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Mezzanine capital, in finance, refers to a subordinated debt
or preferred equity instrument that represents a claim on a company's assets
which is senior only to that of the common shares. Mezzanine financings can be
structured either as debt (typically an unsecured and subordinated note) or
preferred stock.
Mezzanine capital is often a more expensive financing source for a company than
secured debt or senior debt. The higher cost of capital associated with
mezzanine financings is the result of its location as an unsecured, subordinated
(or junior) obligation in a company's capital structure (i.e., in the event of
default, the mezzanine financing is less likely to be repaid in full after all
senior obligations have been satisfied). Additionally, mezzanine financings,
which are usually private placements, are often used by smaller companies and
may involve greater overall leverage levels than issuers in the high-yield
market; as such, they involve additional risk. In compensation for the increased
risk, mezzanine debt holders require a higher return for their investment than
secured or other more senior lenders.
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