6 Mezzanine.....................................................................................................
6.1 Introduction
Mezzanine financing is regarded as a form of financing that contains elements of
both equity and debt. From the perspective of the investor, typical mezzanine in-
vestments are subject to a higher risk than traditional debt instruments but to a
lower risk than traditional shares. For this reason, mezzanine investors tend to re-
quire a higher return on their investment compared with holders of traditional debt
instruments but may accept a lower return compared with holders of traditional
shares. Typically, mezzanine instruments tend to resemble traditional debt instru-
ments in that mezzanine capital will only be invested for a limited period of time
and, in the insolvency of the company, repaid before shareholders’ capital invest-
ment will be repaid.^1
Sources of mezzanine financing. Mezzanine financing is often provided by
credit institutions and specialist institutional mezzanine providers. There can be
two or more layers of mezzanine debt.^2 Mezzanine capital is typically used: in the
expansion phase of the firm; for large-scale investments; and in acquisitions and
similar transactions involving a change in the ownership structure of the firm
(spin-offs, MBOs/MBIs, pre-IPOs, trade sales).
Mezzanine instruments. Mezzanine instruments range from products that are is-
sued to the public (“participation certificates”, convertible bonds, bonds with op-
tions) to products that are placed privately (subordinated loans, “silent participa-
tions”).
Mezzanine technique. Unlike “share capital” and “debt”, “mezzanine financ-
ing” is not a normative concept. Mezzanine instruments are created by using the
“mezzanine technique”. Four things are characteristic of mezzanine instruments.
First, mezzanine instruments are not recognised as a particular class of con-
tracts. A mezzanine instrument will therefore belong to another class of instru-
ments, a class that is recognised at law. (a) From a legal perspective, a mezzanine
instrument is usually a loan or a share, and a mezzanine investor will therefore be
either a shareholder or a lender. In some countries, a mezzanine instrument can
alternatively be a profit-sharing instrument that is neither a loan nor a share.
(^1) Diem A, Akquisitionsfinanzierungen. C.H. Beck, München (2005) § 5 number 9; Bro-
kamp J, Ernst D, Hollasch K, Lehmann G, Weigel K, Mezzanine-Finanzierungen. Vahlen,
München (2008) p 3.
(^2) See Dyer R, Mezzanine Finance: Subordination and Priorities – an Overview, JIBL 5(4)
(1990) pp 154–155.
P. Mäntysaari, The Law of Corporate Finance: General Principles and EU Law,
DOI 10.1007/ 978-3-642-03058-1_6, © Springer-Verlag Berlin Heidelberg 2010