In contrast, the securities placed at the bottom of the capital structure possess the most risk, so the required rate of return is greater.

Equity (30-50%) → At the bottom of the capital structure is common equity, which is last in line in terms of priority in the event of default.Īs a general rule of thumb, the higher the security is placed on the capital structure, the less risk there is – further, less risk coincides with lower returns.

Mezzanine Debt (10-20%) → Right in between senior debt and equity sits mezzanine debt, which blends features of debt and equity.

Senior Debt (30-40%) → The top of the capital structure consists of senior secured debt, such as asset-backed loans and first lien cash flow based loans.

The following illustration from Oaktree shows a sample capital structure of a company. Oaktree Illustrative Capital Structure Example Subordinated Notes with PIK Interest (“Paid-in-Kind”).Some of the more common types of mezzanine financing instruments are the following: Mezzanine financing is NOT meant to be a long-term source of capital – instead, mezzanine financing is short-term funding for companies with a specific purpose (e.g. However, while we’ve defined the formal definition of mezzanine financing, or “mezz financing” for short, the term typically refers to riskier forms of financing just above common stock – as opposed to all subordinated debt (i.e. Within the capital structure, mezzanine financing is a junior form of debt that ranks below senior debt but sits above common equity. Common examples include 2 nd lien debt, senior/subordinated bonds, and preferred stock. Mezzanine Financing is an alternative form of hybrid financing that blends features of debt and equity.

Leverage finance definition