Mezzanine Debt
Definition
Mezzanine debt is junior capital that sits between senior debt and equity in the capital structure — typically subordinated notes or preferred-like instruments. It absorbs losses before senior debt but ranks ahead of common equity.
Because of its position, mezzanine carries high all-in returns (frequently in the low-to-mid teens or higher), often built from a cash coupon plus PIK interest, and sometimes equity upside via warrants or co-invest. It is usually unsecured or second-lien, with bullet maturities longer than the senior debt.
Sponsors use mezzanine to stretch total leverage beyond what senior lenders will provide while limiting equity dilution. In larger deals its role is often filled by high-yield bonds or holdco PIK notes; classic mezzanine remains most common in the middle market.
Why interviewers ask
Capital structure ranking questions ("order these instruments by seniority and cost") almost always include mezzanine. Interviewers may also ask why a sponsor would add expensive mezzanine — the answer is incremental leverage and returns math versus dilution.
Related terms
Interviews don't test definitions — they test recall under pressure.
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