Mezzanine Debt

Loading the player...

What is 'Mezzanine Debt'

Mezzanine debt is when a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments (usually warrants) attached, which increase the value of the subordinated debt and allow for greater flexibility when dealing with bondholders. Mezzanine debt is frequently associated with acquisitions and buyouts, where it may be used to prioritize new owners ahead of existing owners in case of bankruptcy.

BREAKING DOWN 'Mezzanine Debt'

Some examples of embedded options include stock call options, rights and warrants. In practice, mezzanine debt behaves more like stock than debt because the embedded options make the conversion of the debt into stock very attractive.

Under U.S. Generally Accepted Accounting Principles (GAAP), how a hybrid security is classified on the balance sheet depends on how the embedded option is influenced by the debt portion. If the exercising of the embedded option is influenced by the structure of the debt portion in any way, then the two parts of the hybrid (debt and the embedded equity option) must be classified in both the liability and stockholders' equity sections of the balance sheet.

RELATED TERMS
  1. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used ...
  2. Embedded Option

    A provision in a security that is an inseparable part of the ...
  3. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) ...
  4. Debt Exchangeable for Common Stock ...

    A debt instrument that provides the holder with coupon payments ...
  5. Exchangeable Debt

    A type of hybrid debt security that can be converted into the ...
  6. Convertible Subordinate Note

    A short-term debt security that can be changed into common stock. ...
Related Articles
  1. Investing

    Understanding Subordinated Debt

    A loan or security that ranks below other loans or securities with regard to claims on assets or earnings.
  2. Investing

    The Basics Of Financing A Business

    From debt financing to equity financing, there are numerous ways to fund a business startup. But which is the best?
  3. Investing

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  4. Financial Advisor

    The 4 Best Debt Reduction Services

    It can be tricky to find the best debt reduction services for your financial situation. These top 4 debt consolidation firms help make the process easier.
  5. Managing Wealth

    Guide To Embedded Options In Bonds

    Investors should be aware of embedded options that may be available in certain securities as these options may affect the value of the security.
  6. Retirement

    Why Retirees Are Carrying More Debt Than Ever

    It was recently discovered that as people reach retirement they are carrying more debt than ever before.
  7. Markets

    How Debt Limits A Country's Options

    While debt is fundamentally necessary to the operation of a national government, it can also be limiting and dangerous.
  8. ETFs & Mutual Funds

    Private Equity A Trendsetter For Stocks

    In this article, we'll show you how private equity sets the trend for stocks everywhere.
  9. Markets

    Understanding Long-Term Debt

    Long-term debt is any debt or liability that is due in more than one year.
  10. Markets

    Does 2016 Spell the End of a Global Debt Cycle?

    Examine the growth of global debt from 2010 to 2015. Emerging market debt has grown significantly, while advanced economy debt has grown marginally.
RELATED FAQS
  1. How are mezzanine loans structured?

    Discover what a mezzanine loan is and how it is structured, along with reasons why companies consider this alternate form ... Read Answer >>
  2. What factors are most important to mezzanine financiers?

    Understand what it means for a business to use mezzanine financing, and learn what mezzanine financiers consider prior to ... Read Answer >>
  3. What are the primary disadvantages of using mezzanine financing?

    Learn how certain companies can use mezzanine financing as capital for rapid growth, and discover the caveats that might ... Read Answer >>
  4. What are the primary advantages of using mezzanine financing?

    Learn how certain businesses can use mezzanine financing as a source of funding for company growth, and understand its potential ... Read Answer >>
  5. What is the difference between subordinated debt and senior debt?

    Understand the difference between subordinated debt and senior debt. Learn what a company is required to do in case of bankruptcy. Read Answer >>
  6. Why would you look at a company's net debt rather than its gross debt?

    Learn the difference between net debt and gross debt, how to calculate debt using a company's financial statements and why ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center