Glossary
Mezzanine debt
Also called: mezz, mezzanine loan
Mezzanine debt is a loan that ranks behind senior debt but ahead of equity. It is usually secured by a second mortgage or by security over the shares in the project company, and is repaid after the senior lender.
An example
A developer's senior lender will not fund the full cost of a project. A mezzanine lender provides part of the gap behind the senior loan, reducing the equity the developer has to put in.
Why it matters
Mezzanine funding increases leverage and the cost of capital, and it adds another party with rights if the project struggles. The terms in the intercreditor deed are as important as the pricing.
Points to check
Mezzanine debt usually costs more than senior debt because it carries more risk. Ask the senior lender whether it permits mezzanine funding and on what terms, and read the intercreditor deed carefully. Check how mezzanine interest is charged and capitalised, and how much of the sale proceeds must go to the senior lender first. Model the impact on profit, because a higher cost of funds reduces margin.
Read about mezzanine finance