capacity is exhausted but the sponsor wants additional leverage without writing more equity.
Mezzanine Debt in plain English
When a company borrows money, lenders line up in an order for who gets paid back first if things go bad. Mezzanine debt sits near the back of that line — riskier than the safe "senior" loans but ahead of the owners — so it charges a high price for taking that risk. Part of its interest is often paid not in cash but as PIK ("payment in kind"), meaning the unpaid interest gets piled onto the loan balance and snowballs, and lenders frequently also get warrants (the right to buy some shares cheaply later) for extra upside. It's the financing you reach for when the cheap, safe loans are maxed out but you still want more borrowed money instead of putting in more of your own cash.
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