Mezzanine Debt Consideration

by Taureau Group

Mezzanine debt (“mezz” or “mezz debt”) is the layer of capital between equity and senior debt. While not applicable for all companies and situations, mezzanine debt can be a very important part of the capital structure to support an acquisition, management buyout or fund growth initiatives. Unlike sourcing and exploring more traditional senior debt options, which are often abundant and well-known in the marketplace, mezzanine debt providers, especially in the lower middle market, are not as apparent. Through Taureau Group’s years of M&A and capital markets experience, our team has developed relationships with mezzanine debt providers across the country that are willing to lend anywhere between $1 and $30 million of capital. Mezzanine debt, available to established and profitable companies, can be an attractive option to obtaining additional capital and enhancing investment returns.

Like choosing the right senior lender…relationships and terms matter. Not all mezzanine debt and providers are the same and there are several key provisions that should be taken into consideration. Given that mezzanine debt is subordinate to senior debt and may be unsecured all together, the required yield or interest rate is often much higher. It is not uncommon to see all-in interest rates on mezzanine debt between 12-18% (the interest is tax-deductible). While the rates are notably higher than traditional senior debt, mezzanine debt provides more flexibility for the borrower as the structures often have no amortization requirements. And unlike senior debt, if cash flows tighten, mezzanine debt providers are generally more amendable to allowing deferred payments. Longer-term and more return focused, mezzanine debt is often structured with a maturity of three to seven years.

One important term when considering mezzanine debt is if the provider will seek some form of equity interest in the deal. Mezzanine providers may seek to enhance their returns through “equity incentives or kickers,” which most often are in the form of warrants. In short, warrants provide the mezzanine provider the right to put or buy a specific number of shares at predetermined prices and over a predetermined timeframe. The strike or exercise prices on the warrants are usually valued above the current share value with the future value coming from the borrower’s growth or eventual sale.

Regarding cost of capital, debt is almost always cheaper than equity. Prospective equity partners will seek involvement in decisions going forward, some form of compensation and benefit materially when the business is eventually sold. Unlike an equity partner, debt providers can always be prepaid (some with prepayment fees) and do not get to, or on a limited basis, capture the upside potential. Utilizing mezzanine debt, despite the higher rates as compared to traditional senior debt, can allow a borrower to secure more capital and enhance returns.

Whether traditional senior debt, mezzanine debt or bringing in an equity partner, work with Taureau Group to assist in exploring and sourcing capital options that meet your objectives.

For more information or to better understand your options related to capital needs or transitioning your business, please contact Michael Schroeder, Vice President, at or any member of the Taureau Group team at 414-465-5555.