Mezzanine financing: what a borrower pays for a place between debt and equity

Mezzanine is money that enters a company as a loan but earns like an equity stake. The lender agrees to stand in line behind the bank: in a default it is repaid only after the claims of senior debt have been satisfied, while in a success it is entitled, on top of interest, to part of the increased value of the business through an option, a conversion right or a fee linked to the outcome of the deal. The price of this position is not only a higher interest rate but also the lender's rights inside the company: approval of major transactions, restrictions on dividends, sometimes a seat on the board of directors. Mezzanine is used where the senior lender has already refused to lend more and the owner is not prepared to sell a stake at the current valuation.

Where mezzanine sits in the capital structure

The capital structure is a queue for cash flow and for assets in a liquidation. Senior secured debt stands first: it has collateral, covenants and the right to seize the security. Equity stands last: it receives whatever is left. Mezzanine is the layer between them, which is exactly why it is called the intermediate tier.

Legally, it is most often a subordinated loan or a bond issue expressly subordinated to senior debt, or a loan with a right of conversion into participation interests and shares. For banks, the subordinated instrument is described separately: it rests on Article 25.1 of the Law on Banks and Banking Activity, which also sets the conditions under which such funds count towards capital. The convertible loan structure for business companies appeared in Russian corporate law in the early 2020s; before that, the same task was handled with option agreements and conditional sale and purchase agreements for a stake.

What it costs

The economics of mezzanine are built from several layers, and the cash interest rate rarely works alone.

Current-pay interest is the part the company pays in cash every period. It is usually noticeably higher than the rate on a senior loan, because there is less collateral and the subordination risk is higher. As a reference for how the market as a whole prices risk across maturities, investors look at the government debt yield curve: a mezzanine rate is built as a premium over the risk-free level, not pulled out of thin air.

Capitalised interest is the part that is not paid in cash but is added to the principal and repaid at the end. For the company, this relieves cash flow during a construction period or the integration of an acquisition; for the lender, it means a growing principal.

A share in future value is a conversion right, an option to buy a stake at a price agreed in advance, or a cash payment linked to the final valuation of the business. This is the element that allows mezzanine to deliver equity-level returns to the lender while remaining debt on the balance sheet.

Restrictions are a separate matter. Until the mezzanine is repaid, the company as a rule cannot distribute profit freely, which is why payout decisions at heavily indebted issuers look different from a public dividend track record carrying no debt burden.

What subordination means on the day of default

Subordination is tested not in a presentation but in the proceedings. The senior lender is first to receive the money from the sale of collateral; the mezzanine lender waits and often has no right to enforce on its own or to initiate bankruptcy until the senior debt has been settled. These rules are usually set out in the intercreditor agreement, and it is that document, not the interest rate, that determines the real position of the mezzanine.

This has a practical consequence for an investor in public instruments: the presence of a mezzanine layer makes senior debt more resilient and equity riskier. A company's debt structure can be seen in the notes to its financial statements, which the platform collects in the issuer reports section; the timing of their disclosure is tied to the corporate events calendar.

Which deals are closed with mezzanine

A leveraged buyout of a company, when the senior loan does not cover the whole price. The acquisition of a competitor, where the owner does not want to dilute their stake at a low valuation. Property development projects, where cash flow appears only once the building is commissioned. The buyout of a partner's stake. Refinancing, when a longer term is needed than the bank offers.

The common feature: the business has a predictable future cash flow, but today that flow cannot service the full amount of an ordinary loan.

What to check in the agreement

Step 1 — the order of priority: whom the loan is subordinated to, and which events give the lender the right to demand early repayment. Step 2 — how the return is calculated: how much is paid in cash, how much is capitalised, how the option component is valued. Step 3 — the conversion terms: at what valuation, at what point, and who makes the decision. Step 4 — covenants and veto rights: what the company gives up in governance for the life of the deal. Step 5 — the exit scenario: a buyout of the stake, a sale of the business, refinancing with a senior loan.

What market data does not show

Mezzanine is almost always a private deal. Its terms are not published, it has no exchange price, and the platform's database does not contain it: there are public shares and traded bonds here, but not bilateral agreements. That is why the mezzanine layer can only be assessed from the outside indirectly, through the company's own disclosures and through deal announcements. Definitions of the terms that appear in such disclosures are collected in the glossary.

If you need specific rates and terms for the mezzanine market in Russia, the platform has no such data, and it is more honest to say so plainly than to quote a benchmark with no sample behind it.