Holding Company Discount Notes
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.
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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