Mezzanine capital: equity substitute in a changed market

Where mezzanine actually sits in the stack

Mezzanine is a category, not a product. We see junior loans with a second-ranking charge, shareholder loans with subordination, participating loans and silent partnerships. What fits is decided less by the funding gap than by what the senior loan agreement permits.

The most common mistake: negotiating the junior tranche before confirming with the bank whether a second-ranking charge is allowed at all. If the answer is no, the whole structure moves to unsecured — and that typically costs 200 to 400 basis points.

• Negotiate subordination and standstill alongside the senior facility
• Start the intercreditor agreement early; it is the critical path
• Check distribution lock-ups: they decide when the junior lender sees cash

What it costs and when it pays

Pricing depends on leverage, project phase and sponsor. Standing assets with stable cash flow and total leverage up to 85 per cent attract low double-digit return expectations. Development before planning consent sits well above that, often with an exit fee instead of a running coupon.

The repayment mechanic matters more than the coupon. A PIK element preserves liquidity during construction but eats more margin at exit than most models show. We always run both versions side by side.

When we advise against it

On tightly costed developments with thin margins, the junior tranche consumes the entire buffer for construction cost increases. A smaller scheme or a genuine equity joint venture partner is then the better route.