Mezzanine Debt

Where mezzanine sits

In a corporate capital stack, mezzanine attaches where senior and second-lien debt end and detaches where equity begins. It is usually subordinated in right of payment to all senior debt (see subordinated debt). It is often unsecured or holds a junior lien, and it is sometimes issued by a holding company, which adds structural subordination. Its ranking against senior lenders is fixed in an intercreditor agreement covering payment blockage, enforcement standstill, cure rights and purchase options.

Return components

• Cash coupon: often fixed rate.
• PIK interest: accrues to principal and is paid at maturity or exit.
• Fees: arrangement fee or OID.
• Equity participation: warrants or the right to co-invest alongside the sponsor.
• Prepayment protection: non-call periods and premiums, because the lender's return depends on the loan staying outstanding.

Investors quote mezzanine returns as a gross IRR across all of these, not as a coupon.

Corporate vs real estate mezzanine

• Corporate mezzanine is a loan or note to the operating group or its holding company, subordinated by contract.
• Real estate mezzanine is a loan to the entity that owns the property-owning company. It is secured by a pledge of that entity's equity, not by a mortgage on the property. On default the mezzanine lender forecloses on the equity pledge and steps into ownership subject to the senior mortgage loan. The intercreditor agreement with the mortgage lender sets cure and purchase rights.

Mezzanine as a strategy

Mezzanine funds invest across sponsor buyouts, non-sponsored growth and recapitalisation financings, and real estate. In sponsor buyouts, a unitranche loan is an alternative to a separate mezzanine layer: one lender provides stretched leverage in a single first-lien tranche.

How LPs evaluate mezzanine managers

• Realised gross and net IRR split into coupon, PIK, fees and equity kicker, to see how much depends on equity outcomes.
• Loss history.
• The share of positions that are holdco or structurally subordinated.
• Intercreditor rights actually obtained.
• Concentration. A small number of losses can determine a mezzanine fund's outcome.

Worked example

Examples are illustrative; figures are not market data.

Not the same as

• Second Lien: Second lien keeps an equal right of payment and a lien on the shared collateral. Mezzanine is usually payment-subordinated and unsecured or pledge-secured.
• Preferred Equity: Preferred equity is an equity security with no debt claim. Mezzanine is debt with creditor remedies, however junior.
• Unitranche: A unitranche merges senior and junior risk into one first-lien loan. Mezzanine is a separate junior instrument.

Common mistakes

• Comparing a mezzanine cash coupon with a senior loan coupon without adding PIK, fees and warrants.
• Treating real estate mezzanine as secured on the property. It is secured on equity interests in the owner.
• Assuming mezzanine always carries warrants. Many mezzanine loans have none.

Edge cases

• A fully PIK holdco note pays no cash until maturity. It is mezzanine by position, but its risk profile is close to equity.
• Some "mezzanine" tranches in securitisations are rated notes in a waterfall, a different use of the word.

Sources

1. Infrastructure Financing Instruments and Incentives (Mapping of Instruments and Incentives for Infrastructure Financing: A Taxonomy). OECD (R. Della Croce et al.), OECD, September 2015, report to G20. Status: Published (checked 2026-10-01). Instrument taxonomy — supports: Classification of mezzanine as a distinct financing instrument between debt and equity

• Payment-in-Kind (PIK)
• Capital Stack
• Unitranche
• Private Credit

• Debt Yield
• Loan-to-Value (LTV)
• Senior Secured Debt