Mezzanine capital

Also known as: Mezzanine financing

Mezzanine capital is a collective term for types of financing. This is a mixture of equity and debt.

Definition / explanation

Die Mezzanine-financing (ital. mezzo „halb“) ist eine Mischform zwischen den Finanzierungsarten Eigenkapital und Fremdkapital. Dabei vereint das Mezzanine-Kapital die klassische Variante des Eigenkapitals mit den Merkmalen des Fremdkapitals.

The financing instruments used for this, also known as hybrid financing instruments, include profit participation rights, profit-sharing loans or silent partnerships. Depending on which financing instrument is used, the mixed character of the mezzanine capital can be classified closer to equity or close to debt.

Mezzanine financing is of great importance for debt-financed acquisitions in the area of private equity and is an important part of the capital structure. In this way, equity stakes can be kept low.

Features of the mezzanine capital

Repayment obligation - Mezzanine capital is mostly long-term financing. In contrast to equity, it has to be repaid.

Higher returns - Due to the higher risk, mezzanine capital providers demand higher returns than traditional debt capital providers.

Subordination - The agreed subordination in the case of granted mezzanine financing means that, in the event of insolvency, the mezzanine capital is serviced after the normal creditors and before the equity providers. The mezzanine capital is jointly liable for losses and is therefore regarded as economic equity.

Tax deductibility - Compensation is paid for the provision of the mezzanine capital. These reduce the tax ceiling of corporate tax or income tax.

Little say - The financiers of the mezzanine financing have only a small say in the operative business. These essentially concern the right to information and control options.

Advantages of mezzanine capital

  • Equity is strengthened and the equity ratio is increased
  • better credit rating
  • no security order necessary
  • no dependence on banks
  • a mixture of this financing with the bank is possible
  • Freedom of use
  • Investors have no say
  • Bank-independent implementation of financing strategies
  • no credit checks and credit talks
  • Raising capital for start-ups, start-ups and companies
  • Raising equity capital by means of crowd investing

Disadvantages of mezzanine capital

  • higher costs than borrowed capital (such as bank loans)
  • Parts of a company's increase in value and profits must be passed on to the mezzanine capital providers
  • no ordinary and extraordinary termination rights possible in the event of a deterioration in economic conditions

Forms of mezzanine capital

  • Hybrid bond
  • Reverse Convertible
  • Warrant bond
  • Participation certificates and participation rights
  • Subordinated loan
  • silent participation
  • silent Society
  • Income bond
  • Convertible bond

Summary

  • Mezzanine capital is a type of financing and a hybrid of equity and debt capital
  • Features of both types of financing are combined
  • bank-independent financing
  • Little say of the financiers
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