Structure of mezzanine

Typically mezzanine financing is structured through three components:

1. Cash interest payable to the lender e.g. every six months. Typical cash interest comprises Euribor plus an agreed margin.
2. Capitalized interest, which becomes payable usually when the mezzanine debt is repaid or when the business is sold. Such capitalized interest is also known as ‘payment-in-kind-interest’ (PIK-interest).
3. The third component consists of warrants or other forms of equity instruments. Warrants typically constitute options to subscribe shares of the company at a point in the future.

Mezzanine loans are generally bullet loans, i.e. payable in one amount at final maturity or at exit, whichever occurs first, and have maturities typically ranging between 5 and 8 years.

The pricing of mezzanine capital reflects its position in the capital structure. In compensation for the increased risk, due to the weaker position relative to the secured or other more senior lenders, mezzanine debt investors require a higher return for their investment than the other lenders.