Higher Interest

mezz is higher

here’s an explanation from oak tree

For middle-market businesses, mezzanine debt typically takes the place of the high yield bonds used by larger companies. As highlighted in figure 2, the minimum issuance size for a company to access today’s high yield bond market is generally $200 million or more. In other words, most middle-market businesses do not have the financing need or the ability to access the high yield bond market. By creating a capital structure with a ‘‘right-sized’’ combination of mezzanine debt and bank borrowings, middle-market companies can leverage their equity capital to generate attractive returns for their owners. Figure 2: Debut High Yield Bond Issuance

Figure 3: Sample Mezzanine Debt Terms • 11-12.5%(11%cash,0-1.5%PIK) • Subordinated unsecured • 6-7 year debt instrument • Purchasedequity • 2-3 points up-front (or via OID) • 1-2yearsnon-call;premiumprepayment schedule thereafter

risks 1st and foremost, mezzanine debt is junior in the capital structure and typically in a first-loss position after the value of the company drops by more than the amount of its equity. Second, since mezzanine debt is provided through privately negotiated transactions, it is far less liquid than more public securities if it needs to be sold. Lastly, middle-market businesses often face greater idiosyncratic risks compared to larger companies. For example, due to their smaller size, loss of a customer or increases in the cost of raw materials may have a larger impact on the borrower’s EBITDA than it would on a larger company. In certain instances, due to their size and ownership structure, middle-market companies may also have less professional or less seasoned managemen