Mezzanine debt

Type of debt which is between senior debt and equity. It ranks and is repaid after senior debt but before junior/institutional loan stock. It in effect incorporates equity-based options, such as warrants, with a lower-priority debt. Generally it carries an option, warrant or redemption fee, which tends to distinguish it from senior debt reflecting the inherent risk nature of such a debt instrument. Mezzanine debt is actually closer to equity than debt, in that the debt is usually only of importance in the event of bankruptcy. Mezzanine debt is often used to finance acquisitions and buyouts, where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs. The cost of mezzanine debt is greater than senior debt as there is more risk involved.