Hey guys,
I'm having a tough time understanding why HCDN would be part of mezzanine financing. They're exactly the same as regular bonds, with the only exception being that the cash-interest payments usually begin after 5 years. Shouldn't they be classified as debt? How common do you guys see these in PE deals?
Thanks.
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Discount notes are considered mezzanine financing because of their subordinated position in the cap structure. The notes are unsecured - meaning they are junior to any and all secured debt, and would compete for the same capital as other unsecured securities (e.g., mezzanine financing, PIK notes, trade credit, etc.).
I have been on deals where these notes were used, though usually the notes are only issued when you have a specific reason for doing so - generally, these would be securities in a newco that a previous seller might be forced to buy per the terms of a purchase agreement (think seller notes).
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