Mezzanine capital is any Subordinated debt or preferred equity instrument that represents a claim on a company assets which is senior only to that of the common shares. Mezzanine financing’s can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. Mezzanine capital is often a more expensive financing source for a company than secured
debt or senior debt.
The higher cost of capital associated with mezzanine financing’s is the result of its being an unsecured, subordinated (or junior) obligation in a company capital structure (i.e., in the event of default, the mezzanine financing is only repaid after all senior obligations have been satisfied).
Additionally, mezzanine financing’s, which are usually private placements, are often used by smaller companies and may involve greater overall levels of leverage than issues in the high-yield market; they thus involve additional risk. In compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or more senior lenders.