Mezzanine debt is subordinated financing that ranks behind a senior secured lender but ahead of equity in an acquisition’s capital stack, priced higher than senior debt to compensate the lender for that lower priority.
Deavo’s own description of the instrument is precise: “mezzanine sits between senior debt and equity — it is repaid after the bank but before shareholders, so it costs more (typically 8–12%, often with a ‘payment-in-kind’ component where some interest accrues instead of being paid in cash).” In mid-market Canadian deals it typically fills the gap between what a senior lender will advance — illustratively around 3.0× EBITDA — and the sponsor’s own equity, adding roughly another 1.0× EBITDA of capacity, for total leverage near 4× EBITDA on a typical deal and 5–6× on a more aggressive one.
Because a mezzanine lender is unsecured or only lightly secured relative to the bank, its junior ranking is formalised in a separate contract with the senior lender — a subordination agreement — rather than assumed from the order the two facilities were signed in.
Some mezzanine facilities add an equity kicker on top of that coupon — warrants or a right to convert part of the loan into an ownership stake — which treadstonelaw.ca’s guide to Ontario mezzanine financing describes as “reflecting the lender’s added risk,” on top of the interest-rate premium the worked example above assumes. The senior lender’s own security, by contrast, is typically registered with first-priority status under the Personal Property Security Act, R.S.O. 1990, c. P.10 — the registration a mezzanine lender’s subordination agreement ranks behind.
A platform generates $4,000,000 of EBITDA. The senior lender caps its advance at 3.0× EBITDA, or $12,000,000, but the sponsor needs $16,000,000 of debt capacity to keep its own equity cheque inside its target range. A mezzanine fund provides the remaining $4,000,000 — 1.0× EBITDA — at 11%, with 4% paid in cash and 7% accruing as payment-in-kind, extending total leverage to 4.0× EBITDA without asking the senior lender to advance beyond its own comfort level.
See also: Leveraged buyout · Subordination agreement · Senior secured term loan.
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