Mezzanine debt

Mezzanine debt is a hybrid financing instrument positioned between senior debt and equity in the capital structure of an LBO or acquisition. Subordinated to senior bank debt, it offers higher risk-adjusted returns (10–15%) combining a cash coupon, PIK (payment in kind) interest and sometimes an equity kicker (warrant or equity participation). It fills the financing gap between what senior debt can cover and what equity investors are willing to commit. Its risk profile is intermediate — protected by equity cushion below but exposed to loss if senior debt is not fully serviced.

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Example: in a CHF 50.0 million LBO, the financing structure includes CHF 25.0 million senior debt (50%), CHF 10.0 million mezzanine (20%) and CHF 15.0 million equity (30%). The mezzanine tranche carries 8% cash coupon + 5% PIK capitalised, plus a 3% equity kicker — targeting a 15–18% total return for the mezzanine lender if the transaction succeeds as planned.

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Hectelion structures mezzanine tranches in LBO and acquisition financing, calibrating coupon and equity kicker to the specific risk profile and business plan of each transaction.