Structure
Mezzanine
Mezzanine is a loan sitting behind the senior facility, secured and dated, usually part cash-pay and part PIK. It buys quantum the senior lender will not stretch to, and it adds a creditor, a maturity and an intercreditor.
Also called mezzanine debt · mezzanine finance · junior debt · subordinated debt · mezz
Position in the queue sets the price. Mezzanine is a step above unitranche and well above bank senior debt.
| Layer | All-in cost |
|---|---|
| Bank senior | ≈6.75% |
| Unitranche | 9.25-11.75% |
| Mezzanine | Low to mid teens |
All-in cost by layer, plotted on a 0 to 18% axis. Bank senior at about 6.75% and unitranche at 9.25-11.75% are published figures. The guides give mezzanine as low to mid teens; 13 to 16% is our reading of that phrase for plotting, not a published band.
Where it sits
Between the senior debt and the shareholders, and it is documented as a loan rather than as equity.
That means a facility agreement, a fixed maturity, and security that ranks behind the senior lender's, usually a second charge over the same assets. If the company fails, the senior lender is repaid first, the mezzanine lender next, and the shareholders take what remains.
That position in the queue is what sets the price. Everything else about the instrument follows from being second in line with a legal claim rather than first in line or last.
What it costs
In the UK lower mid-market, mezzanine runs in the low to mid teens all-in, a step above unitranche and well above bank senior debt.
Set against the published costs of the layers around it, that puts it above a unitranche at 9.25 to 11.75% and well above a bank senior facility at an all-in near 6.75%. The lenders are debt funds and a small number of specialist houses rather than banks, and the strip is usually sized as a minority of the whole structure, sitting behind a larger senior facility.
The headline rate is not the whole cost. Some facilities add a warrant, a small option over equity negotiated deal by deal, which means mezzanine can carry a sliver of dilution as well as a coupon. Where a warrant is attached, the true cost depends on the exit value and is unknowable at signing, which is a materially different proposition from a fixed coupon.
A senior and mezzanine structure can price below a single stretched facility, on less quantum. The comparison is cost against reach, not one against the other.
| Structure | Blended cost |
|---|---|
| Senior £6m + mezz £2m | 8.56% |
| Unitranche £9m | 10.50% |
Derived arithmetic on £2m of EBITDA using published costs: £6m of bank senior at 6.75% plus a £2m mezzanine strip at 14%, against £9m of unitranche at the midpoint of the published band. Mezzanine also brings a second creditor and an intercreditor, which no cost figure captures.
Cash pay and PIK
The coupon usually splits in two, and the split is the point of the instrument as much as the rate is.
Part is cash pay, a running interest cost the business services like any other loan. Part is PIK, payment in kind, which rolls up into the loan balance instead of leaving the company. The split preserves cash while the plan builds, which is precisely what a business funding growth or an acquisition needs.
It also carries the instrument's quiet danger, which is compounding. The rolled-up balance grows on itself, so a slow exit hands a growing share of the equity value to the lender. How fast that runs, and what it does to the number owed, is worked through on our page on PIK.
The practical consequence is that a mezzanine strip is far more sensitive to timing than a senior facility. Repaid on plan it is expensive but bounded. Repaid three years late it is a different instrument.
What it buys
Quantum the senior lender will not stretch to, without selling equity to get it.
A business whose senior lender will fund three times EBITDA and whose plan needs four has three routes: accept the smaller facility, sell equity to bridge the gap, or add a junior layer. Mezzanine is the third, and it is priced accordingly.
The comparison against equity is the one worth making carefully. Mezzanine is expensive against debt and cheap against equity, because equity gives away a permanent share of everything the business becomes, while mezzanine gives away a coupon and a maturity. Where a business is growing quickly and the owners believe the equity is worth more later, that trade often favours the debt.
Where growth is uncertain, the trade inverts. Equity absorbs a bad year and mezzanine does not, because a loan with a maturity has to be repaid whether or not the plan worked.
What it consumes
Senior tolerance, and this is the constraint borrowers most often discover late.
Because it is debt, mezzanine has to be tolerated by the senior lender above it. The senior lender demands an intercreditor agreement: ranking, standstill periods, and a block on payments to the junior lender while things are bad. Negotiating that triangle takes time and legal fees, and some senior lenders at this end of the market simply decline to have a junior lender behind them.
That last point is worth testing before building a structure around it. A mezzanine strip is only available if the senior lender will accept one, and the answer varies by lender rather than by borrower.
Preferred equity, by contrast, sits outside the debt stack altogether. From the senior lender's seat it thickens the equity cushion beneath the debt, which supports senior capacity rather than consuming it, and there is no intercreditor to agree. Its cash is still controlled, because the permitted payments schedule will block dividends while the facility runs, but a blocked dividend that accrues is a postponement, not a default.
