Mezzanine Debt
Private Equity glossary · Advanced LBO Modeling Mechanics & Deal Structuring
Definition
Subordinated, unsecured (or structurally subordinated) debt ranking between senior debt and equity, typically featuring a cash coupon plus PIK interest and warrants or equity co-investment. Tenor: 7-8 years, bullet. Pricing: 10-14% all-in (cash + PIK). Less common in modern deal structures (largely displaced by unitranche) but still used in specific situations where the sponsor wants to maximize leverage at aggressive capital structures.
Mezzanine Debt in plain English
When a company borrows money to buy another company, it stacks up different loans in a pecking order for who gets paid back first if things go wrong. Mezzanine debt sits in the risky middle: it gets paid AFTER the safe 'senior' bank loans but BEFORE the owners' own money (equity). Because lenders take more risk in that middle spot, they charge a lot (about 10-14% a year) and often get part of it as 'PIK' interest — instead of cash, the unpaid interest just gets added to the loan balance to pay later — plus 'warrants,' which are coupons to buy a slice of the company cheaply if it succeeds. Think of it like the family friend who lends you money to buy a house: the bank has first claim, so your friend charges extra and asks for a small cut of any profit. It's less common today because a simpler single loan ('unitranche') usually replaces it, but it still shows up when a buyer wants to borrow as much as possible.
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