What is the Difference between Mezzanine Debt and Mezzanine Capital?

Posted on: May 14th, 2013

While this may appear to be mere semantics, there are some differences between mezzanine debt and mezzanine capital. But first we should take a minute and understand what this commonly misunderstood word is.

Mezzanine debt and mezzanine capital are often subject to a number of misconceptions. The word mezzanine derives from the Latin word Latin medianus, which means middle, and is defined as the intermediate story that projects in the form of a balcony.

If you have ever been to a concert hall or sports arena, you may recall seeing a sign for the mezzanine level which is in the middle of the building, above the orchestra or lower level but below the balcony or upper deck.

Applying this to the world of finance, mezzanine means the middle layer of capital below a secured loan but above the equity layer. A three-layer cake analogy is a good way to see this with the mezzanine being the middle layer of the cake.

Some would say the mezzanine debt and mezzanine capital are interchangeable terms, but the contrast between the words debt and capital do offer some interesting insights.

Debt can be a form of capital, but capital is not always debt. Capital is defined as a store of useful assets, something companies need in order to grow. Capital is often a fancier term for the word money.

Debt is a loan, which has a principal repayment requirement and an interest payment. Mezzanine debt is the vehicle through which money can be raised by a company.

Once this money is invested by the company to generate long-term growth, it becomes mezzanine capital, which is very similar to equity. While the mezzanine money may have loan like attributes, it functions more like equity and hence is elevated into that rarefied status of mezzanine capital.

So while the world may see mezzanine debt and mezzanine capital as the same, mezzanine capital represents the beneficial end result to the company, the opportunity to realize great, long-term value.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.