Mezzanine
Hybrid financing that sits between senior debt and equity in the capital structure, often debt with equity warrants.
The exam usually tests mezzanine through a capital-structure ranking question: order the claims, and mezzanine slots above equity but below senior secured debt, so in default it ranks behind senior lenders but ahead of the equity sponsor. The “tell” is language about a financing gap or an equity kicker (warrants/options) — that signals mezzanine, not plain debt. Item-writers also use it inside an LBO: when senior lenders cap leverage, mezzanine adds capacity, letting the sponsor commit less equity and lift the deal’s equity return (IRR).
The classic trap is conflating mezzanine with the related strategies. Buyout/private-equity returns come from owning equity — debt paydown, operational/EBITDA gains, and multiple expansion — whereas mezzanine’s return is mostly a high coupon plus modest warrant upside, a fixed claim rather than ownership. Don’t call it senior debt: it is subordinated (often unsecured), which is exactly why the coupon is higher. Memory hook: mezzanine = the floor between the ground (senior debt) and the upper level (equity).
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