What does mezzanine debt stand for?
Mezzanine debt refers to a hybrid debt issue subordinated to another debt issue from the same issuer. It comes with equity instruments that are called warrants. These warrants increase the value of the subordinated debt, thereby allowing flexibility while dealing with bondholders. Mezzanine debt is used by rank new owners ahead of the existing owners in case of bankruptcy during the events of acquisitions and buyouts.
Mezzanine debt is used to bridge the gap between debt and equity financing. However, it is one of the highest-risk forms of debt, is considered one of the highest return providing debts, that usually range from 12% to 20%.
Here are some examples of Mezzanine Debt to give you an insight into the subject.
As mentioned above, mezzanine debt comes with different equity instruments that may include stock call options, rights and warrants. The debt is considered more of a stock than debt because the embedded options make the conversion of the debt into stock impressive.
For example, a private equity firm wants to purchase of company for $50 million, but the lender is able to provide only 50% of the value. In this case, the private equity firm needs to put up the rest of its own capital to meet the requirement. If the company does not want to do so, it can look out for a mezzanine investor to finance 45% of the amount and it will invest only $5 million to buy the company.
When it is used?
Mezzanine debt is generally used to meet capital requirements in mergers and acquisitions (M&A). Further it is used in leveraged buyouts and real estate finance.
If you are looking for mezzanine debt, you should approach an alternative lender to get the best deal.
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