Which is more senior, high yield bonds or mezzanine debt?
The 4th edition of the WSO tech guide (p 39) states that high yield bonds are "similar to mezzanine debt/bonds but lower in the capital structure." but in Rosenbaums IBanking book (p187), it states that "mezzanine debt offers a higher rate of return than traditional high yield bonds" meaning mezzanine debt is lower in the capital structure as it yields higher risk/return.
Which form of debt financing is indeed more senior? Please explain.
Thanks in advance.
**Not to mention, Macabacus also states that high yield bonds are senior to mezzanine debt.
http://macabacus.com/valuation/lbo/capital-structure
I had thought that HY bonds are lower... but I tend to trust Macabacus...
The WSO usage is wrong in terms of general usage, but both overstate their case-high yield bond and mezzanine debt are both flexible terms and are not mutually exclusive.
"High yield" means sub-investment-grade but is applied to debt that could be secured, senior unsecured, or subordinated.
Mezzanine as a term is used a lot of ways-generally can refer to any security below 1st lien and before common (2nd lien, sub debt, preferred equity, holdco debt).
In practice in a cap structure with sr unsecured notes (most common form of high yield bond) the term "mezzanine" usually only be used for things junior to those notes.
On the other hand in some cases (especially smaller LBOs) a 2nd lien or unsecured tranche (loan or bond) may be called mezz.
ABL revolver>Cash-Flow Revolver>Bank Debt (TL A,B, etc)>Sr. Sec. Note>Sr. Unsec. Notes>Unsecured notes>Sub debt>Preferred equity>common equity
Mezz. is usually sub debt with an equity component or some sort of juicy PIK feature so sits in the sub debt basket
HY simply refers to yield not seniority
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