The senior lender experiences the two very differently. Mezzanine is another creditor inside its structure; preferred equity sits outside the debt stack altogether.
| Feature | Demand on the senior |
|---|---|
| Preferred equity: no intercreditor | Sits outside the stack |
| Second charge over the same assets | 35–58 on the scale |
| Payment blockage and standstill | 52–75 on the scale |
| A negotiated intercreditor | 68–90 on the scale |
| Some seniors decline outright | The hard limit |
What each junior layer consumes from the senior lender's seat. A trade-off rather than a ranking, following the source guide: mezzanine is cheaper and more demanding, preferred costs more and forgives more.
Mezzanine against preferred equity
A trade-off between cost, cash flow, control and dilution rather than a ranking, and the honest summary is short.
Mezzanine is cheaper but adds a creditor, a maturity and an intercreditor. Preferred costs more and forgives more.
The variable that usually decides it is confidence in timing. Mezzanine's maturity is a hard date, and its standstill and payment-blockage machinery bites in exactly the scenario where the business is under pressure. Preferred equity has no maturity to miss and no intercreditor to negotiate, and it accrues quietly through a bad year rather than triggering anything.
Cost pushes the other way, and so does dilution where the preferred instrument converts or participates. Neither dominates, which is why the choice belongs to the specific plan rather than to a general rule.
When it earns its place
In three situations, and it is worth being sceptical elsewhere.
Funding a gap in an acquisition, where the senior facility reaches most of the way and the alternative to a junior strip is writing a larger equity cheque or losing the deal.
Funding growth in a business whose earnings are about to step up, where the PIK element preserves cash through the build and the exit repays it. The instrument is designed for exactly this shape.
And bridging a shareholder transaction, where a buyout needs more than the senior lender will fund and the buyers do not want further dilution. In each case the common feature is a credible event that repays the strip.
Where there is no such event, and the mezzanine is simply filling a permanent hole, the cost compounds against a business that has no plan to escape it. That is the case where the smaller senior facility is usually the better answer.
What to negotiate
The cash-pay and PIK split, the call protection, the warrant, and the intercreditor terms that reach you.
On the split, more PIK preserves cash today and costs more in total, so the right balance depends on how much cash headroom the plan needs rather than on how much it can bear.
On call protection, mezzanine commonly carries meaningful non-call or make-whole provisions, so a strip taken to bridge two years can be expensive to repay after one. What early repayment costs is worth knowing before the flexibility is assumed.
On the warrant, negotiate the strike and the coverage, and model what it costs at a good exit rather than at the base case, since that is where it will be exercised.
And on the intercreditor, the provisions that matter to a borrower are the permitted payments schedule and the standstill length, because those decide whether the junior lender can be paid at all in a difficult year and how long a stalemate can last.
Common questions
What is mezzanine finance?
A loan sitting behind the senior facility, secured and dated, with interest usually split between cash pay and PIK. It ranks ahead of the shareholders and behind every senior creditor, and it is documented as a facility agreement with a fixed maturity and usually a second charge over the same assets.
What does mezzanine cost?
In the UK lower mid-market it runs in the low to mid teens all-in, a step above unitranche at 9.25 to 11.75% and well above bank senior at an all-in near 6.75%. Some facilities also carry a warrant, a small equity option negotiated deal by deal, so the true cost can exceed the coupon.
Is a senior plus mezzanine structure cheaper than a unitranche?
It can price lower on less quantum. On £2m of EBITDA, £6m of senior at 6.75% plus £2m of mezzanine at 14% blends to about 8.56% across £8m, against 10.50% on a £9m unitranche. The layered structure also brings a second creditor and an intercreditor, which no cost figure captures.
Why is the interest split between cash pay and PIK?
To preserve cash while the plan builds. The cash-pay element is serviced like any other loan; the PIK element rolls up into the balance instead of leaving the company. The cost is compounding, which grows the amount owed the longer repayment takes.
Will my senior lender allow a mezzanine strip?
Not always, and it is worth asking early. The senior lender must tolerate the junior layer and will require an intercreditor agreement covering ranking, standstill periods and a block on payments to the junior lender while things are bad. Some senior lenders at this end of the market decline to have a junior lender behind them at all.
How does mezzanine compare with preferred equity?
Mezzanine is cheaper but adds a creditor, a maturity and an intercreditor. Preferred costs more and forgives more, since it sits outside the debt stack, thickens the equity cushion beneath the senior facility and accrues rather than defaults. It is a trade-off between cost, cash flow, control and dilution rather than a ranking.
When does mezzanine earn its place?
Where there is a credible event that repays it: an acquisition the senior facility nearly funds, a growth plan whose earnings step up, or a shareholder transaction the owners do not want to dilute further. Where it is filling a permanent hole with no plan to escape it, a smaller senior facility is usually the better answer.
What should I negotiate on a mezzanine facility?
The cash-pay and PIK split against the cash headroom the plan needs, the call protection, since early repayment can be expensive, the warrant strike and coverage modelled at a good exit rather than the base case, and the intercreditor terms that reach you: the permitted payments schedule and the standstill length.
The full treatment sits in the guide: mezzanine vs preferred equity.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.