| Subordinated debt, also known as mezzanine or junior | | | | to fund internal growth strategies. Mezzanine loans |
| debt, is a second-level of debt. Such debt is referred | | | | have thus become a common alternative to |
| to as subordinate, because the debt providers | | | | conventional subordinate financing where the terms |
| (lenders) have subordinate status in relationship to | | | | of a first position loan prohibit junior liens. |
| the senior debt. | | | | MEZZANINE FINANCING STRUCTURE AND TERMS |
| Senior debt refers to debt that is in first-lien position. | | | | Mezzanine loans are typically utilized in conjunction |
| In the event of a default and subsequent liquidation, | | | | with equity capital and senior debt and would rank |
| the senior lender (often a commercial bank), has first | | | | second below first-lien debt, but above equity in the |
| priority in recouping its investment. When a company | | | | event of bankruptcy. Mezzanine loans are therefore a |
| goes bankrupt, stake holders divide the proceeds | | | | more expensive source of financing than senior debt |
| from selling the company's assets. The senior lender | | | | because of the increased credit risk. Consequently, a |
| is first to be re-paid, followed by the subordinated | | | | mezzanine financier is generally looking for a 16 to 30 |
| debt holders, followed by equity holders. Because | | | | percent return on investment. |
| senior debt's first priority repayment presents a | | | | Most mezzanine deals have a life of about three to |
| lower-risk position compared to subordinated debt or | | | | seven years with the bulk of the principal often paid |
| equity investors, this debt is expected to have more | | | | toward the back-end of the loan. In addition to an |
| favorable interest rates associated with it, | | | | interest payment normally associated with debt, |
| commensurate with the lower risk assumed. | | | | mezzanine loans will often include an option for an |
| PURPOSE OF MEZZANINE FINANCING | | | | equity stake in the company in the form of warrants |
| Mezzanine loans fill the gap between equity and | | | | to convert the debt to equity much like that of a |
| senior debt and are often used to finance leveraged | | | | convertible bond. |
| buyouts, to recapitalize a company's balance sheet or | | | | |