284 6 Mezzanine
(b) From an accounting perspective, a mezzanine instrument is regarded as a debt
instrument or a share or a combination of both.
Second, if the instrument is a debt instrument, that instrument will be made to
behave more like a share. For example, the debt instrument will be complemented
with: the use of the equity technique (for the equity technique, see section 5.1); the
choice of payment obligations that make the value of the instrument behave like
the value of an equity instrument (for a taxonomy of payment obligations, see
Volume II); the use of a right to an equity instrument (section 5.1); or a combina-
tion of two or more of those methods. In short, a typical mezzanine investment
consists of a debt paired with an “equity kicker”.
Mezzanine debts can thus be in the form of subordinated loans, second-lien
loans, loans linked to an equity kicker, convertible bonds, or bonds with options.^3
They may also consist of a share seller’s loans or shareholders’ loans.
Mezzanine debt is usually unsecured. Alternatively, the debt is secured, but the
collateral has a lower ranking (for second lien debt, see below) than the collateral
of senior debt.
Third, if the instrument is a share, it will be made to behave more like a debt
instrument. For example, such an instrument will be complemented with: an obli-
gation to pay a fixed sum of money (Volume II); a right to repay or redeem the in-
strument; the use of credit enhancements (Volume II); or a combination of two or
more of those methods.
Such mezzanine shares usually mean preferred shares (such as shares pursuant
to § 139 AktG).
Fourth, in both cases, the ancillary elements of mezzanine financing would in-
clude: an average expected yield, lying between that of equity and debt capital; a
limited term (usually five to ten years); and often tax deductibility of the costs as-
sociated with the provision of capital.^4
Fifth, the laws of some countries may recognise profit-sharing arrangements
that are neither loans nor shares. In Germany, such arrangements include silent
partnerships or interests (see below).
Balance sheet. The categorisation of mezzanine capital on the balance sheet
depends on the applicable accounting standards. For example, a German company
might have to apply: German accounting standards set out in the HGB (if it is
unlisted or listed on a market that is not a regulated market); international account-
ing regulations such as IAS/IFRS (if its securities have been admitted to trading
on a regulater market in the EU); or US GAAP (if it is listed on a US stock ex-
change).^5
Some mezzanine instruments are regarded as equity on the balance sheet of the
company (equity mezzanine) and others are regarded as debt (debt mezzanine).
There are also mezzanine instruments that, from an accounting perspective, con-
(^3) Wiehe H, Jordans R, Roser E, Mezzanine Finance Structures under German Law, JIBLR
22(4) (2007) p 219; Habersack M, Grundfragen der freiwilligen oder erzwungenen Sub-
ordination von Gesellschafterkrediten, ZGR 2000 pp 384–419.
(^4) Wiehe H, Jordans R, Roser E, ibid, p 218.
(^5) See ibid, pp 221–222.