Mezzanine

Mezzanine is the deepest layer of debt in a structure, ranking behind everything secured and immediately above equity. It is priced accordingly, historically in the low to mid teens on an all in basis.

Its interest is frequently paid in kind rather than in cash, accruing to the principal so the business preserves liquidity during the hold and repays a larger balance at exit. It is often sweetened further with detachable warrants giving the lender a slice of the equity upside.

That structure makes it a hybrid: contractually debt, economically closer to equity, which is why mezzanine providers underwrite the business plan much as a sponsor would.

Unitranche facilities have displaced much of the traditional mezzanine market in mid market Europe, since a single blended tranche from one private credit fund is simpler and faster than layering senior and mezzanine separately.