what is mezzanine debt 
mezzanine debt occurs when a hybrid debt issue is subordinated to another debt issue from the same issuer mezzanine debt has embedded equity instruments attached often known as warrants which increase the attractiveness of the subordinated debt and allow greater flexibility when dealing with bondholders mezzanine debt is frequently associated with acquisitions and buyouts for which it may be used to rank new owners higher than existing owners in the stakeholder seniority list in case of company liquidation investopedia jake shiunderstanding mezzanine debtmezzanine debt bridges the gap between debt and equity financing and it s one of the highest risk forms of debt it s senior to pure equity but subordinate to pure debt but it also offers some of the highest returns when compared to other debt types it often receives rates between 12 and 20 per year 1types of mezzanine debtthe types of equity included with the debt can be many some examples of embedded options include stock call options rights and warrants mezzanine debt behaves more like a stock than debt in practice because the embedded options make the conversion of the debt into stock very attractive mezzanine debt structures are most commonly found in leveraged buyouts a private equity firm might seek to purchase a company for 100 million with debt but the lender only wants to put up 80 of the value and offers a loan of 80 million the private equity firm doesn t want to put up 20 million of its own capital and instead looks for a mezzanine investor to finance 15 million the firm then only has to invest 5 million of its own dollars to meet the 100 million price tag the investor used mezzanine debt so they ll be able to convert that debt to equity when certain requirements are met using this method of financing leverages the buyer s potential return while minimizing the amount of capital that it must put up for the transaction a hybrid security classification on the balance sheet under u s generally accepted accounting principles gaap is dependent on how the embedded option is influenced by the debt portion the two parts of the hybrid the debt and the embedded equity option must be classified in both the liability and stockholders equity sections of the balance sheet if the act of exercising the embedded option is influenced by the structure of the debt in any way example of mezzanine debtmezzanine debt is most often used in mergers and acquisitions olympus partners a private equity firm based in connecticut received debt financing from antares capital in 2016 to acquire amspec holding corp a company that provides testing inspection and certification services for petroleum traders and refiners the total amount of the financing was 215 million this included a revolving credit facility a term loan and a delayed draw term loan antares capital provided the total capital in the form of mezzanine debt thus giving it equity options 2