Mezzanine Finance is indebtedness that’s junior to the senior indebtedness but is senior to equity. Mezzanine Finance is usually employed in connection with transactions where senior lenders won’t provide the full amount of financing, and there’s a gap between the amount of equity and senior that can be provided and the ultimate purchase price.

Mezzanine Finance is characterized by high interest rates, from the mid teens up to the low twenties, including an equity component generally in the form of warrants or stock.

The term is typically three to five years in duration. Many mezzanine loans come with what’s known as yield protection which provides that during the first several years it’s not permitted to be repaid unless the full amount of interest that would otherwise be payable during that period of time is also paid with prepayment.

Mezzanine Finance is ordinarily used in the context of transactions such as mergers or acquisitions, restructurings, or other transactions to bridge the gap between the total purchase price and the equity and senior debt that’s available.

There are many mezzanine firms, which range from family offices to private equity related firms and specialty credit funds. They are all characterized by those higher interest rates and the same types of provisions and equity coverage.