Acquisition finance—mezzanine facility
Acquisition finance—mezzanine facility

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Acquisition finance—mezzanine facility
  • What is mezzanine debt?
  • Documenting the mezzanine facility
  • Warrants
  • Intercreditor and security position

This Practice Note covers the typical characteristics of the mezzanine facility and explains the key changes needed to turn a senior facilities agreement into a mezzanine facility agreement.

For an introductory guide to acquisition and leveraged finance, see Practice Note: Acquisition finance—introductory guide and for an explanation of commonly used jargon, see: Glossary of acquisition finance terms and jargon.

What is mezzanine debt?

The mezzanine facility is a form of finance that ranks after the senior facilities. It is sometimes used in leveraged finance transactions:

  1. to make up any shortfall in the purchase price when the senior facilities and equity investment (and any other funding) are combined, and

  2. to access certain kinds of lenders who prefer to invest in mezzanine which is higher risk and higher reward rather than senior debt

Mezzanine is generally provided by institutional investors such as funds that invest in leveraged loans, pension funds, hedge funds and specialist mezzanine houses.

Mezzanine lending tends to increase in volume if the high yield bond market falters and vice versa; they are rarely seen in the same transaction.

For introductory information about sources of funds for leveraged finance transactions and how mezzanine fits into the capital structure, see Practice Note: Sources of finance for leveraged buy-outs.

Documenting the mezzanine facility

The mezzanine facility will be documented by a mezzanine facility agreement (MFA). Although there are typically