Mezzanine Debt
Private Credit glossary · Loan Structures & Instruments
Definition
Subordinated, often unsecured debt sitting between senior secured loans and equity in the capital structure. Typical structure: 0–1.5× EBITDA, 11%–15% all-in coupon split cash/PIK (e.g., 8% cash + 5% PIK), bullet maturity (5–8 years), call protection (102/101/par), and an equity kicker (warrants for 1%–5% of fully diluted equity or co-investment rights) that lifts the all-in IRR roughly 200–400 bps above the headline coupon. Highest-yielding layer of corporate debt; highest loss-given-default (sim 80% LGD).
Mezzanine Debt in plain English
When a company borrows money, not all lenders are treated equally if things go wrong — some get paid back first, others last. Mezzanine debt sits in the risky middle: it gets paid after the "senior" lenders (who often have a legal claim on specific assets as collateral) but before the owners' own stake, so it's more dangerous than a normal loan. Because it's riskier, it pays a much higher interest rate — often 11 to 15 percent — and part of that interest may be "PIK" (paid-in-kind), meaning instead of cash the lender just gets a bigger IOU that grows the balance. Lenders also usually grab a small slice of ownership upside (an "equity kicker," like warrants — the right to buy shares cheaply later), which sweetens their total return; the flip side is that if the company defaults, mezzanine lenders typically recover very little (around 20 cents on the dollar).
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